Business

Citigroup’s woes began with failed bid for Wachovia

Less than two months ago, Citigroup emerged from the wreckage of the financial crisis as one of the last titans left standing on Wall Street.

Now, in a stunning turnabout, the banking giant has sunk to its knees after a series of blows that have driven its stock price to a mere $3.77 on Friday last — and left it running short on time and options.

In the decade since Citigroup was born from the merger of Citicorp and Travelers Group, it weathered many storms that threatened to pull it apart. But the current turmoil can be traced back to the last weekend of September, when it sought to reassert itself by swallowing Wachovia, the stricken Charlotte-based bank whose vast deposit base would have turned Citi into one of America’s dominant lenders.

As the global meltdown drove Wachovia toward collapse, the government frantically engineered their marriage. At a bargain price of $1 a share, Vikram S. Pandit, Citigroup’s chairman, was happy to oblige. The deal would have greatly enhanced Citi’s retail banking presence and added more stable consumer deposits to a balance sheet staggered by billions of dollars in write-downs on bad mortgage loans and related securities.

But like so many other things for Citigroup over the last several years, it fell apart. Less than a week later, Wells Fargo, the powerful San Francisco-based bank, swooped in with a higher offer. Citi was left in the lurch, without a business that was vital to its future.

That collapse kicked off a steady decline in Citigroup shares that snowballed last week as speculation grew that the bank may require a government bailout, a forced merger that would crush common equity holders, or an ouster of Pandit.

In the last five days alone, more than half of Citigroup’s market value was vaporised, and investors and analysts intensified calls for the bank to find ways to lift its stock price, including splitting the company, selling pieces, or selling itself outright.

The bank has fought back vigorously with assertions that its capital position is strong. It announced plans on Monday last to cut costs and slash 52,000 jobs. On Thursday last, Saudi Prince Alwaleed bin Talal, Citi’s biggest individual shareholder, said he would increase his stake in the bank to 5 per cent from 4 percent.

But none of that has appeased investors, some of whom believe Citigroup must raise $20 billion or more in new capital to offset expected losses — and may have trouble doing so.

To some extent, Citigroup’s fortunes have declined as the storm in the broader financial industry has grown angrier.

Many of these problems were masked during the credit boom this decade. But with the financial crisis in full swing, the bank’s failure to unite its empire has become more exposed than ever.

These strains intensified significantly in recent days, when a near three-week long grace period in financial markets came to an abrupt halt. Credit markets had begun to thaw as a $700 billion bailout for the financial industry kicked in, and the U.S. presidential elections breathed a temporary euphoria into markets worldwide.

. Policymakers had suggested the government would have paid higher prices for the securities than they could fetch on the open market, something that would have helped reduce the financial pressure on Citigroup.

Allen L. Sinai, president of Decision Economics in New York, said that while the original plan to buy assets was poorly conceived, the decision to scrap it severely damaged banks like Citigroup that were holding billions of dollars of mortgage-related assets.

Now ``those balance sheets will continue to contract as long as housing prices continue to go down,” said Sinai. ``What the flip-flopping has done is put another nail in some of our financial institutions.”

Investors pounded financial shares further as a recent drumbeat of dire economic news about consumers and unemployment made clear that banks will face larger losses on consumer loans, as well as the prospect of billions of dollars more in mortgage-related write-downs. While financial shares fell across the board, Citigroup, with its large cost base and troubled holdings, quickly became viewed as the most vulnerable, sparking huge sell-offs that worsened as hedge funds bet on a decline in Citigroup stock.

Then, on Tuesday, a report about imminent defaults on two large commercial mortgages sent the price of bonds backed by those loans tumbling. The first $209 million loan was backed by two Westin hotels in Arizona and Hilton Head, S.C., and the second was a $125 million loan backed a shopping complex in southern California.

These problems sparked renewed fears that a vast wave of damaged commercial loans would course through banks — including Citigroup — already hit by a tsunami of toxic mortgage products.

BEN WHITE and VIKAS BAJAJ
New York Times News Service

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