Citi: The Writedowns Are on the Wall

Stocks rose on announced changes to Citigroup's organization and management. But more losses are likely

by Steve Rosenbush

Citigroup (C) is shaking up its investment banking business in an effort to get back on track.

On Nov. 13 the new head of investment banking at the embattled financial giant brought in new lieutenants and streamlined the structure of the business. James Forese, who took over last week as co-chief executive of investment banking, said in a memo that the heads of underwriting and sales will now oversee both equity and debt operations. In the past, debt and equity units operated separately. "During the last several months, our firm and our industry have faced enormous challenges," Forese wrote in the memo, a copy of which was reviewed by BusinessWeek.com. "[The changes] will more closely align our origination and sales functions across traditional product categories."

Bucking the Street No Longer

Citi's new banking structure is in line with standard Wall Street practice. Citi had been the only major Wall Street bank to maintain separate functions. The changes were described in a memo to employees on morning of Nov. 13. Forese wants sales and banking staff to be "product agnostic," according to one person familiar with the matter.

The combined underwriting unit will be led by Tyler Dickson, who will report to Forese. Dickson had been head of equity capital markets, and he has longstanding ties with Forese. Both men worked at Salomon Brothers, now part of Citigroup. Antonio Cacorino and Jim O'Donnell will lead the combined sales operation.

The changes were sparked by massive losses in the credit markets (BusinessWeek.com, 11/6/07), with writedowns that could top $17 billion this year. Charles Prince stepped down as chief executive under pressure, and Forese took over for Thomas Maheras.

Hopeful Investors Push Up Prices

New management won't necessarily stave off additional writedowns, since any such writedowns would be a function of market prices and credit ratings. Still, the changes may help restore investor confidence.

Citi shares surged 7% on Nov. 13, to close at $35.90. They have declined 38%, from a 52-week high of $57 in early January. "It's the first major announcement since Chuck Prince's resignation, and it tells me someone is at the switch," says Charles Smith, lead manager of the Fort Pitt Capital Total Return Fund (FPCGX), which owns Citi shares.

Citi shares also got a boost from comments by Lloyd Blankfein, chief executive at rival Goldman Sachs (GS). Blankfein said he didn't anticipate any more significant credit-related write-offs at Goldman (BusinessWeek.com, 9/20/07), which investors took as a sign that Citi may also see some improvement.

Only "A Reasonable Stab"

Although Citi shares benefited from Blankfein's assessment, the outlook at Citi is darker than at Goldman. Citi has greater exposure to risky investment pools known as structured investment vehicles, or SIVs. Several SIVs with exposure to subprime mortgages already have defaulted (BusinessWeek.com, 11/8/07), and signs suggest more are in trouble. On Nov. 9, Fitch Ratings put one of the seven Citi-managed SIVs on Credit Watch.

Although Citi isn't legally obligated to lend money to the SIVs, it will face enormous pressure to keep them afloat—so its big institutional customers don't suffer huge losses. Fitch put $658 million worth of notes held by Sedna Finance on Credit Watch; the notes currently are rated A. Citi said Sedna is fully funded through the end of the year, but Fitch said it was concerned Sedna will face "significant" refinancing needs in the first quarter of 2008. Fitch said Sedna could have trouble refinancing its debt, which could lead to losses.

To avoid such losses, Citi may have to step in and make loans that would appear on its own balance sheet. Such loans could lead to higher reserves and writedowns. Citi has emphasized that its estimate of $8 billion to $11 billion in additional charges in the fourth quarter is a best estimate, and that the figure could change with market conditions. "There's no way, I think, anyone can give you assurance of how things are going to move," said Gary Crittenden, Citi's new chief financial officer. "We've taken what I think is a reasonable stab."

Rosenbush is a senior writer for BusinessWeek.com in New York.