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Citigroup’s Pandit Tries to Save the Little That’s Left to Lose
By Bradley Keoun and Josh Fineman
Jan. 17 (Bloomberg) -- Citigroup Inc. shareholders aren’t buying Vikram Pandit’s attempt to salvage the bank by splitting it in two. Nor are they buying the stock.
Citigroup shares tumbled to a 16-year low on Jan. 16 after Pandit, the U.S. bank’s 52-year-old chief executive officer, said he would undo a decade of acquisitions by separating the bank into two units, Citicorp and Citi Holdings.
The problem: Nothing -- not $45 billion of U.S. government funds, not federal guarantees on $301 billion of debt, not a pledge to dump non-core assets -- can stave off the worst financial crisis since the Great Depression. Already crippled by trading losses on mortgage bonds, the bank faces credit-card losses that surged to a record in the fourth quarter.
“The losses from the investment banking businesses wiped out any margin for error that Citi might have had to be able to weather the storm of the U.S. consumer defaulting on his debts,” said James Ellman, president of San Francisco-based money manager Seacliff Capital LLC.
After initially rallying 17 percent yesterday on news of Pandit’s planned reorganization, Citigroup shares fell, closing down almost 9 percent at $3.50. At that level, it’s below the $3.77 it dropped to on Nov. 21, when the bank entered talks with officials from the U.S. Treasury Department and Federal Reserve over a second round of rescue funds.
Citigroup Chief Financial Officer Gary Crittenden said In an interview yesterday that the bank has had “no conversations at all about additional capital from the government.”
Deposits Stay Steady
Analysts aren’t speculating -- as they were in November -- that nervous depositors might pull out their savings and erode the money Citigroup uses to fund its operations. Total deposits stood at $774 billion at the end of December, little changed from the end of September, Citigroup said.
The government’s $52 billion of preferred stock in Citigroup provides a cushion for depositors, who would stand to get paid off before the government in an insolvency. Common shareholders, whose interests are junior to the government’s, don’t get the same comfort.
Tangible common equity, a measure of a company’s net worth that excludes “intangible” accounting entries such as goodwill, fell by $3 to $5.40 a share in the fourth quarter, Deutsche Bank analyst Michael Mayo estimated in a report.
‘Lowest in Industry’
In dollar terms, there’s $28.9 billion of tangible common equity, or 1.5 percent of total assets, according to Citigroup. The ratio is “perhaps the lowest in the industry,” Mayo wrote.
“Management needs to sell business units fast, in our view, to build capital before another big quarterly loss emerges,” wrote David Trone, an analyst at Fox-Pitt Kelton Cochran Caronia Waller.
Relief isn’t in sight. North American credit-card losses, as a percentage of total loans, climbed to 8.04 percent in the fourth quarter from a third-quarter rate of 7.13 percent, the bank said. During the early 1990s recession, the losses peaked at 6.44 percent.
“Given current estimates of rising unemployment into late 2009 or early 2010, we could expect to see the cards” loss rate continue to rise, Crittenden said yesterday on a conference call.
Crittenden said in the interview that the bank’s plan to hive off about $850 billion, or about 45 percent of total assets, won’t immediately add to equity. The main benefit is to “provide strategic clarity and managerial clarity,” Pandit said on the conference call.
Among the businesses being moved into the “non-core category of Citi Holdings are the CitiFinancial consumer-lending business and Primerica Financial Services life-insurance unit. The company’s core businesses, to be grouped under Citicorp, will include branch banking, corporate lending, transaction processing and securities underwriting and handling trades for clients.
Every time Pandit sells a business -- such as its German retail banking operations, which were sold in December for a $4 billion gain -- he has to forfeit the revenue that goes with it. In the fourth quarter, Citigroup got $582 million of profit from discontinued operations, not including the one-time gains from selling them. The figure dwarfs the $29 million earned by the bank’s only profitable division, global wealth management.
“Splitting Citigroup into two separate subsidiaries doesn’t change Citi’s business model,” said Roy Smith, a former Goldman Sachs Group Inc. partner who’s now a finance professor at New York University’s Stern School of Business. The plan merely “moves the peripheral business into a separate place.”
‘Stop the Bleeding’
For the U.S. government, Pandit’s mission to save Citigroup carries urgency. The Treasury and Federal Reserve said in a joint statement in November that it had to prop up the bank to “strengthen the financial system and protect U.S. taxpayers and the U.S. economy.” The company also has 323,000 employees, to whom Pandit said yesterday in a memo that the new organization will “enable us to sharpen our focus.”
Another round of government intervention would probably take the form of an American International Group Inc.-style nationalization, NYU’s Smith said. Pandit and board members probably would lose their jobs and the government would try to “stop the bleeding without too much regard for saving the business model or future shareholder value for that matter,” he said.
Citigroup has racked up $28.5 billion of net losses over the past five quarters, or an average of $5.7 billion per quarter. At that rate, the bank’s tangible common equity won’t last long.
“The next six months will determine if there is anything left,” said Smith Asset Management CEO Bill Smith, who has repeatedly called for a breakup.
With the stock at $3.50, there’s little left to lose.
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 17, 2009 00:01 EST