Citigroup (C)

In late July, Merrill Lynch sold a large block of collateralized debt obligations (CDOs) to a private equity group for approximately 20 cents on the dollar of initial par value. Were Citigroup to realize a similar sale price, it would need to take $12+ billion in charges or writedowns - and even if Citi were able to avert a firesale price, Merrill was carrying its CDO assets at 35% of par prior to the deal; Citi still maintains its CDO assets at close to 65% of par on the books. If the CDO assets of the two firms are roughly comparable, Citigroup has several billion dollars of writedowns it will need to take in the third quarter (or later).

From http://collegeanalysts.com/2008/07/29/merrill-lynch-mer-throwing-in-the-towel-on-cdos

Dramatic Changes Underway : Citi's cost cutting won't see benefits in the short term, and the regions its investing in hold much risk as information is not as widely available. It will be difficult to achieve immediate increases in stock price given the firm's scope and scale.

Citi is still reeling in the wake of the subprime lending fallout. CEO Chuck Prince was forced to step down after Citi announced unexpected write downs in their subprime related investments. These write downs come a few months after Citi announced it was largely protected from the turndown in the subprime sector. While new leadership may be a good thing for the beleaguered bank, the new management will still have to deal with an additional $8B-$11B in subprime writedowns expected in the fourth quarter.

Citi had to chop lot of wood. It has lot of bad stuff on its B/S. If your time horizon is 4-5 years, then C and all other financial stocks are good. They have close to $100b of risky asset class. Lot of work for the new management team...

Merrill Lynch & Co. and Citigroup Inc. had their second-quarter earnings estimates cut by Oppenheimer & Co.'s Meredith Whitney on expectations of writedowns related to the subprime market and bond-insurer downgrades.

Merrill, the third-biggest U.S. securities firm, will probably lose $4.21 a share and write down $5.8 billion of assets, Whitney said in a report today, compared with her earlier estimate for a profit of 20 cents. Citigroup will probably lose $1.25, compared with her prior estimate for a gain of 21 cents. She forecast Citigroup's writedown at $12.2 billion.

Analysts and investors are reversing their predictions that the worst of the credit-market contraction is over after more than $400 billion of writedowns and losses by the world's largest financial institutions. Lehman Brothers Holdings Inc. last month increased its loss estimate for Merrill and more than doubled its prediction for the firm's subprime writedown, to $5.4 billion.

June 26 -- Citigroup Inc., the bank that's posted the biggest losses from the collapse of the U.S. mortgage market, may take an additional $8.9 billion in net writedowns in the second quarter, Goldman Sachs Group Inc. said.

Goldman also lowered its rating on U.S. brokerages to ``neutral from ``attractive, saying the pace of deterioration in the industry ``appears to be far worse than it originally anticipated, according to a June 25 note.

``The turnaround in business trends that we had been expecting in the second half of 2008 may not occur as quickly as we should have thought, Goldman said. ``We see multiple headwinds for Citigroup, such as risks of further writedowns, higher consumer provisions, and the potential need for additional capital raisings, dividend cuts or asset sales, Goldman said

Citigroup Inc. could take substantial writedowns for subprime mortgages, leveraged buyout loans and other assets in the second quarter, the company's chief financial officer said on a call with investors Thursday- June 19th. In at least some of these areas, the writedowns are on track to be smaller than the first quarter, but could still be substantial, CFO Gary Crittenden said. Mr. Crittenden's disclosure, in a conference call sponsored by Deutsche Bank, sent Citi shares 4 per cent lower, while rival banks Bank of America Corp. and JPMorgan Chase & Co. were down 4.4 per cent and 3.3 per cent, respectively. Also in reaction to Mr. Crittenden's comments, Citi's debt protection costs rose. Crittenden also said the bank could face another credit value adjustment similar to the last quarter from exposure to bond insurers. In the first quarter, in which Citi posted a $5-billion (U.S.) loss, the bank took a $1.5-billion writedown for exposure to bond insurers. Costs linked to worsening consumer credit quality could have a meaningful impact on Citi's results for the rest of the year, Mr. Crittenden said.

The bank closed its Old Land Partners hedge fund, which was co-founded by Citigroup CEO Vikram Pandit. It was bought for over $800 million not even a year ago. Citigroup will purchase most of the fund's assets and client redemptions will be allowed as of July 31. Previously, Citigroup said that most investors would withdraw their money while a $202 million Q1 charge was already taken. This move is consistent with last month's decision to sell off $400 billion worth of assets but taking these assets on will increase assets by $9 billion. While it appears that the change-of-heart is proof of a management blunder, consider that buying the fund was a way to secure Pandit's services. Citigroup shares are still down over 32% on the year.

Value or Growth? : In the past summer reporters noted Citigroup as being a global bank that had trouble raising its stock price in-line with its competitors. At the same time, Bank of America was being lauded as a high-growth institution that could replace Citigroup as the largest bank.