What went wrong at Citigroup?

By BusinessWeek

Just a year ago it was the world's biggest bank, but Citigroup (C, news, msgs) today may face the humbling prospect of again going out to beg for more capital.

At one point on March 4, Citi shares had dropped 8%, to their lowest level in almost a decade. One reason for the plunge: Analysts at Merrill Lynch and elsewhere added to the chorus of worries about Citi's wobbly financial situation.

Alarms were also raised by a speech from the Mideast, where Citi has already raised billions from sovereign wealth funds. Sameer al-Ansari of Dubai International Capital, an insider in the world of oil-rich investing, suggested this week that Citi would need to even more capital to stay afloat.

Citi has already raised almost $30 billion in an effort to heal the damage from the credit crisis.

Company executives said this week that they are confident in Citigroup's capital levels and aren't seeking more funds.

• Video: Tough times at Citi

Citi's bleeding from the credit crisis won't seem to stop. Merrill's Guy Moszkowski said he expects that in this quarter alone, Citi will write down an additional $15 billion in losses from subprime-related debt, as well as $3 billion from other troubled loans and investments.

Citi won't announce first-quarter earnings until April 18, but in recent weeks analysts have turned sharply pessimistic about 2008 profits.

Moszkowski now expects Citi to swing to a first-quarter loss of $1.66 per share and to post full-year earnings of just 24 cents per share. The company had a profit of 55 cents a share in the first quarter of 2007.

Standard & Poor's equity analysts on March 4 lowered profit expectations for Citi to earnings of $1.05 per share for the full year, from $2.99. And Goldman Sachs changed its first-quarter estimate to a loss of $1 per share, from earnings of 15 cents, attributing the change to a math error.

So what is the matter with Citi?

The list of problems is long, though nearly all stem from the credit and housing crises. Merrill's Moszkowski cites the "vicious" decline in home values and the "continued deterioration in U.S. residential and commercial mortgage markets, corporate debt markets and key investment-banking categories."

Citi's Japanese consumer-finance business is having trouble, but the international bank's main troubles are in the United States. American consumers are having a tougher time meeting credit obligations, especially mortgages, causing loans on Citi's balance sheet to turn bad at a faster pace.

"Underlying conditions are extremely weak," Moszkowski wrote this week.

As it faces heavy losses from the credit crisis, one option for Citi is to go begging for more money from investors like sovereign wealth funds. But such capital raising can significantly dilute current shareholders' stakes.

Other options including cutting costs and selling off assets. An unconfirmed report from CNBC this week said Citi could cut 30,000 or more jobs in the next year and a half, about 8% of its work force of 374,000.

'No easy fix'

Oppenheimer's Meredith Whitney, one of the Citi's most pessimistic (and, so far, correct) analysts, thinks Citi could be forced to sell up to $100 billion in assets. That's difficult to do while markets suffer from credit turmoil.

"Under duress, (Citi) will likely be forced to sell what it can and not what it should," Whitney wrote Feb. 25. She also worries Citi may need to again cut its dividend -- after the stock's recent decline the dividend yield stands at a relatively generous 5.4%.

Though analysts aren't questioning Citi's long-term survival, few expect an easy road ahead, especially if the credit crisis doesn't ease and loans continue turning sour.

As Credit Suisse analyst Susan Roth Katzke wrote recently, "This is no easy fix, even for the best of managers."

But how bad could things really get? After all, Citi stock is already trading at the lowest level in recent memory. Citi's stock closed down 4.3% to $22.10 per share on March 4 after hitting a 52-week low of $21.23 during the trading session. Shares have lost 57% of their value over the past 12 months.

Keefe, Bruyette & Woods analyst Diane Merdian recently calculated a "worst-case scenario," which she places at a 10% probability of occurring: If Citi had to write off all of its subprime and other risky debt, it would take a $32 billion pretax hit, she figures, and Citi might need to raise $20 billion more in capital. That could cut Citi's share value to $15.19.

That's another hit of more than 30%. Investors may continue running away from Citi's stock until they get signals -- either from the credit markets or from Citi executives -- that their worst nightmares won't come true.

This article was reported and written by Ben Steverman for BusinessWeek.