November 20, 2008

Citi Under Pressure

While lawmakers are asking the Big Three carmakers to produce their future business plans before a bailout, already bailed out financial institutions are enduring further pessimism from investors.

Citicorp's shares traded under 5 on November 20 as the Dow moved toward 7,500, even though Saudi Prince Alwaleed bin Talal had said he plans to increase his stake to 5 percent from less than 4 percent. He also called the bank's shares "dramatically undervalued" following a nearly 90 percent drop since late 2006.

The Saudi prince gave his full support for embattled Chief Executive Vikram Pandit, who earlier this week announced a plan to eliminate 52,000 jobs as part of a program to cut expenses 20 percent, but investors remain skeptical. They are especially concerned about further expected write-downs and related troubles associated with the current global economic recession and its impact on the bank.

Earlier in the week, Citi said that in order to complete the wind-down of the Citi-advised Structured Investment Vehicles ("SIVs"), it committed to acquire the remaining assets of the SIVs at their current fair value, estimated to be roughly $17.4 billion, net of cash, as compared to $21.5 billion at September 30.

Citi explained that it will record these assets as available for sale. As a result of the transaction, Citi's GAAP assets will be reduced by approximately $6 billion and risk-weighted assets will be increased by approximately $2 billion.

The SIVs have been selling assets as part of an orderly asset-reduction plan to fund maturing debt obligations on a timely basis, and have reduced long-term assets from $87 billion at the end of July 2007 to $17 billion currently.

As previously disclosed, Citi has been providing financial support to the SIVs, the company says. The current fair value of such support is $6.5 billion and is expected to be repaid upon completion of the transaction. This transaction will result in the SIVs' having sufficient funds to repay maturing senior debt obligations, according to the company. Citi's net incremental funding requirement at closing is estimated at $300 million.

Citigroup is among the final bidders for Chevy Chase Bank, along with JPMorgan Chase and Capital One Financial. Chevy Chase Bank has about $11 billion in deposits, while Citi has some $780 billion.

Reprints Discuss this story
This is where the comments go.