Citigroup's Worries Mount

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Citigroup CEO Vikram Pandit, right. Mark Wilson/Getty Images

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The consumer business is Citi's bread and butter. As of the third quarter, revenues of $16.68 billion in its global cards and consumer-banking business made up 67.3% of the bank's total net revenues. But that business is sinking and fast. Revenues in the global cards business fell 40% in the quarter. In the portfolio of consumer loans that includes the U.S., serious delinquencies are skyrocketing. For instance, the percentage of some $202 billion in residential mortgages more than 90 days late in the third quarter more than doubled, to 3.85%, up from 1.76% a year ago. Serious delinquencies in the $19.7 billion auto loan portfolio are up to 1.78%, from 1.26%.

Unknown Derivatives Exposure

What's worse is that these numbers don't account for the "October from Hell," when consumer spending fell off a cliff, according to Martin D. Weiss, founder of Weiss Research. According to a Commerce Dept. report, U.S. consumer spending, which accounts for nearly two-thirds of the economy, fell by 4.1% in October from a year earlier. That was the sharpest decline since at least 1992. All signs point to more household belt-tightening as unemployment numbers rise and house values continue to fall.

Analysts also perceive Citigroup's derivatives exposure to be a black hole. The bank is the second-largest player in credit derivatives, the riskiest sector of the derivatives market, with a $3.6 trillion portfolio. "Many suspect that they don't even know what they have," says Philip van Doorn, banking analyst with the Street.com Ratings. Its exposure to the risk of failure by its trading partners is huge: For each dollar of Citi's capital, it has $2.58 in risk exposure.

There's another headache for Citi to deal with. On Nov. 19, the bank also agreed to acquire the remaining $17.4 billion in structured investment vehicle assets it advises and bring those assets on its balance sheet. Analysts worry that the value of these assets is inflated. "There's a concern that there are more losses hidden on the balance sheet," says Optique's Fitzpatrick. "And that Citi isn't going to be able to raise more capital into 2009."

"On the Razor's Edge"

Citi is lobbying lawmakers and the Securities & Exchange Commission to reinstate a ban on the short-selling of financial stocks, The Wall Street Journal reported Nov. 20 on its Web site, citing sources familiar with the matter. The company is also seeking a reinstatement of the "uptick rule," which requires investors to wait until a company's stock goes up before short-selling it, according to the Journal.

"We're getting to the critical doomsday question: What happens when a megabank like Citi fails," says Weiss. He says the bank is "on the razor's edge. The biggest banks are not just important to the banking system, they are the banking system. All this starts to get into the neverland of uncertainty. No one really knows what happens next."

Der Hovanesian is Banking editor for BusinessWeek in New York.