Zazzle Shop

Screen printing

Friday, January 16, 2009

Citigroup Posts Loss, Will Break up into 2 Units

NEW YORK (AP) -- Citigroup said Friday it is splitting into two businesses as it reported a fourth-quarter net loss of $8.29 billion -- its fifth straight quarterly loss.

Related Quotes


In Citigroup's reorganization, one business, Citicorp, will focus on traditional banking around the world, while the other, Citi Holdings, will hold the company's riskier assets.

CEO Vikram Pandit's move will allow Citigroup to sell or spin off the Citi Holdings assets to raise cash. It also reveals the company's growing focus on back-to-basics lending and deposit-gathering, and dismantles the "financial supermarket" created a decade ago.

Shares rose about 4 percent in pre-market trading.

Some investors have been calling for a breakup of Citigroup for years, as the bank struggled to keep up with its Wall Street peers. Those calls grew louder as the mortgage crisis caused the company's troubles to mount.

There has been harsh blame for Citigroup's woes directed at the board, too -- and the company said Friday it plans to get rid of more board members after the recent departure of long-time director and former Treasury Secretary Robert Rubin.

"There has been one announced departure from the board. Together with other anticipated departures, this gives us the opportunity to reconstitute the board and we will do so as quickly as possible," said Richard Parsons, Citi's lead director, in a statement.

The New York-based bank's fourth-quarter loss amounted to $1.72 per share. Analysts expected a loss of $1.31 per share. While the per-share loss was higher than the consensus estimate, the total loss was smaller than the $10 billion many investors feared. For the year-ago fourth quarter, Citigroup had a net loss of $9.83 billion, or $1.99 per share.

The results were "clearly disappointing," Pandit said during a conference call with investors. "I can assure you that my No. 1 priority is to return this company back to profitability."

For the latest quarter, Citigroup marked down $7.8 billion in securities and banking revenue, and $5.3 billion on the value of credit derivatives. It also lost $2.5 billion in private equity and equity investments, $2 billion in restructuring costs, and $6 billion to add to reserves.

It also booked more than $4 billion in gains, after taxes, from selling its German retail bank and its India-based outsourcing business.

Revenue fell 13 percent to $5.6 billion from a year ago. At its peak performance in the second quarter of 2007, Citigroup was pulling in $25.8 billion in revenue. Citigroup used to be the largest bank by assets, but recently lost that title to JPMorgan Chase & Co.

After massive layoffs and business sales in 2008, the bank's work force dropped by about 52,000 to 323,000 in 2008, the company said. Last fall, Pandit announced Citigroup would shed a total 75,000 employees -- meaning there are 23,000 employees still to be let go.

The cuts come as Citigroup has racked up more than $28 billion in losses for the past five quarters. Its biggest deficit was in the fourth quarter of 2007; the losses abated, but then accelerated in late 2008.

For all of 2008, Citi suffered a net loss of $18.72 billion, or $3.88 per share. The compares with a profit of $3.62 billion, or 72 cents per share, in 2007.

The new Citicorp will include the retail bank; the corporate and investment bank; the private bank, which serves wealthy individuals; and global transaction services.

Citi Holdings -- which will account for $850 billion of Citigroup's $1.95 trillion in assets -- will include Citi's asset management and consumer finance segments, including CitiMortgage and CitiFinancial. It will also be in charge of Citi's 49 percent stake in the joint brokerage with Morgan Stanley, and the pool of about $300 billion in mortgages and other risky assets that the U.S. government agreed to backstop late last year.

Citigroup said it entered a definitive agreement on that deal with the government on Thursday. The government has already lent the bank $45 billion. Citigroup is not alone in requiring more government funding than originally planned last fall -- early Friday, the Bush administration agreed to give Bank of America Corp. an additional $20 billion worth of fresh capital to help it sustain losses at Merrill Lynch, in addition to $25 billion in rescue funds it previously received.

Pandit said Citi Holdings has some valuable businesses, but ones that are not "core" to Citigroup's mission as it tries to hone in on its global banking business and become more careful about risk.

He said he will consider "all options," but that "we're not in a rush to sell businesses."

The company's new structure is practically a reversal back to 1998, when John Reed's Citicorp merged with Sandy Weill's financial services conglomerate Travelers Group. Travelers Group at the time had an insurance business, an asset management business, the retail brokerage Smith Barney, and the investment bank and bond trader Salomon Brothers.

The 1998 combination was Weill's idea, and was made possible by the partial repeal of the Glass-Steagall Act of 1933 -- which prohibited banks from also getting involved in investing and insurance. Reed agreed to the deal, saying that average people did not want to have to shop around for financial products.

The culture and technology over the past decade, however, seem to have shot down that forecast.

"In this day and age, with the Internet and access to information, a lot of savvy consumers have figured out that it's better to shop around," said Michael Pagano, a finance professor at Villanova University School of Business. "The reality is there are some customers, but not enough, to justify this comprehensive set of services that are out there."

It's not the model itself, though, that clobbered Citigroup, said Bert Ely, a banking industry consultant in based in Alexandria, Va.

"Possibly, Citigroup bit off too much too quickly to make it work," Ely said. "It was more focused on doing deals ... and not focused on the nitty gritty of integration and execution, of making it work day in and day out."

Many shareholders criticize Citigroup's board and previous management for allowing too much risk-taking.

Back in July 2007, when mortgage defaults were piling up but the credit markets were still functional, Citigroup's then-CEO Charles Prince told the Financial Times: "When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you've got to get up and dance. We're still dancing."

Prince, a protege of Weill, was ousted that November and replaced by Pandit -- a Morgan Stanley veteran brought on in 2007 by Citigroup.

(Another protege of Weill -- JPMorgan Chase CEO Jamie Dimon -- has garnered praise on Wall Street and in Washington for running a more stable enterprise than Citigroup. JPMorgan just barely eked out a profit for the fourth quarter, it said Thursday.)

Now that Citigroup will be relying more on basic banking, it must address its weaknesses in that area. Citigroup recently lost the opportunity to buy Wachovia Corp.'s U.S. deposit base to Wells Fargo & Co. Meanwhile, JPMorgan Chase & Co.'s deposit base soared after it bought Washington Mutual Inc.

And the bank's results Friday showed that credit deterioration was severe in the fourth quarter, from North America to Europe to Latin America to Asia. Even if Citigroup separates its "bad" assets from its "good" assets, the bank still faces strong headwinds to profitability.

"A major challenge," Ely said, "is how are they going to build a meaningful domestic banking business?"