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Friday, January 16, 2009
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.
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.
"Ring Fencing" Bank of America
from www.federalreserve.gov
January 15, 2009
Summary of Terms
Eligible Asset Guarantee
Eligible Assets: A pool of financial instruments consisting of securities
backed by residential and commercial real estate loans and
corporate debt, derivative transactions that reference such
securities, loans, and associated hedges, as agreed, and
such other financial instruments as the U.S. government
(USG) has agreed to guarantee or lend against (the Pool).
Each specific financial instrument in the Pool must be
identified on signing of the guarantee agreement. Financial
instruments in the Pool will remain on the books of
institution but will be appropriately “ring‐fenced.”
The following financial instruments will be excluded from
the Pool: (i) foreign assets (definition to be provided by
USG); (ii) assets originated or issued on or after March 14,
2008; (iii) equity securities; and (iv) any other assets that
USG deems necessary to exclude.
Size: The Pool contains up to $118 billion of financial
instruments. More specifically, the Pool includes cash
assets with a current book (i.e., carrying) value of up to
$37 billion and a derivatives portfolio with maximum
potential future losses of up to $81 billion (based on
valuations agreed between institution and USG).
Term and Coverage of Guarantee:
Guarantee is in place for 10 years for residential assets and
5 years for non‐residential assets. Residential assets will
include loans secured solely by 1‐4 family residential real
estate, securities predominately collateralized by such
loans, and derivatives that predominately reference such
securities. Institution has the right to terminate the
guarantee at any time (with the consent of USG), and the
parties will negotiate in good faith as to an appropriate fee
or rebate in connection with any permitted termination. If
institution terminates the guarantee, it must prepay any
January 15, 2009 outstanding Federal Reserve loan (described below) in full.
Guarantee covers Eligible Losses on the Pool. Eligible
Losses are the aggregate incurred credit losses (net of any
gains and recoveries) on the Pool during the term of the
guarantee, beyond the January 15, 2009, marks and credit
valuation adjustments for the Pool (as agreed between
institution and USG). Eligible Losses do not include
unrealized mark‐to‐market losses but do include realized
losses from a sale permitted under the asset management
template (described below).
Deductible: Institution absorbs all Eligible Losses in the Pool up to
$10 billion.
USG (UST/FDIC) will share Eligible Losses in the Pool in
excess of that amount, up to $10 billion. All Eligible Losses
beyond the institution’s deductible will be shared USG
(90%) and institution (10%).
Financing: Federal Reserve will provide a non‐recourse loan facility to
institution, subject to institution’s 10% loss sharing.
Federal Reserve loan commitment will terminate (and any
loans thereunder will mature) on the termination dates of
USG guarantee. Institution has the right to terminate the
Federal Reserve loan commitment and prepay any Federal
Reserve loans at any time (with consent of Federal
Reserve).
Federal Reserve will charge a fee on undrawn amounts of
20 bp per annum and a floating interest rate on drawn
amounts of OIS plus 300 bp per annum. Interest and fee
payments will be with recourse to the institution.
Institution may draw on Federal Reserve loan facility if and
when additional mark‐to‐market and incurred credit losses
on the Pool reach $18 billion.
January 15, 2009
Fee for Guarantee – Preferred Stock and Warrants:
Institution will issue to USG (UST/FDIC) (i) $4 billion of
preferred stock with an 8% dividend rate (under terms
described below); and (ii) warrants with an aggregate
exercise value of 10% of the total amount of preferred
issued. The fee may be adjusted, as necessary, based on
the results of an actuarial analysis of the final composition
of the Pool, as required under section 102(c) of the
Emergency Economic Stabilization Act of 2008.
Management of Assets:
Institution generally will manage the financial instruments
in the Pool in accordance with its ordinary business
practices, but will be required to comply with an asset
management template provided by USG. This template will
require institution, among other things, to obtain USG
approval (not to be unreasonably withheld) before any
Material Disposition. A Material Disposition is a disposition
of financial instruments in the Pool that creates an Eligible
Loss that, combined with other dispositions of Pool
instruments in the same year, exceeds 1% of the Pool size
at the beginning of the year. This template also will
include, among other things, a foreclosure mitigation policy
acceptable to USG.
Revenues and Risk Weighting:
Institution will retain the income stream from the Pool.
Risk weighting for the financial instruments in the Pool will
be 20%.
Dividends: Institution is prohibited from paying common stock
dividends in excess of $.01 per share per quarter for three
years without USG consent. A factor taken into account for
consideration of USG consent is the ability to complete a
common stock offering of appropriate size.
Executive Compensation:
An executive compensation plan, including bonuses, that
rewards long‐term performance and profitability, with
appropriate limitations, must be submitted to, and
January 15, 2009
approved by, USG. Executive compensation requirements
will be consistent with the terms of the preferred stock
purchase agreement between USG and institution.
Corporate Governance:
Other matters as specified, consistent with the terms of the
preferred stock purchase agreement between USG and
institution.
The foregoing is accepted and agreed
by and among the following as of
January 15, 2009:
DEPARTMENT OF THE TREASURY
FEDERAL RESERVE BOARD
BANK OF AMERICA CORPORATION
FEDERAL DEPOSIT INSURANCE CORP
So we now have the playbook on how the government will ring-fence (nationalize? I guess its a matter of semantics at this point) the big banks. None of the systematically important big banks will be allowed to fail. The government will provide guarantees on bad assets. It might be better to actually remove these assets from the balance sheets and create a bad bank. This will provide the banks will more confidence to lend. But this shouldnt be done without mechanisms for appropriate oversight. This move is important and is a good move. It begins to restore confidence in the financials. Transparency is still missing but hopefully the new administration will be able to provide that in the future. The tackling of insolvency has begun in the first quarter and overall this is very positive news. There are still other institutions out there. We need to get those under control asap as well. This slow bleed - Countrywide, Merill, Wachovia, Freddie / Fannie, AIG, Bank of America is unfortunate. There are others with bad assets - those should all be dealt with speedily and in this quarter!
January 15, 2009
Summary of Terms
Eligible Asset Guarantee
Eligible Assets: A pool of financial instruments consisting of securities
backed by residential and commercial real estate loans and
corporate debt, derivative transactions that reference such
securities, loans, and associated hedges, as agreed, and
such other financial instruments as the U.S. government
(USG) has agreed to guarantee or lend against (the Pool).
Each specific financial instrument in the Pool must be
identified on signing of the guarantee agreement. Financial
instruments in the Pool will remain on the books of
institution but will be appropriately “ring‐fenced.”
The following financial instruments will be excluded from
the Pool: (i) foreign assets (definition to be provided by
USG); (ii) assets originated or issued on or after March 14,
2008; (iii) equity securities; and (iv) any other assets that
USG deems necessary to exclude.
Size: The Pool contains up to $118 billion of financial
instruments. More specifically, the Pool includes cash
assets with a current book (i.e., carrying) value of up to
$37 billion and a derivatives portfolio with maximum
potential future losses of up to $81 billion (based on
valuations agreed between institution and USG).
Term and Coverage of Guarantee:
Guarantee is in place for 10 years for residential assets and
5 years for non‐residential assets. Residential assets will
include loans secured solely by 1‐4 family residential real
estate, securities predominately collateralized by such
loans, and derivatives that predominately reference such
securities. Institution has the right to terminate the
guarantee at any time (with the consent of USG), and the
parties will negotiate in good faith as to an appropriate fee
or rebate in connection with any permitted termination. If
institution terminates the guarantee, it must prepay any
January 15, 2009 outstanding Federal Reserve loan (described below) in full.
Guarantee covers Eligible Losses on the Pool. Eligible
Losses are the aggregate incurred credit losses (net of any
gains and recoveries) on the Pool during the term of the
guarantee, beyond the January 15, 2009, marks and credit
valuation adjustments for the Pool (as agreed between
institution and USG). Eligible Losses do not include
unrealized mark‐to‐market losses but do include realized
losses from a sale permitted under the asset management
template (described below).
Deductible: Institution absorbs all Eligible Losses in the Pool up to
$10 billion.
USG (UST/FDIC) will share Eligible Losses in the Pool in
excess of that amount, up to $10 billion. All Eligible Losses
beyond the institution’s deductible will be shared USG
(90%) and institution (10%).
Financing: Federal Reserve will provide a non‐recourse loan facility to
institution, subject to institution’s 10% loss sharing.
Federal Reserve loan commitment will terminate (and any
loans thereunder will mature) on the termination dates of
USG guarantee. Institution has the right to terminate the
Federal Reserve loan commitment and prepay any Federal
Reserve loans at any time (with consent of Federal
Reserve).
Federal Reserve will charge a fee on undrawn amounts of
20 bp per annum and a floating interest rate on drawn
amounts of OIS plus 300 bp per annum. Interest and fee
payments will be with recourse to the institution.
Institution may draw on Federal Reserve loan facility if and
when additional mark‐to‐market and incurred credit losses
on the Pool reach $18 billion.
January 15, 2009
Fee for Guarantee – Preferred Stock and Warrants:
Institution will issue to USG (UST/FDIC) (i) $4 billion of
preferred stock with an 8% dividend rate (under terms
described below); and (ii) warrants with an aggregate
exercise value of 10% of the total amount of preferred
issued. The fee may be adjusted, as necessary, based on
the results of an actuarial analysis of the final composition
of the Pool, as required under section 102(c) of the
Emergency Economic Stabilization Act of 2008.
Management of Assets:
Institution generally will manage the financial instruments
in the Pool in accordance with its ordinary business
practices, but will be required to comply with an asset
management template provided by USG. This template will
require institution, among other things, to obtain USG
approval (not to be unreasonably withheld) before any
Material Disposition. A Material Disposition is a disposition
of financial instruments in the Pool that creates an Eligible
Loss that, combined with other dispositions of Pool
instruments in the same year, exceeds 1% of the Pool size
at the beginning of the year. This template also will
include, among other things, a foreclosure mitigation policy
acceptable to USG.
Revenues and Risk Weighting:
Institution will retain the income stream from the Pool.
Risk weighting for the financial instruments in the Pool will
be 20%.
Dividends: Institution is prohibited from paying common stock
dividends in excess of $.01 per share per quarter for three
years without USG consent. A factor taken into account for
consideration of USG consent is the ability to complete a
common stock offering of appropriate size.
Executive Compensation:
An executive compensation plan, including bonuses, that
rewards long‐term performance and profitability, with
appropriate limitations, must be submitted to, and
January 15, 2009
approved by, USG. Executive compensation requirements
will be consistent with the terms of the preferred stock
purchase agreement between USG and institution.
Corporate Governance:
Other matters as specified, consistent with the terms of the
preferred stock purchase agreement between USG and
institution.
The foregoing is accepted and agreed
by and among the following as of
January 15, 2009:
DEPARTMENT OF THE TREASURY
FEDERAL RESERVE BOARD
BANK OF AMERICA CORPORATION
FEDERAL DEPOSIT INSURANCE CORP
So we now have the playbook on how the government will ring-fence (nationalize? I guess its a matter of semantics at this point) the big banks. None of the systematically important big banks will be allowed to fail. The government will provide guarantees on bad assets. It might be better to actually remove these assets from the balance sheets and create a bad bank. This will provide the banks will more confidence to lend. But this shouldnt be done without mechanisms for appropriate oversight. This move is important and is a good move. It begins to restore confidence in the financials. Transparency is still missing but hopefully the new administration will be able to provide that in the future. The tackling of insolvency has begun in the first quarter and overall this is very positive news. There are still other institutions out there. We need to get those under control asap as well. This slow bleed - Countrywide, Merill, Wachovia, Freddie / Fannie, AIG, Bank of America is unfortunate. There are others with bad assets - those should all be dealt with speedily and in this quarter!
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