In These New Times

Independent

22nd November, 2008

Citigroup assembled its board to “think the unthinkable” yesterday, with a fire sale or a break-up of the financial giant on the table.

The company’s shares plunged for the fifth straight day, as the rest of Wall Street followed the twists and turns of a drama every bit as significant as the fall of Bear Stearns or Lehman Brothers earlier in the year.

The situation is different this time, however, because the US government has become a major investor in Citigroup, putting $25bn into the company in October, guaranteeing new debt issued by the company and in effect anointing it “too big to fail”. Officials from the Treasury and other regulators were working with Citigroup yesterday as it examined its options for averting a crisis of confidence.

The day began with reports that Citigroup’s board had begun informally examining options such as selling part or all of the company, and would convene a full meeting to discuss ways of staunching the crisis.

Then at 8am, Vikram Pandit, chief executive, convened a conference call with senior managers at which he stressed his commitment to Citigroup’s existing business model as a “financial supermarket” spanning high-street banking, stockbroking and investment banking. There was no plan to spin off the Smith Barney stockbroking business, he said, and blamed the share price spiral on rumour-mongers. The company’s capital position is strong, he said.

When trading opened in New York, however, Citigroup shares took another leg down, falling below $4 for the first time in 15 years. They closed down 20 per cent, even as the wider stock market had rebounded from its sharp sell-off of the previous two days.

The Dow Jones closed up 494 points, surging after reports that the President-elect, Barack Obama, had picked Timothy Geithner, president of the New York Federal Reserve, to be his Treasury Secretary, easing fears of a power vacuum in Washington.

Half Citigroup’s equity value has been wiped out this week, as traders bet it must raise more money to cover losses on mortgage derivatives and other investments.

The company can trace its origins back to 1812, and is one of the most famous brands in world banking. Through a string of acquisitions in the Nineties, it became the biggest banking corporation in the US, only to lose that position in the current credit crisis. It has posted a loss in its past four quarterly results, after writing down tens of billions of dollars in mortgage investments.

Analysts are concerned that the market’s focus on the crumbling share price will lead to a crisis of confidence that might lead customers to flee the company, even though several pointed out the government guarantees would make that flight irrational.

Dick Bove, financial sector analyst at Ladenburg Thalmann, listed the federal guarantees on Citigroup’s deposits and its debts, and its ability to borrow from the Federal Reserve to make good on any short-term loans, and he said the market was over-estimating the losses it will incur on the remaining mortgage assets and other loans on its books. “The current decline in the stock price is reflecting a series of fears related to loans and security values that cannot be actualised without a severe setback in the economy and a very rapid increase in interest rates,” Mr Bove told clients.

None the less, traders speculated that Citigroup or the US Treasury would have to move quickly to restore confidence, with a de facto nationalisation or a merger with Goldman Sachs among the scenarios being discussed across Wall Street