- The Washington Times - Friday, November 21, 2008

UPDATED:

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.

While mortgage losses continue to grow, banks are suffering a fresh outbreak of defaults and credit losses on credit cards, commercial real estate, consumer and corporate loans - all fortes of Citigroup and the other big banks, he said.

“The credit losses that have already unfolded have already exceeded expectations,” he said, forcing Citibank to raise $75 billion in capital to offset losses in the last year. “Investors worry that write-downs on other types of assets could follow.”

Citigroup has lost $20 billion in the past year, and analysts say those losses could double in the coming year.

Raising cash from investors has become far more difficult as the banks’ stocks have plunged and their losses mounted. But Citigroup managed to attract another big cash infusion Thursday from Saudi Prince Alwaleed bin Talal, who said he would raise his stake in the bank to 5 percent from less than 4 percent.

The Saudi called the bank’s shares “dramatically undervalued” following a nearly 90 percent plunge since late 2006, and he expressed “full and complete support to Citi management,” including embattled Chief Executive Officer Vikram Pandit.

Citi’s troubles forced it earlier this week to announce the second-largest round of layoffs in history with the elimination of 52,000 jobs worldwide.

While the banks’ woes are real and growing, Mr. Beales said the drubbing of bank shares this week has been overdone.

“It’s highly unlikely that the end game for Citi or its big rivals is collapse,” he said. “They remain too big to fail” and would be rescued by the government if they faltered.

Mr. Pandit’s call for a new ban on short sales is probably “futile,” Mr. Beales said. “The bank that never sleeps may not get any respite for a while.”

“Citigroup’s biggest problem is that they didn’t raise money early, and now they’re in trouble because they don’t have the sufficient cash” to cover growing losses, said Saj Karim, investment adviser at Canaccord Capital.

Citigroup has lost more than half its market value this month and lately has been the top decliner among large U.S. banks. But JP Morgan stock also plunged by 19 percent Thursday, while Bank of America shares dropped 14 percent.

Once the largest U.S. bank, Citigroup was overtaken in market value this week by US Bancorp and Bank of New York Mellon, despite dwarfing both in worldwide assets. Citigroup’s market value was about $35 billion on Wednesday, putting the value of the new Saudi investment at $349 million.

Citigroup “can’t go bankrupt because they’re too big,” Mr. Karim said. “They will get bailed out, and that’s another unfortunate strain on the U.S. government.”

To bolster its finances, Citigroup has been searching for banks with stable deposit income to acquire. It sought to acquire Wachovia bank in a takeover initially blessed by government regulators last month, but it ended up losing a bidding war with Wells Fargo & Co. for the North Carolina bank.

Lately, Citigroup has been courting Chevy Chase Bank, but it also has rival bidders for the Bethesda bank.

Mr. Alwaleed, a nephew of Saudi King Abdullah, said the Citigroup is “taking all the necessary steps to position the company to withstand the challenges facing the banking industry and the global economy.”

The prince said he is “fully confident that Citigroup’s universal banking model and global franchise will make it a long-term winner in the financial services industry.”

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