Cleaning House At Citigroup

Monday, November 5th 2007, 8:50 am
By: News On 6

NEW YORK (AP) _ Citigroup Inc. shareholders may have finally gotten what they wanted _ the resignation of Chairman and Chief Executive Charles Prince _ but Wall Street's worries are far from over.

At an emergency meeting of the Citi board Sunday, the nation's largest bank announced Prince's widely expected departure, but also estimated it would take additional losses of $8 billion to $11 billion.

In the third quarter, it already took a hit of $6.5 billion in asset markdowns and other credit-related losses. And Monday, Citigroup revised down its results for that quarter by $166 million, after correcting the value of the company's exposure to complex instruments called collateralized debt obligations.

Citigroup, in a filing with the Securities and Exchange Commission, says it earned $2.21 billion in the third quarter, or 44 cents per share. It had reported earnings of $2.38 billion, or 47 cents per share, when it initially posted third-quarter results on Oct. 15.

Citigroup also revised its exposure to collateralized debt obligations, or CDOs, to $43 billion.

Deutsche Bank analyst Mike Mayo, who only Thursday estimated Citigroup would be forced to take $4 billion in writedowns in the fourth quarter, now expects Citigroup to post a loss. He added that he thought Wall Street's 2008 estimates of $1.01 per share for Citi earnings were too optimistic

Citigroup said despite the additional writedown it will retain its dividend and return capital ratios to adequate levels by the second quarter of 2008. CIBC Wolds Markets Corp. analyst Meredith Whitney said that is not likely.

Whitney said in a research note the anticipated fourth-quarter losses, coupled with $2.7 billion paid out in dividends, will strain capital levels even further. Citigroup also could face more writedowns and charges or have to sell assets at discounted prices, leading to further declines in capital levels.

Meanwhile, the company remains entrenched in a mire of off-the-books investment vehicles funded by risky debt. Though Citigroup says it has no contractual obligation to put those losses on their books, they may end up doing so.

And Citigroup's not alone in its debt problems. When borrowers with poor credit stopped paying their mortgages, many banks not only had to take losses on those subprime mortgages, they also saw instruments in their portfolios backed by mortgages plummet in value. No one knows how much longer home prices will keep slumping, and whether problems related to the housing market will start affecting other types of consumer debt.

Also to be seen is how much longer the credit markets will stay tight, and if the currently strong portions of the economy will be hampered by banks' inability to make loans.

``It's the lending practices,'' said Steven Goldman, chief market strategist at Weeden & Co. in Greenwich, Conn. ``How much is that going to be impaired?''

Citi said former U.S. Treasury Secretary Robert E. Rubin, once co-chairman of Goldman, Sachs & Co., will be chairing the beleaguered bank. Sir Win Bischoff, chairman of Citi Europe and a member of the Citi management and operating committees, will serve as interim CEO.

Prince joined former Merrill Lynch & Co. CEO Stan O'Neal, who resigned from the investment bank last month, as the highest-profile casualties of the debt crisis that has cost billions at other financial institutions as well.

Prince, 57, became chief executive of Citigroup in October 2003. Many shareholders criticized him openly for much of his tenure, as Citigroup's stock lagged that of its peers while Prince executed what was called an umbrella model of corporate organization, with several separate lines of business. Shares closed Friday at $37.73, about 20 percent below where they were when Prince became CEO.

Rubin, 69, after 26 years at Goldman Sachs, became President Bill Clinton's chief economic adviser in 1993 before leading the Treasury Department. His experience steering the U.S. economy during the Mexican and Asian financial crises could come in handy as Citigroup attempts to navigate the tight credit markets.

Bischoff was the chairman of the British investment bank Schroders PLC, then joined Salomon Smith Barney Inc., a subsidiary of Citi, when it acquired Schroders. He began his current position in May 2000.

``There's no change of strategy that we see, actually, going forward,'' Bischoff said, noting that the company still plans to focus on international expansion, at least until a new CEO is chosen.

It was not known whether Bischoff was in the running to replace Prince as CEO. Before Sunday's meeting, many ideas for Prince's replacement were floated by industry watchers; one name that has come up often is John Thain, who was once president of Goldman Sachs and is now CEO of NYSE Euronext.

But it may take more than a figurehead change to restore shareholders' confidence in Citigroup, considering how much bad debt it has on its hands and its hard-to-shed image of a rule-flouting old boys club.

In 2004, Citigroup had to close its Japan Private Bank amid allegations of improper activities. And in January, former head of global wealth management Todd Thomson resigned, reportedly having been forced out for extravagant spending and dealings with CNBC anchor Maria Bartiromo.

Citigroup did a minor reshuffing in early October, combining its investment banking and alternative investments businesses into one unit led by Vikram Pandit, who had led Citigroup's alternative investments unit. Tom Maheras, co-CEO of the investment banking unit, left.