- The Washington Times - Tuesday, January 13, 2009

NEW YORK

Citigroup Inc.’s stock sank Monday to its lowest levels since November as investors wondered how much more cash the troubled bank will need.

Citigroup, in an effort to raise capital, is hammering out a deal to sell the bulk of its retail brokerage, Smith Barney, to Morgan Stanley. The joint venture - expected to be announced later this week - would lead to an after-tax gain for Citigroup of $5 billion to $6 billion, a person close to the negotiations said Monday.

But maintaining cash levels that are high enough to make up for upcoming loan losses remains a big challenge for Citigroup.

“While we believe this deal will provide some near-term capital relief, more likely will be needed,” Meredith Whitney, a financial analyst at Oppenheimer & Co., wrote in a note Monday.

Citigroup stock fell $1.15, or 17 percent, to $5.60 Monday - making it by far the steepest decliner among the 30 stocks that make up the Dow Jones industrial average - even though many industry analysts were positive about the deal. Lauren Smith at Keefe, Bruyette & Woods said in a note that the potential joint venture “seems like a win-win to us.”

Morgan Stanley shares fell 27 cents to $18.79 after rising in earlier trading. Most bank stocks tumbled Monday after President-elect Barack Obama said he plans to fundamentally change the way the second half of the government’s $700 billion financial bailout fund is spent. He said he will target housing and small businesses.

Citigroup lost more than $20 billion between October 2007 and October 2008, and is expected to post another deficit for the final quarter of last year when it reports those results next week. The government already has loaned Citigroup $45 billion and agreed to absorb the losses from a huge pool of mortgages and other assets.

“We’ve seen various indications that Citibank’s problems run deep. The fact that the government came in and backstopped some of their assets was one signal of that. Citi’s selling the majority share of Smith Barney is probably another such signal,” said Jim Wilcox, a professor at the Haas School of Business at the University of California, Berkeley.

Smith Barney for years has been regarded as one of Citigroup’s few strong businesses.

Citigroup is not alone in its problems, but where it differs from its peers - JPMorgan Chase & Co., Bank of America Corp., and Wells Fargo & Co. - is the degree to which it bet on a strong housing market and ample liquidity in the credit markets. Even in July 2007, several months into the housing downturn, Citigroup’s then-CEO Charles Prince told the Financial Times: “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.”

Morgan Stanley - which got $10 billion in government financing - is likely to pay Citigroup between $2 billion and $3 billion in cash for a 51 percent stake in Smith Barney, the person close to the talks said. After accounting for the revaluation of Smith Barney, Citigroup would get a pretax gain of $10 billion, or $5 billion to $6 billion after taxes, the person said.

Morgan Stanley then would have the option to buy the rest of Smith Barney over the next three to five years, the person said. The joint venture between Smith Barney and Morgan Stanley’s retail brokerage, the former Dean Witter, would employ a team of more than 20,000 and rival Bank of America Corp.’s Merrill Lynch in size.

Morgan Stanley did post a $2.37 billion loss during the quarter ended Nov. 30. But its woes have not been as huge as Citi’s woes.

Banking regulators are now pushing Citi to replace its chairman, Win Bischoff, in an effort to restore confidence in the New York-based bank after it needed billions of dollars in government support, according to a New York Times report. The Times and the Wall Street Journal said Monday that Richard Parsons, former CEO of Time Warner Inc. and a Citi director, is likely to succeed Mr. Bischoff.

Citi could report an operating loss as large as $10 billion during the fourth quarter, according to the report in the Journal.

About $4 billion of the loss would be offset, though, by a gain from the bank’s sale of its German retail banking operations in a deal that closed late last year, the newspaper said.

Citigroup declined to comment Monday on the newspaper reports. The Federal Reserve also declined to comment on the government’s reported involvement in replacing Mr. Bischoff.

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