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Citigroup: Bank under pressure

Submitted by on Tuesday, 25 November 2008No Comment

The government rescue of Citigroup reversed the perilous slide of the company’s stock, but pressure is mounting on its executives and directors to do even more to stabilise the financial giant.

Citigroup’s shares jumped 58 per cent after federal officials announced an agreement late Sunday night to pour $US20 billion ($31 billion) of capital into Citigroup and absorb as much as $US249 billion in potential losses on real-estate loans and securities held by the bank.

Citigroup executives acknowledged today that the government made it clear in weekend negotiations that it expects the company to continue to reduce its appetite for risk, and to seriously weigh more drastic actions, including possibly breaking up the company.

Gary Crittenden, chief financial officer, said in an interview that Citigroup has no “preconceptions” about its vast array of businesses. “The constituent parts could change,” he said. “We’re looking all the time to see if there are different possible combinations, either buy or sell, that make sense for the organisation.”

Mr Crittenden declined to comment on the scenarios being examined. Executives and directors have discussed potential mergers with other financial institutions or selling major business lines, people familiar with the situation said.

“This is a reprieve, but it’s not a complete pardon,” said another person familiar with the matter, referring to the government rescue plan. “Nobody’s confused about that.”

The government did not push for the ouster of Citigroup’s chief executive, Vikram Pandit, as part of the agreement, as it did with the CEO of American International Group when it bailed out that company. Still, as federal officials debated the structure of the plan, there was disagreement on whether Mr Pandit was at fault for the company’s problems, according to people familiar with the situation. One name that Wall Street executives have mentioned as a possible replacement is American Express chief executive Kenneth Chenault.

Spokespeople for Citigroup and American Express declined to comment.

News of the rescue pushed stocks sharply higher, with the Dow Jones Industrial Average climbing 396.97 points, or 4.9 per cent, to 8443.39. That close was the highest since November 14. Still, the Dow is down 40 per cent from its all-time high in October 2007.

People involved in the frenzied bailout negotiations said in interviews that Citigroup executives realised by the middle of last week that the plunge in the company’s shares — they fell 60 per cent last week — posed a major threat to the company’s viability.

Having dodged the bullet, Mr Pandit finds himself under intense pressure to take major steps to stabilise the company. He faces a board of directors, clients and shareholders who remain nervous about Citigroup’s stability, and government regulators who seem prepared to keep the company on a tight leash.

Since becoming CEO last December, Mr Pandit has embraced Citigroup’s existing structure, resisting calls to dismantle the sprawling global enterprise. Mr Crittenden said today that the company’s “fundamental strategy basically stays the same, but we’re open-minded.”

The company faces swelling losses on loans that aren’t covered under the government’s loss-sharing agreement, which amounts to insurance on a $US306 billion pool of assets. Under the plan, Citigroup will shoulder the first $US29 billion in losses on that pool. After that, three government agencies will absorb 90 per cent of any remaining losses, which amounts to $US249 billion

The arrangement covers Citigroup’s portfolios of US residential and commercial mortgages and its leveraged corporate loans, among other assets. The assets aren’t just risky ones; the government insisted that the agreement cover entire asset classes, so that Citigroup couldn’t simply dump toxic loans and securities in the lap of taxpayers.

Absent from the arrangement are Citigroup’s giant credit-card business, where defaults have been rapidly piling up, and its overseas lending operations, which also are showing signs of stress.

While the government deal bolsters Citigroup’s capital ratios, “we are concerned that losses may eventually exceed the government’s backstop,” said Standard & Poor’s equity analyst Stuart Plesser.

In exchange for covering hundreds of billions of dollars in potential losses, Citigroup is issuing the government a total of $US27 billion in preferred shares, in which the government will receive regular dividends. The government now holds a 7.8 per cent stake in Citigroup, which entitles it to $US3.4 billion a year in dividends.

Last Wednesday, Citigroup executives began discussing the idea of seeking a show of support from the government if the stock price kept declining. By the end of the week, a small number of clients, including wealthy customers of Citigroup’s private bank, had started defecting. Executives and government officials worried about a potential exodus.

Confidence “began to shake,” said a person with direct knowledge of the situation. “It was a complete death spiral and we had to stop it.”

Bank officials contemplated what they might do to pave the way for federal assistance, such as agreeing to steps to avoid foreclosing on delinquent mortgage customers.

Last Friday, Citigroup vice-chairman Lewis Kaden and investment banker Edward Kelly spoke by phone with New York Fed president Timothy Geithner to discuss the worsening situation. Mr Geithner, president-elect Obama’s nominee for Treasury secretary, encouraged the Citigroup executives to come up with ideas for how the government could help stabilise the company.

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