[A-List] Citigroup Loss Raises Anxiety Over Economy

["Charles Brown" <charlesb@xxxxxxxxxxxxxxxxxxxxx>]

NY Times, January 16, 2008
Citigroup Loss Raises Anxiety Over Economy
By JENNY ANDERSON and ERIC DASH

Citigroup, the nationâs largest bank, reported a staggering 
fourth-quarter loss of $9.83 billion on Tuesday and issued a sobering 
forecast that the housing market and the broader economy still had not 
bottomed out.

To shore up their financial condition, Citigroup and Merrill Lynch, 
which has also been rocked by the subprime mortgage debacle, both were 
forced again to go hat in hand for cash infusions from investors in the 
United States, Asia and the Middle East, for a combined total of nearly 
$19.1 billion.

Citigroupâs gloomy news will most likely amplify the anxiety of 
consumers and workers already concerned that the mortgage crisis could 
plunge the economy into a recession. Adding to worries, the government 
reported that retail sales in December declined for the first time since 
2002.

Growing pessimism led to another sharp sell-off in stocks, which fell 
about 2 percent for the day and are now down about 6 percent since the 
beginning of 2008, the third worst start for a year since 1926.

More bad news is coming, with Merrill Lynch expected to report sizable 
losses this week and major financial institutions like Bank of America 
retreating from their investment banking business. These moves add to 
concerns that financial institutions will be forced to pull back on 
lending at a time the economy most needs access to credit to help 
cushion against a downturn.

âIt looks like the financial sector as a whole will see a big decline in 
profits, and the only time this happened in the last 100 years â 
financial firmsâ going from making good profits to negative profits â 
was the Depression in the 1930s,â said Richard Sylla, a professor of 
financial history at New York University. âI donât think it will be as 
bad this time; the Federal Reserve is fighting the problem as hard as it 
can.â

Just last week, the Federal Reserve chairman, Ben S. Bernanke, said the 
economy was worsening, bringing widespread hope that the Fed would move 
swiftly to lower interest rates. Wall Streetâs worsening results 
combined with Mr. Bernankeâs comments will certainly add fuel to the 
economic stimulus package being debated by the White House, Congress and 
the central bank.

Citigroupâs record loss was caused by write-downs from soured 
mortgage-related securities and reserves for current and future bad 
loans totaling $23.2 billion. Responding to a string of dismal quarters, 
the bank said it would also lay off another 4,000 workers, on top of 
announced reductions of 17,000 employees, and cut its dividend to 
conserve $4.4 billion cash annually.

Citigroup, which earlier raised $7.5 billion from the Abu Dhabi 
Investment Authority to improve its capital, said it had raised an 
additional $12.5 billion from a number of investors, including the 
Government of Singapore Investment Corporation and Citigroupâs former 
chairman and chief executive, Sanford I. Weill. Citigroup will also 
offer public investors about $2 billion of newly issued debt securities, 
a portion of which will be convertible into stock.

At the same time, Merrill Lynch announced it had issued $6.6 billion in 
preferred stock to the Kuwait Investment Authority, the Korean 
Investment Corporation, Mizhuo Financial Group, a Japanese bank and 
other investors, including the New Jersey pension fund and a Saudi 
investment fund. That is in addition to the $4.4 billion it raised in 
December from Temasek Holdings of Singapore.

While the banks were able to raise record amounts of cash, they had to 
circle the globe to get it, and they had to raise it in two separate 
rounds. There is âa tremendous amount of liquidity in the world,â Mr. 
Weill said in an interview. âThat is witnessed in the amounts of money 
Citigroup was able to raise in a very short period of time.â

Citigroup, which has a large consumer lending business, sounded some 
warning bells on Tuesday that the American economy was turning. The bank 
reported sharp upticks in losses stemming from souring auto, home and 
credit card loans, with problems coming from the same areas being hit by 
real estate.

Two-thirds of the credit card losses, for example, occurred in just five 
states â California, Florida, Illinois, Arizona and Michigan â that have 
been among those hit hardest by the housing downturn. Gary L. 
Crittenden, the companyâs chief financial officer, acknowledged the 
bankâs losses appeared to be accelerating month after month.

The banksâ need for additional financing suggests that housing-related 
problem will persist. Citigroup executives expect house prices around 
the country will fall, on average, another 6.5 percent to 7 percent.

The news sent the companyâs stock tumbling 7.3 percent, to $26.94. It 
has now fallen about 50 percent in the past year.

The write-downs did not assuage fears in the market that more bad news 
was coming. âI think the financials will continue to need to raise more 
money,â said Barry L. Ritholtz, chief executive of Fusion IQ, a 
quantitative research and asset management firm.

The fear is that financial institutions will continue to take large 
write-downs as bad loans mount, while consumers, facing higher energy 
costs, falling house prices and a bleak outlook for job growth, will 
rein in spending even more than they already have.

Citigroup set aside $4.1 billion for future bad loans, and Mr. 
Crittenden said the bank is tightening lending standards as credit card 
defaults increase, a move that could make it harder for consumers to 
continue the spending that has helped fuel growth in recent years.

Bank of America said on Tuesday that it would lay off 650 people on top 
of the previously announced 500 and retrench in a number of significant 
businesses, including certain trading operations and prime brokerage, or 
servicing hedge funds. Kenneth D. Lewis, its chairman and chief 
executive, sounded a somber note about the markets.

âI am not sure there are any quick fixes,â he said in a meeting with 
reporters. âOnly time and a little more pain will be the answer.â

Adding concern to the outlook is the significant role that financial 
service companies have come to play on the back of robust growth. From 
1995 through 2006, financial service companies represented 17.8 percent 
of the Standard & Poorâs 500 index and contributed a whopping 25.1 
percent of total earnings. No longer.

Including Citibankâs large fourth-quarter write-down, financial service 
companies constituted roughly 7 percent of total fourth-quarter 
earnings, according to Howard Silverblatt, senior index analyst at 
Standard & Poorâs.

For a sense of how steep the fall has been, Mr. Silverblatt pointed out 
that for the fourth quarter, earnings for all companies in the index 
fell 11.2 percent. But taking out financials, the index was up almost 11 
percent.

Mr. Ritholtz from Fusion IQ is watching carefully to determine if 
weakness in consumer spending is psychological and temporary or more 
severe, stemming from a lack of available capital.

âLending is a function of trust â trust that people will pay back what 
they borrow,â he said. âThe problem with the banks is that they donât 
trust their clients or each other.â