“Our banking system is a safe and a sound one.”
– Henry Paulson (Mon Jul 21, 2008)
A sign is displayed on the Citigroup Center in New York on Jan. 14, 2009. Photographer: Chip East/Bloomberg News
Jan. 16 (Bloomberg) — Citigroup Inc. posted an $8.29 billion loss, twice as much as analysts estimated, and said it will split in two under Chief Executive Officer Vikram Pandit’s plan to rebuild a capital base eroded by the credit crisis.
Citigroup rose 2.3 percent in New York trading after tumbling 43 percent this year through yesterday. Pandit will undo the legacy of former CEO Sanford “Sandy” Weill by creating Citicorp to house the New York-based company’s global bank, and Citi Holdings, for “non-core” assets, including $301 billion of mortgages, bonds, corporate loans and other assets that the government agreed in November to guarantee.
“The financial supermarket was buried today,” said Bill Smith, founder of Citigroup shareholder Smith Asset Management Inc. in New York, who has repeatedly called for a breakup.
A dwindling capital cushion and sinking stock price forced the 52-year-old Pandit to abandon Citigroup’s decade-old strategy of providing investment advice and insurance alongside branch banking, stock underwriting and corporate lending. He’s shedding units to free up capital and save the bank from insolvency.
“They are going to try to home in on what’s worth something, and try and sell the pieces that they really can’t value,” Todd Colvin, vice president of MF Global Inc., said in a Bloomberg TV interview.
Shares of Citigroup rose 6 cents to $3.89 as of 11:31 a.m.
Pandit said on a conference call with analysts that the bank plans to cut head count to about 300,000, from 323,000 at the end of December and 352,000 in September.
Citigroup’s lead independent director, Richard Parsons, said today in a statement that the bank also plans to shake up its board of directors. He didn’t provide details. Robert Rubin, the former Treasury secretary who was a consultant to Citigroup’s board, resigned earlier this month after being criticized by investors for failing to help steer the bank clear of the subprime mortgage market’s collapse.
Also unclear is the future of Win Bischoff, a Citigroup executive who took over as chairman in December 2007, when Pandit was named CEO.
Pandit, who took over 13 months ago from ousted predecessor Charles O. “Chuck” Prince, earlier this week announced plans to sell control of the Smith Barney brokerage. The bank said today it has tagged for disposal the CitiFinancial consumer- lending business and Primerica Financial Services life-insurance unit, both building blocks of the financial colossus assembled by Weill.
“We can better contain the impact of our legacy assets through dedicated management,” Pandit said on the conference call. “In fact, we hope to make announcement regarding the CEO for this unit shortly.”
Pandit said Citi Holdings will have about $850 billion in assets and the new Citicorp will have about $1.1 trillion.
The bank’s net loss of $1.72 a share compared with a loss of $9.8 billion, or $1.99, a year earlier. Excluding a $3.9 billion gain from the sale of a German consumer bank and other results from discontinued operations, the bank’s loss was $2.44 a share. On that basis, the loss was more than twice as wide as the $1.08 average estimate of analysts in a Bloomberg survey.
As Citigroup plunged 77 percent last year in New York trading, the bank was forced to accept $45 billion of U.S. government rescue funds.
“It looks like a kitchen-sink quarter,” said Peter Sorrentino, who helps manage $16 billion at Huntington Asset Advisors Inc. in Cincinnati, including Citigroup shares. “Sweep it all in there and get this behind us.”
The cost of protecting Citigroup from default dropped 49 basis points to 276, according to CMA Datavision prices for credit-default swaps.
Citigroup’s announcement came as Bank of America Corp., the biggest U.S. bank by assets, received emergency funds from the government to support its acquisition of Merrill Lynch & Co. The Charlotte, North Carolina-based company reported a loss of $1.79 billion and cut its dividend to 1 cent a share.
Weill solidified the strategy of serving corporate and individual clients around the world with a range of financial services in 1998, when his Travelers Group Inc. merged with John Reed’s Citicorp to form Citigroup Inc.
Assigning the name Citicorp for the businesses Pandit wants to keep harks back to the pre-Weill era. The old Citicorp traces its roots to the City Bank of New York,
Citigroup plans to put Smith Barney into a $21 billion joint venture and relinquish majority control to Morgan Stanley. The deal, which bolsters Citigroup’s capital base with a $5.8 billion pretax gain, came less than two months after Pandit told employees he didn’t want to sell the business.
The plan to cut off “non-core” businesses in a deteriorating economy may put the bank into a deeper hole, Sanford C. Bernstein & Co. analyst John McDonald wrote in a Jan. 14 report.
“It will likely be difficult for Citi to effectively dispose of assets and businesses in the current environment,” McDonald wrote. “Any new solution is likely to need an incremental infusion of common equity, either from the government, private investors or the public markets, any of which is likely to be dilutive to existing Citi shareholders.”
The company’s fourth-quarter loss included $4.58 billion of writedowns on subprime mortgages and related bonds called collateralized debt obligations; $991 million on commercial real-estate loans and investments, and $594 million on loans to companies with low credit ratings.
It also included $1.06 billion of writedowns on structured investment vehicles that had to be assumed after they collapsed in late 2007, and $307 million on auction-rate preferred securities that Citigroup agreed to buy back from customers under a settlement with state regulators.
Mitigating the writedowns was a $2 billion gain related to an accounting rule that lets companies mark their liabilities to market value. On the conference call today, Chief Financial Officer Gary Crittenden said that the value of the liabilities fell during the fourth quarter as Citigroup’s bond prices fell.
Ladenburg Thalmann & Co. analyst Richard Bove has criticized the accounting rule as providing an artificial benefit to companies when their own creditworthiness is declining.
Costs for reserves to cover loan losses totaled $12.2 billion, compared with $7.3 billion a year earlier, Citigroup said. In North America, the percentage of credit-card loans more than 90 days past due climbed to 2.87 percent, from 2.19 percent in the third quarter and 1.88 percent in the fourth quarter of 2007.
Revenue in the wealth-management division, which includes Smith Barney, fell 94 percent to $29 million.
To contact the reporters on this story: Bradley Keoun in New York at firstname.lastname@example.org; Josh Fineman in New York at email@example.com.
Last Updated: January 16, 2009 11:40 EST
By Bradley Keoun and Josh Fineman