Citigroup Reports Big Loss and a Breakup Plan

By ERIC DASH

Published: January 16, 2009
NYTimes

Citigroup capped a devastating 2008 with an $8.29 billion fourth-quarter loss on Friday, as the banking company comes under mounting pressure from regulators to rethink its financial supermarket model and shrink itself.

With nearly every part of the company suffering a huge blow, Citigroup’s chief executive, Vikram S. Pandit, is putting in place a new strategy that will divide the banking company into two parts, Citicorp and Citi Holdings, to focus its executives’ attention on its stronger remaining businesses while winding down its money-losing operations.

Even so, Mr. Pandit has agreed to split off Smith Barney, its valuable retail brokerage arm, into a joint venture with Morgan Stanley to raise capital so that it could offset the fourth quarter’s huge losses.

“We believe there is a lot of value in having them focused,” Mr. Pandit said, referring to his plan to split up the company. “We are not in a rush to sell businesses.”

Citigroup’s loss, which amounts to $1.72 a share, compares with a loss of $9.8 billion, or $1.99 a share, in the period a year earlier. Analysts had estimated on average that Citigroup would break even on a per-share basis, according to a survey by Bloomberg News.

The company has reported a loss for five consecutive quarters, and Friday’s announcement of a staggering $25.2 billion in write-offs and losses in both its consumer and investment bank brought its total charges to $90 billion.

Citigroup shares have dropped by almost half in the last week, and they were down another 5 percent on Friday afternoon.

For the full year 2008, Citigroup reported a net loss of $18.72 billion. With unemployment rising and evidence of a global slump, the bank is bracing for another dismal year.

Gary L. Crittenden, Citigroup’s chief financial officer, said the bank was projecting job losses to peak in early 2010 and would probably have to set aside money to cover losses all year. He said that mortgage losses were approaching the peak levels of the recession in the early 1990s and that credit card losses had already surpassed them.

Still, Mr. Pandit said he believed that Citigroup’s big consumer business was “bending the curve on losses” and that the overall company would emerge from the current environment stronger and smarter.

Mr. Pandit held a noontime town hall meeting at Citigroup’s Park Avenue headquarters in Manhattan to discuss the strategy and bolster the spirits of demoralized employees.

Reports emerged early this week that Citigroup was accelerating moves to dismantle parts of its troubled financial empire. But some Wall Street analysts and investors questioned whether the plan, which included the announcement on Tuesday that it would split off its prized Smith Barney brokerage, goes far enough to address Citigroup’s immediate troubles.

The bank’s breakup plan comes after Citigroup received a stern regulatory warning in late November, when its rapidly deteriorating share price prompted the government to give it a second cash infusion, of $20 billion.

Citigroup’s first cash infusion from the government came in October in a $25 billion capital injection from the Troubled Asset Relief Program, or TARP. Eight other banks also received capital infusions to stabilize them as the global financial crisis deepened.

With its receipt of a second lifeline from the government in November, Citigroup began operating under what is known as open-bank assistance, which involves a loss-sharing arrangement devised by the F.D.I.C. and an investment by the Treasury typically reserved for deeply troubled institutions.

Since then, federal regulators have been leaning hard on Citigroup to shake up its board and shrink the sprawling company to address a credibility gap with its investors. On Friday, Citigroup also issued a statement from its lead director, Richard D. Parsons, the former Time Warner chairman and the bank’s current lead director, signaling that several of its directors would soon leave. Mr. Parsons is widely expected to become Citigroup’s next chairman.

Citigroup will legally remain in tact for now. But by segmenting Citigroup into Citicorp and Citi Holdings, run by separate managers, Mr. Pandit may be setting the stage for a spin-off of Citigroup’s stronger operations or an eventual merger. Meanwhile, reporting the two sets of businesses separately should burnish its quarterly results by making it easier for investors to focus on its healthier operations.

Still, Citigroup will still have to find buyers for the troubled businesses and assets it hopes to unload — a difficult task in this market environment. It also will have to finance its legacy assets, and some Citigroup insiders suggest that it may have to once again return to the government for assistance.

Splitting off Smith Barney appears to be the first step in a strategy that now includes whittling Citigroup’s financial supermarket into a new Citicorp operation, including its global investment and consumer banking franchises as well as its private bank. The goal is shrink the bank’s balance sheet to $1.1 trillion, or about half its peak size in 2007, and forge a new business catering to multinational and wealthy clients that resembles the old Citicorp that preceded Citigroup’s creation.

That will leave another group of noncore business that are expected to be sold or unwound over the next three years called Citi Holdings. Those parts include its consumer finance operations, its private-label credit card businesses, its Primerica insurance unit, and the $301 billion of illiquid assets, largely guaranteed by the government.

The bank also plans to shed its remaining proprietary trading and wind up its alternative investment division, and sell off its overseas brokerage and asset management units, which no longer fit with the bank’s plans. Citigroup managers overseeing the Citi Holdings properties will be paid based on how quickly they sell their assets and how much value they recover.

For Citigroup, the changes draw a somber curtain over the one-stop shop created in 1998 when the company’s architect and former chief, Sanford I. Weill, merged the insurance giant Travelers Group and Citicorp, then the nation’s largest bank. The deal brought traditional banking, insurance and Wall Street businesses, like stock underwriting, under one roof.

But the company came under repeated fire from shareholders for lackluster results; its stock price has fallen more than 76 percent since it was formed. And the fourth quarter was no different.

Citigroup posted $5.6 billion in revenue, down 13 percent from the comparable quarter a year earlier, reflecting the “difficult economic environment and weak capital markets.” All regions suffered. The bank also reported another long list of write-downs: $1.3 billion of complex mortgage investments, $1.1 billion on structured investment vehicles, $991 million on its commercial real estate positions, and $897 million tied to its monoline insurance exposure; and $87 million on auction-rate securities losses. In addition, Citigroup set aside another $14 billion to protect against rising consumer and corporate loan losses.