Citigroup Writedowns May Be as Much as $13.7 Billion (Update6)

By John Glover and Jody Shenn


Nov. 6 (Bloomberg) -- Citigroup Inc., the world's biggest bank, may have losses from asset-backed bonds of as much as $13.7 billion, roughly equal to the company's profit so far this year. The shares fell for a sixth straight day.

The bank may have to write down an additional $2.7 billion of subprime mortgage-backed and related securities, CreditSights Inc. said today. Citigroup said on Nov. 4 that securities it holds may have lost $11 billion of value, prompting rating companies to downgrade its credit and precipitating the ouster of Chief Executive Officer Charles O. ``Chuck'' Prince III.

Additional writedowns may balloon to $21.1 billion if off- balance-sheet units are included, according to analysts David Hendler, Richard Hoffman and Pri de Silva in New York. That compares with potential losses of $5.4 billion for Bank of America Corp. in Charlotte, North Carolina, the second-biggest U.S. bank, and $4.1 billion for New York-based JPMorgan Chase & Co., the third-biggest, CreditSights said.

``Citigroup causes us the most concern of the big banks,'' the analysts said in a report today. ``Citi's risk is further amplified by its relatively weak capital position,'' reducing its flexibility in responding to crises.

Citigroup fell 82 cents, or 2.3 percent, to $35.08 as of 4:20 p.m. in trading on the New York Stock Exchange. The shares have fallen 17 percent in a week, and reached a four-year low today.

Potential Losses

The analysts cited New York-based Citigroup's business structuring collateralized debt obligations and its leading position in setting up off-balance-sheet units that it now may have to take back on its books.

With the exception of Merrill Lynch & Co., which last month reported $8.4 billion of writedowns in the third quarter and may be on the hook for another $9.4 billion, the potential losses related to CDOs at the three major banks in absolute terms dwarf those of the largest brokers.

Lehman Brothers Holdings Inc., Bear Stearns Cos., Goldman Sachs Group Inc. and Morgan Stanley, all based in New York, stand to lose as much as a quarter of their equity, according to CreditSights.

The announcement of Citigroup's potential losses and the exit of its CEO prompted Fitch Ratings to cut its rating to AA, three levels below the top, and say it may reduce the rating again. Standard & Poor's said it may lower its AA grade.

Emergency SIV Financing

Citigroup reported $5 billion in net income in the first quarter, $6.2 billion in the second quarter and $2.4 billion in the third quarter, for a total of $13.6 billion. Writedowns of $21.1 billion would be equal to about 17 percent of the bank's reported shareholders' equity of $120 billion in 2006.

Citigroup Inc. said yesterday that it provided $7.6 billion of emergency financing to the seven structured investment vehicles it runs after they were unable to repay maturing debt. The SIVs drew on the $10 billion of so-called committed liquidity provided by Citigroup, according to a Securities and Exchange Commission filing.

``This company, if it were any other company, would probably be considered to be operating in an unsafe and unsound condition,'' said Josh Rosner, managing director at New York- based investment research firm Graham Fisher & Co.

SIVs sell commercial paper to buy longer term assets such as mortgage or bank bonds. Citigroup SIVs have no direct investments in subprime assets and $70 million of ``indirect exposure'' through collateralized debt obligations, or bonds that package debt, according to the filing, based on figures as of Oct. 31. The bank won't consolidate the assets of the SIVs on its balance sheet, according to the filing.

Richard Stuckey

Citigroup named Richard Stuckey, 51, to manage most of its $43 billion of subprime mortgage assets, the same executive who helped unwind hedge fund Long-Term Capital Management LP's bad bets nine years ago.

Stuckey, who has been with the company since 1983, will oversee most of the bank's securities linked to homeowners with poor credit, according to a memo to employees. Rescuing the bank's subprime holdings may be a harder challenge than Long-Term Capital, said Lawrence White, professor of economics at New York University's Stern School of Business.

``The opaqueness as well as the stinkiness are greater,'' White said.