Citigroup reports big loss and a breakup plan

By Matthew Saltmarsh and Eric Dash

Friday, January 16, 2009
Citigroup capped a devastating 2008 by announcing Friday that it would split into two entities and that it had posted an $8.29 billion loss for the fourth quarter.

Citigroup confirmed that it would divide, for management purposes, into two separate businesses — Citicorp and Citi Holdings.

"We are setting out a clear road map to restore profitability and enable us to focus on maximizing the value of Citi," it said in a statement with the earnings.

Citigroup also issued a statement from its lead director, Richard D. Parsons, signaling that changes in its board were in the offing. Parsons, the former chairman of Time Warner, has been widely expected to become Citigroup's next chairman.

Citigroup's loss, which amounts to $1.72 a share, compares with a loss of $9.8 billion, or $1.99 a share, in the period a year earlier.

Peter Dixon, an economist at Commerzbank in London, said the decision to split the financial giant was "an indication that the era of big financials is at an end for now."

Reports emerged early this week that Citigroup was accelerating moves to dismantle parts of its troubled financial empire.

But some Wall Street analysts and investors questioned whether the plan, which included the announcement on Tuesday that it would split off its prized Smith Barney brokerage, goes far enough to address Citigroup's immediate troubles.

The bank has reported a loss for five consecutive quarters and announced a further $7.78 billion in write-downs in securities and banking for the fourth quarter. Revenue was $5.6 billion during the quarter, down 13 percent, lower across all regions.

The bank also said Friday that its head count had been reduced by approximately 29,000 since the third quarter and approximately 52,000 for all of 2008.

Analysts estimated on average that Citigroup would break even on a per-share basis, according to a survey by Bloomberg News.

Citigroup moved its earnings announcements forward from next week to address increasing anxieties among shareholders and pressure from the U.S. government government to deal with its growing difficulties.

Citigroup posted $5.6 billion in revenue, down 13 percent on a same quarter a year earlier, reflecting the "difficult economic environment and weak capital markets." All regions suffered.

For the full year 2008, Citigroup reported a net loss of $18.72 billion. With unemployment rising and evidence of a global slump, the bank is bracing for another dismal year.

The company's stock has dropped by almost half in the last week, closing Thursday at $3.83, down 70 cents, or 15 percent on the day.

With nearly every part of the company suffering a massive blow, Vikram Pandit, the chief executive, is rolling out a new strategy that will divide into a "New Citi" and "Legacy Citi" that aims to focus its executives' attention on its stronger remaining businesses while winding down its money-losing operations.

Even so, Pandit agreed to split off Smith Barney, its valuable retail brokerage arm, to raise capital so that it could offset the fourth quarter's massive losses.

"I have no doubt we will emerge from the current environment stronger, smarter, and better positioned to realize the full earnings power of this great franchise," Pandit said in a statement with the results.

Pandit is also hosting a noon town hall meeting at Citigroup's Park Avenue headquarters to address demoralized employees.

The bank's break-up plan comes after a stern regulatory warning it received in late November, when its rapidly deteriorating share price prompted the government to give it a second cash infusion, of $20 billion.

Citigroup's first cash infusion from the government came in October in a $25 billion capital injection from the Troubled Asset Relief Program, or TARP. Eight other banks also received capital infusions to stabilize them as the global financial crisis deepened.

With its receipt of a second lifeline from the government in November, Citigroup began operating under what is known as open-bank assistance, which involves a loss-sharing arrangement devised by the FDIC and an investment by the Treasury typically reserved for deeply troubled institutions.

Since then, U.S. government regulators have been leaning hard on Citigroup to shake up its board and shrink the sprawling company to address a credibility gap with its investors.

The changes draw a somber curtain over the one-stop shop created in 1998 when the company's architect and former chief, Sanford Weill, merged the insurance giant Travelers Group and Citicorp, then the nation's largest bank. The deal brought traditional banking, insurance and Wall Street businesses, like stock underwriting, under one roof.

But the company came under repeated fire from shareholders for lackluster results; its stock price has fallen more than 76 percent since it was formed. And the fourth quarter was no different.