FYI | Nov 05 2007
By Greg Peel
As was expected, the emergency meeting of the Citigroup board called for the weekend has resulted in the resignation of CEO Chuck Prince. News that the meeting had been called, and anticipation of Prince’s demise, was what turned the Citi share price and the Dow around late on Friday.
What was not expected, however, was the announcement that following US$6 billion in write-downs in the third quarter Citi is expecting to write down a further US$8-11 billion in the valuation of distressed credit instruments.
The US market was spooked on Thursday when a financial sector analyst at CIBC downgraded Citi shares to Sell, suggested the bank’s capital position was in trouble, and offered that its dividend would likely be cut. Many a rival analyst piped up to denounce these claims, suggesting Citi’s trillions in capital base was easily sufficient to weather the credit market storms. However, recent weakness in the financial sector has more generally been about renewed fears that more big write-downs would transpire in the fourth quarter from across the bank and brokerage spectrum.
When Merrill Lynch wrote down $8 billion, the market was aghast. They were aghast the week before when Citi announced write-downs totalling $6 billion, but Citi is one of America’s biggest retail banks while Merrills is an investment bank and brokerage. Guidance from both houses that more write-downs would follow brought about renewed fears from traders who had thought the first big write-downs from the likes of JP Morgan, Morgan Stanley, Lehman Bros and Bear Stearns appeared to suggest all the bad news was out.
The CIBC analyst who downgraded Citi is now receiving death threats from investors.
If Citi is to write down another US$8-11 billion, this is enormous, and probably much more than the market would have pessimistically believed. Apart from reigniting speculation over the bank’s capital adequacy, it will turn the spotlight strongly onto all the other credit market players. Just how much are they all hiding? And how many are still in denial?
Stand by for some soul searching in the US market tonight. Citi is a Dow component.
