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Citigroup, other banks in new trouble

S&P 500 at 11-year low; short selling continues

By Patrice Hill (Contact) | Friday, November 21, 2008

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The deepening downturn in the economy created new trouble for Citigroup and other big banks and sent stocks into another tailspin that left one major stock index fluctuating around its lowest level in 11 years Friday.

Citigroup shares lost more than a quarter of their value on Thursday and continued to fall by 15 percent on Friday despite a major new investment promised by a Saudi Arabian prince, putting the giant New York bank that was once the country's largest at the top of a list of candidates that might have to be rescued by the government's $700 billion bailout fund. Citigroup has already received a $25 billion cash infusion from the fund.

Citigroup's board of directors met Friday morning to consider options, but the bank's chief executive Vikram S. Pandit ruled out a break-up or selling key assets like its Smith Barney brokerage unit.

Two other megabanks that had been models of health only months ago - JP Morgan Chase and Bank of America - also succumbed to a new wave of short selling by investors betting against their stocks. Citigroup pleaded behind the scenes for federal regulators to reinstate a ban on short selling imposed temporarily in September.

The White House and Treasury are "closely monitoring" and "concerned" about the banks, Keith Hennessey, director of the White House National Economic Council, said late Thursday. Treasury Secretary Henry M. Paulson Jr. warned on Tuesday that more big banks could fail and that bailout funds should be reserved for such an emergency.

"We are seriously concerned," Mr. Hennessey told Bloomberg Television. "The principal problem right now is ongoing concerns among financial institutions and in the credit markets."

The renewed troubles at big banks, which have been fed by mounting losses on credit cards, commercial real estate and other loans, triggered a 6.7 percent dive in the Standard & Poor's 500 Index Thursday to 753, its lowest level since 1997. The 80-year-old index, which has lost more than half its value in the past year, fluctuated between small gains and losses on Friday.

The Dow Jones Industrial Average fell further below 8,000 Thursday, plunging 444 points to end at 7,554, and was wavering around that level on Friday. The renewed crisis in global stock markets prompted investors to rush into safe havens like Treasury securities, sending their yields to record lows.

"Fear is circling these institutions more ominously" because the darkening economic outlook is threatening important lines of business that had been strong earlier this year even while the banks sustained huge losses on mortgages, said Richard Beales, analyst at Breakingviews.com.