Citigroup's Shares Fall 4.9%
Amidst Credit-Market Turmoil

One day after the departure of Chief Executive Charles Prince, Citigroup Inc. officials said it will take the bank until the middle of next year to clean up its problems caused by credit-market turmoil.

Investors made it clear they think the largest bank in the U.S. by assets will need much longer than that. As it became clearer how the bank's problems have deepened in recent weeks, they sent Citigroup's stock down 4.9% yesterday, despite pledges by officials that the bank would maintain its dividend and remain a "vibrant" institution.

The bank Sunday night said it expected it may have to record losses of between $8 billion to $11 billion in the current quarter, likely wiping out net profit for this period.

The Citigroup shares yesterday reached their lowest level since April 2003, falling $1.83 to $35.90 in 4 p.m. composite trading on the New York Stock Exchange. Since the debt-market turmoil erupted in August, Citigroup's market value has dropped nearly $50 billion, and since the start of the year the shares are down 36%.

That helped spark a 1.63% fall yesterday to 5136.81 in the Dow Jones Wilshire U.S. Banks Index, its lowest close since October 2003.

Citigroup has been weighed down for months by investors' concerns about its leadership, financial flexibility and corporate strategy. Besides its exposure to subprime mortgages, Citigroup is also facing problems with off-balance-sheet vehicles that are now the focus of a possibly $100 billion industry rescue attempt.

Citigroup's mounting woes led to several reversals in the past week among Wall Street analysts who had been optimistic about the bank keeping up with rivals. Morgan Stanley's Betsy Graseck, citing concerns about the firm's risk-management procedures, yesterday told clients to "sell into any rally" in Citigroup stock.

Chief Financial Officer Gary Crittenden, on a conference call with analysts yesterday, acknowledged that the $8 billion to $11 billion in losses flagged by the bank are an estimate of write-downs that may be needed. The bank "can't give any assurance" that the loss won't grow as the quarter progresses, he added.

Analysts are bracing for the worst. "We wouldn't be surprised if additional write-downs were forthcoming," Goldman Sachs analyst William Tanona wrote in a note to investors.

Investors were particularly unnerved by the fact that Citigroup announced the possibility of additional write-downs just weeks after it said third-quarter losses due to the bank's subprime exposure would be $1.56 billion. The new, vastly bigger losses called into question the bank's ability to measure its holdings and the information it was providing to markets.

Mr. Crittenden said potential fourth-quarter losses were sparked by downgrades of mortgage-backed securities in October. These sparked losses in indexes that track even highly rated mortgage-backed securities. As a result, Citigroup was forced to change some of the assumptions backing models it uses to value collateralized debt obligations, or CDOs, and mark down their value.

Citigroup Sunday disclosed that it had $55 billion in subprime exposure, of which about $43 billion is in the form of securities known as CDOs that are linked to risky mortgages. But that came as a surprise even to some analysts who cover the company closely.

CDOs pool different securities, often including bonds backed by mortgages, and sell slices that carry different risk and payout levels. Citigroup said the majority of its CDO holdings were considered the safest slices but the downgrades had affected even these securities.

Mike Mayo, an analyst at Deutsche Bank who rates Citigroup's stock a "sell," questioned why investors weren't given information about the bank's CDO holdings earlier and whether Citigroup's board was aware of their potential for losses. He asked on the Citigroup conference call yesterday what the board did, if it knew, and why it didn't disclose the potential problems.

In response, Robert Rubin, who was appointed Citigroup chairman on Sunday in the wake of Mr. Prince's departure, said that "ever since the board became aware of the problem, the board has been engaged" in working to resolve it.

Some analysts questioned whether Citigroup could restore its capital base, given the potential for further write-downs. Citigroup's Tier 1 ratio, a key measure of a bank's capital cushion, fell to 7.3% at the end of the third quarter, from 8.6% a year earlier. In addition, investors are worried that this ratio could deteriorate further if Citigroup is forced to take off-balance-sheet assets onto its books. That could happen anyway, if the feared losses materialize. Write-downs that result in an after-tax loss of $7 billion could cause Citigroup's Tier 1 ratio to fall to 6.8%, says Pri de Silva, an analyst at CreditSights.

Citigroup's ratio is still well above a 6% threshold considered by the Federal Reserve to assure that institutions are well capitalized. But it is below an 8.1% average Tier 1 ratio seen at the end of the third quarter.

Citigroup's Mr. Crittenden stressed that, despite possible write-downs, such losses don't impede cash flow. The bank will have sufficient liquidity to pay its dividend, currently at 54 cents a share a quarter, and boost capital levels by June 2008, he said.

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