Citigroup problems grow

by Jonathan Stempel and Dan Wilchins, Reuters - Nov 5, 2007

Citigroup Inc's (NYSE:C - News) problems deepened on Monday as it was unable to assure investors a potential $11 billion write-down for subprime mortgages won't grow, and its nearly pristine credit rating was downgraded.

The largest U.S. bank also reduced previously reported third-quarter profit because of worsening credit market problems, which it expects to reduce future cash flow. Its shares fell more than 5 percent.

"There's no way I think anyone can give you an assurance of how things are going to move," Chief Financial Officer Gary Crittenden said on a conference call. "We've taken what we think is a reasonable stab."

Citigroup's struggles comes as the bank faces a leadership void following Chairman and Chief Executive Charles Prince's resignation on Sunday.

He left after a four-year tenure during which the bank's shares fell 17 percent amid criticism that Citigroup had grown unwieldy and lacked direction.

Former U.S. Treasury Secretary Robert Rubin, who led the bank's executive committee, was named chairman. Sir Win Bischoff, head of Citigroup's European business, became acting chief executive.

The announcement of an expected $8 billion to $11 billion write-down, equal to $5 billion to $7 billion after taxes, helped drag down shares of rivals such as Bank of America Corp (NYSE:BAC - News), Merrill Lynch & Co (NYSE:MER - News) and Morgan Stanley (NYSE:MS - News).

Investors worry that write-downs for subprime mortgages and other debt might not be isolated.

Citigroup on October 15 wrote off just $1.56 billion for its subprime portfolio for the third quarter, part of a $6.5 billion write-down for a variety of losses. The new write-down reflects problems discovered since then.

Analysts said Merrill Lynch may add to its own announced $8.4 billion write-down. That company ousted its chief executive, Stanley O'Neal, last Tuesday.

"It shows the clumsiness of pricing mechanisms across Wall Street," said Michael Holland, a money manager and founder of Holland & Co. in New York. He said it's difficult to value Citigroup "until the dust settles."

PRINCE ALWALEED

Saudi Prince Alwaleed bin Talal, Citigroup's largest individual shareholder, declined to comment on the company's problems until the "picture becomes clearer," spokeswoman Heba Fatani said.

Alwaleed endorsed bringing back Sanford "Sandy" Weill, who built Citigroup and hand-picked Prince to succeed him, to run the company on an interim basis, CNBC television said. Weill is not interested in returning to run Citigroup, but is willing to do what is needed to help, CNBC said.

Much of Citigroup's trouble relates to $43 billion of so-called collateralized debt obligations, or CDOs, linked to lower-quality mortgages.

While these "super-senior" securities were once considered rock-solid, Crittenden said investors stopped buying them.

Fitch Ratings cut Citigroup's credit rating one notch to "AA," its third-highest grade, from "AA-plus," citing "severe pressure" on capital markets operations and "an inhospitable consumer credit environment" as mortgage delinquencies soar.

Its outlook is negative, meaning another cut is possible within two years. Standard & Poor's said it may also downgrade the bank.

Citigroup lowered third-quarter profit to $2.21 billion, or 44 cents per share, from the reported $2.38 billion, or 47 cents, after writing off $270 million for the CDO portfolio. This brought the total quarterly write-down to $6.8 billion.

"We wouldn't be surprised if additional write-downs were forthcoming," wrote Goldman Sachs & Co. analyst William Tanona, who rates Citigroup "neutral."

SHARES FALL

Citigroup shares fell $1.97, or 5.2 percent, to $35.76 in afternoon trading, after earlier falling to $35.61. They began the year at $55.70. The yield on Citigroup's 6 percent notes maturing in 2017 rose to 1.57 percentage points above U.S. Treasuries from 1.45, according to MarketAxess.

Citigroup's problems come as Rubin and Bischoff try to restore morale while hunting for a permanent chief executive.

Four directors, including Rubin and Time Warner Inc (NYSE:TWX - News) Chief Executive Richard Parsons, are conducting the search.

Parsons is expected later Monday to step down as Time Warner chief executive, to be replaced by Chief Operating Officer Jeffrey Bewkes, but will remain chairman, CNBC said.

On a conference call, Rubin said he wants someone at Citigroup with the capacity to "relate ... to the multiplicity of businesses this institution has."

A candidate needs a "strong international focus, not necessarily enormous international experience," he said.

Citigroup operates in more than 100 countries, and generates nearly half its revenue internationally.

The bank declined to say how long the chief executive position will remain unfilled.

"I look forward to an interesting but relatively short period of months before handing over to the next CEO," Bischoff said.