Citigroup May Get Government Rescue, Investors Say
Nov. 21 (Bloomberg) -- Citigroup Inc. will probably get rescued by the U.S. government after a crisis in confidence erased half its stock-market value in three days, investors and analysts said.
Citigroup has more than $2 trillion of assets, dwarfing companies such as American International Group Inc. that got U.S. support this year. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke may favor a rescue to avoid the chaotic aftermath of Lehman Brothers Holdings Inc.‚Äôs bankruptcy in September.
‚ÄúThere is no question that Citi is in the category of ‚Äėtoo big to fail,‚Äô‚ÄĚ said Michael Holland, chairman and founder of Holland & Co. in New York, which oversees $4 billion. ‚ÄúThere is a commitment from this administration and the next to do what it takes to save Citi.‚ÄĚ
While Citigroup executives say the company has adequate capital and liquidity to ride out the crisis, its tumbling share price may shake the confidence of creditors, clients and rating agencies. A similar scenario played out at Lehman, when Chief Executive Officer Richard Fuld declared the firm was ‚Äúon the right track‚ÄĚ five days before the firm went bankrupt.
‚ÄúThe market may be implying some sort of regulatory intervention,‚ÄĚ Jason Goldberg, a former Lehman analyst who now works at Barclays Capital in New York, wrote in a note to clients today. ‚ÄúIn situations where the government has stepped in, the equity holders have not fared well.‚ÄĚ
Pandit‚Äôs Conference Call
Citigroup CEO Vikram Pandit told employees today that he doesn‚Äôt plan to break up the company, aiming to reassure workers as the stock resumed its skid. Citigroup shares dropped 94 cents, or 20 percent, to $3.77 at 4:08 p.m. in New York, giving the company a market value of about $21 billion. The stock pared its loss after the close of official trading, fetching $4.07 as of 4:35 p.m.
Pandit and Chief Financial Officer Gary Crittenden, speaking on a worldwide conference call this morning, also said they don‚Äôt expect to sell the Smith Barney brokerage unit, according to two people who listened to the call and declined to be identified because it wasn‚Äôt open to the public.
The call came as Citigroup‚Äôs board, led by Chairman Win Bischoff and independent director Richard Parsons, prepared to meet today at the bank‚Äôs headquarters in New York, said a person familiar with the company‚Äôs plans who declined to be identified because the deliberations are private. Bischoff, interviewed at a conference in Portugal today, declined to comment on any potential changes to the board.
No. 5 By Value
Once the biggest U.S. bank, with a market value of $274 billion at the end of 2006, Citigroup has now slipped to No. 5 behind Minneapolis-based U.S. Bancorp. A plan by 51-year-old Pandit this week to cut costs by shedding 52,000 jobs and an endorsement by billionaire Saudi investor Prince Alwaleed bin Talal didn‚Äôt assuage shareholders‚Äô concern that bad loans and securities writedowns may extend a year-long run of net losses totaling $20 billion.
‚ÄúTo be consistent with the last few government interventions, I don‚Äôt think Citigroup‚Äôs going to be allowed to fail,‚ÄĚ said William Fitzpatrick, an analyst at Optique Capital Management Inc. in Milwaukee, which oversees about $1 billion and doesn‚Äôt own Citigroup shares. ‚ÄúThis company‚Äôs too intertwined with the rest of the financial system to allow any further deterioration.‚ÄĚ
Citigroup spokesman Michael Hanretta declined to comment. On the call today with employees, Pandit said the company‚Äôs capital and liquidity are strong.
Including a $25 billion capital injection from the U.S. Treasury under the $700 billion Troubled Asset Relief Program, the company has at least $50 billion of capital above the amount required by regulators to qualify as ‚Äúwell capitalized.‚ÄĚ Capital is the cushion banks must keep to absorb losses and protect depositors.
Deutsche Bank AG analyst Mike Mayo wrote in a report today that the bank‚Äôs $25 billion of reserves, when combined with other resources, ‚Äúshould be enough to cover estimated cumulative losses of $50 billion on loans.‚Äô‚ÄĚ Mayo rates the stock ‚Äúhold‚ÄĚ and has a $9 price target.
‚ÄúWith Citi being as big as they are, the government will make a special case and step in and find another reason to dispose of more TARP funds,‚ÄĚ said Matt McCormick, a portfolio manager and banking analyst at Bahl & Gaynor Investment Counsel in Cincinnati, which manages about $2.9 billion and doesn‚Äôt own Citigroup stock or debt.
Deposits Are Safe
Pandit was appointed last December to succeed Charles O. ‚ÄúChuck‚ÄĚ Prince, who was ousted as mortgage-bond writedowns saddled the bank with a record fourth-quarter loss of almost $10 billion. Prince was the handpicked successor of former Chairman and CEO Sanford ‚ÄúSandy‚ÄĚ Weill, who built the company through a series of acquisitions over 17 years before stepping down in 2003.
Bischoff, 67, was Citigroup‚Äôs top executive in Europe until he was named chairman when Pandit became CEO.
Bank employees have been telling customers their deposits are safe, and so far corporate clients haven‚Äôt moved their money elsewhere, said three people familiar with the matter who declined to be identified because they weren‚Äôt authorized to speak publicly about the accounts.
Crittenden, 50, has told colleagues it would be unwise to make hasty decisions to dispose of good businesses to satisfy investor demands for a show of action, one person familiar with the matter said.