Citigroup worries mount, shares tumble 23 percent

NEW YORK (Reuters) - Citigroup Inc faced growing uncertainty on Wednesday about whether it will rebound from punishing losses, as investors drove the stock below $5, its lowest level since a government rescue in November.

More bad news is expected on Friday, when the bank plans to report quarterly results, six days ahead of schedule, and analysts are looking for a fifth straight multibillion-dollar loss. The bank is also widely expected Friday to provide details of a comprehensive downsizing designed to ensure its survival.

Rival JPMorgan Chase & Co also moved up its earnings report by six days to Thursday.

Once the world's largest bank, but now No. 3 in just the United States, Citigroup is expected to shrink by about one-third as it focuses on corporate, investment and retail banking and trims trading operations, a person familiar with the plan said.

Citigroup will also put unwanted businesses and assets into a separate structure, with an eye toward their eventual sale, the source said.

The U.S. Treasury Department has pumped $45 billion of taxpayer funds from the Troubled Asset Relief Program, including $20 billion on November 23, when the government agreed to a bailout, sharing in bank losses in exchange for preferred stock and warrants.

The bailout helped avoid a collapse on the heels of the Lehman Brothers Holdings Inc's bankruptcy on September 15.

"I really don't know how the unraveling finishes," said Henry Asher, president of Northstar Group Inc in New York. "It looks like the government is forcing a controlled descent, without going the full monty as it did with Lehman."

In a memo to employees, Chief Executive Vikram Pandit said the bank is ready to release earnings on Friday, with "no need to wait" another six days.

Pandit, who turned 52 on Wednesday, also said while Citigroup's goals include a streamlining of operations and strengthening of its balance sheet, "We are and will remain a bank." He said the bank faces a "long-term transformation."

Shareholders have shown little patience. Citigroup shares fell $1.37, or 23.2 percent, to $4.53 Wednesday as trading volume topped 510 million shares.

Other bank stocks also declined, including larger rivals Bank of America Corp and JPMorgan, which fell 4.2 percent and 1.7 percent, respectively. The 24-member KBW Bank Index .BKX slid 6 percent and touched a 13-year low.

PANDIT'S ABOUT-FACE

Getting rid of major assets marks an about-face for Pandit, who wanted to shrink the bank while keeping large parts of the "financial supermarket" model promoted by Sanford "Sandy" Weill, who created Citigroup in a 1998 merger.

On Tuesday, Citigroup said it will combine its Smith Barney brokerage and other units with Morgan Stanley's wealth management unit. Morgan Stanley will pay $2.7 billion and take a 51 percent stake in the joint venture, and can buy the rest after five years.

While the transaction will bolster Citigroup's balance sheet and result in a $5.8 billion gain, the decline in the stock resembled the downdraft on November 17-21, the week before Citigroup got the second TARP infusion. Shares fell 60.4 percent that week.

"We continue to be concerned that weakness in Citigroup's share price may lead to lack of customer (or government) confidence," Barclays Capital analyst Jason Goldberg wrote on Wednesday.

There has been a drumbeat of analysts' questions about whether regulators or Citigroup directors and executives will give Pandit time to finish the job.

"Regulators are concerned about the quality of the management that got us where we are in the banking industry," said Nancy Bush, an independent banking analyst and managing member of NAB Research LLC. "At Citigroup, the government has far more influence than on any other bank in the industry, and that's why there may be more force to bear there."

WHERE ARE THE BUYERS?

Pandit became CEO in December 2007, inheriting many problems from predecessor Charles Prince.

The bank has reported $20.3 billion in net losses, and taken more than $64 billion in credit losses and writedowns since Pandit took over.

Critics have said Pandit, known from his days as a top Morgan Stanley executive as a brilliant but cautious leader, was not aggressive enough in tackling the morass that Citigroup's $2 trillion-plus balance sheet had become.

Citigroup's ability to spin off assets may be limited. "We question where the buyers will come from, since few are both large enough and strong enough," wrote David Trone, an analyst at Fox-Pitt Kelton Cochran Caronia Waller. He rated Citigroup shares as "in line."

Ten analysts who issued estimates over the last week look for a fourth-quarter loss of 94 cents per share, on average, according to Reuters Estimates.

The annual cost of protecting $10 million of Citigroup debt against default for five years rose to $410,000 on Wednesday from $265,000 Tuesday, according to Phoenix Partners Group.


 

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