Citigroup Splits in 2 - Citicorp (Good?) and Citi Holdings (Bad?)

from www.bloomberg.com
Citigroup Reports $8.3 Billion Loss, Splits Into Two (Update5)
By Bradley Keoun and Josh Fineman

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 fell 3.3 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 fell 13 cents to $3.70 as of 3:06 p.m.

Head Count
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.

‘Legacy Assets’
“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.”

Default Protection
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,
Joint Venture

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.
Asset Writedowns

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 bkeoun@bloomberg.net; Josh Fineman in New York at jfineman@bloomberg.net. Last Updated: January 16, 2009 15:09 EST



from www.nytimes.com

January 14, 2009
Citigroup Plans to Split Itself Up, Taking Apart the Financial Supermarket
By ERIC DASH

Staggered by losses despite two federal rescues, Citigroup is accelerating moves to dismantle parts of its troubled financial empire in an effort to placate regulators and its anxious investors.

Under pressure from Washington and Wall Street, the financial giant plans to split itself in two, people with knowledge of the plan said on Tuesday, heralding the end of the landmark merger that created the bank a decade ago.

Citigroup, which originally planned to sell in coming years the businesses it no longer deemed central, is speeding up the process to mitigate potentially billions of new losses as the economy worsens, these people said. The government, which has twice supplied it with taxpayer support during the financial crisis, wants to avoid a repeat, said another person with knowledge of the situation.

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.

“They have moved the chips around, but it’s the same game,” said Meredith A. Whitney, an Oppenheimer banking analyst who has been critical of the company. “They still have the same capital needs.”

Citigroup faces a devastating fourth quarter, with expectations of a $10 billion operating loss, and potentially billions more this year. Federal regulators have been pressing Citigroup to clarify its strategy, shore up its finances and shake up its board, according to two people briefed on the situation. Government officials want the bank to close what they see as a credibility gap with investors.

The bank’s plan to accelerate a dismantling of its financial supermarket comes after a stern regulatory warning it received in late November, when its rapidly deteriorating share price prompted the government to give it a second cash infusion, of $27 billion.

That warning, according to one of the people briefed on the discussions, was delivered by Sheila C. Bair, the chairwoman of the Federal Deposit Insurance Corporation, who told Citigroup that any further requests for cash would result in a breakup of its operations dictated by regulators.

A spokesman for Ms. Bair said that the F.D.I.C. did not as a matter of course discuss confidential supervisory matters.

But by devising the breakup plan, Citigroup appears to be acknowledging the regulatory admonition, though on its own terms. The moves may also set the stage for a spinoff of a stronger company or eventual merger. A spokeswoman for Citigroup declined to comment.

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. Some analysts say they believe the arrangement could result in the bank selling more divisions.

Citigroup has “a new C.E.O.,” William B. Smith, a Citigroup investor who has long sought a breakup of the company, said on Tuesday. “His name is Uncle Sam, he is an activist, and he wants the company monetized.”

Mr. Smith said Citigroup was embarking on the correct strategy at the wrong time, saying that the bank missed an opportunity to whittle its unwieldy operations two years ago, when it was trading at $50 a share. On Tuesday, Citigroup’s stock closed up 5.4 percent, at $5.90.

Defining the “core” and “noncore” businesses, with separate names and management teams, may set the stage for later spinning off Citigroup’s stronger operations over time. By reporting the two sets of businesses separately, Citigroup will make it easier for its investors to focus on its underlying results. Citigroup will still have to find buyers for the troubled businesses and assets it hopes to unload — a difficult task in this market environment.

The joint venture between the Smith Barney brokerage and Morgan Stanley should help fill some of Citigroup’s capital needs by providing an immediate cash injection and a big accounting gain at a time when it is difficult to raise capital. Morgan Stanley paid $2.7 billion to own 51 percent of the new entity and can buy the rest of the business in three years for a price to be set then. The combined brokerage will include some 20,000 brokers and 1,000 retail offices.

The spinoff was the first step in a strategy that now includes whittling Citigroup’s financial supermarket into a core operation — including its global investment and consumer banking franchises as well as its private bank — and a group of noncore, loss-inducing business, according to the people close to the situation.

Those include its consumer finance operations, private-label credit card businesses and the $306 billion of illiquid assets, largely guaranteed by the government. The bank also plans to slim down its trading activities and sell off its overseas brokerage and asset management units, which no longer fit with the bank’s plans.

The formal plans will be announced Jan. 22, when Citigroup reports its fourth-quarter results.

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 rewrote the rules of American finance by bringing traditional banking, insurance and Wall Street businesses, like stock underwriting, under one roof. It also ushered in a period of unprecedented deregulation, vast deal-making and high-octane growth on Wall Street.

Citigroup fell far short of those lofty goals. Over time, it found itself repeatedly beset by behind-the-scenes problems in the boardroom and executive suites.

It came under repeated fire from shareholders for lackluster results; its stock price has fallen more than 75 percent since it was formed. More recently, Citigroup has been hobbled by more than $65 billion in losses, write-downs for troubled assets and charges for future losses largely linked to a huge mortgage-related stake that the bank’s own internal risk management team and other executives failed to understand.

These problems fed criticism of lax oversight and lapses in internal controls within the bank. It became subject to investigation by numerous regulators into its various business dealings. Wall Street seemed to conclude the company was too big to manage, if not too big to fail.

Vikram S. Pandit took over Citigroup in December 2007 after the tumultuous tenure of Charles O. Prince III, the handpicked successor of Mr. Weill. Under Mr. Prince, Citigroup began a partial deconstruction of the company, selling off its Travelers insurance business and shedding its Legg Mason asset management units.

But after a four-month “dispassionate review” of Citigroup’s businesses, Mr. Pandit pledged to continue with those plans to keep the company intact and promised better management. He planned to shed more than $400 billion of assets over several years, not a matter of months. These long-range plans also included shedding noncore businesses like Primerica insurance, offloading toxic mortgage assets and focusing on a business strategy that would make the bank look increasingly like the old Citicorp bank, with less emphasis on trading.

Even so, Mr. Pandit considered Smith Barney, the bank’s retail brokerage unit, a crown jewel that the bank was unlikely to sell.

But federal regulators pushed Mr. Pandit to move faster. Since at least last fall, regulators had been urging Citigroup to replace several directors and rethink its strategy. Officials were concerned with the investor reaction to the company’s plans and asked the bank to clarify its business model, according to the people familiar with the discussions.

Mr. Pandit, a cerebral but sometimes indecisive manager, huddled with a handful of close confidants to develop new plans during the fall. Most of his own senior business managers were kept out of the loop.

But Citigroup’s troubles kept getting worse. By late December, Mr. Pandit grew concerned about the bank’s depleted capital levels as he prepared to report another devastating quarterly loss to a fractured board.

Under pressure from regulators, Mr. Pandit made the tough decision that the bank’s beloved Smith Barney unit would have to be spun off, touching off the beginning of a final dismantling of the firm.

Gretchen Morgenson, Louise Story and Julie Creswell contributed reporting.