Stocks: A Barrage of Bad News

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In the third quarter, it wrote down $2.2 billion.

"There were things to like and dislike" in Citigroup's results, said Jeff Harte, an analyst at Sandler O'Neill. On the one hand, by raising an extra $12.5 billion through the issue of convertible securities, questions about the adequacy of Citi's capital should end, Harte wrote. However, "credit quality continues to deteriorate," he added.

The beleaguered bank announced additional steps to shore up its balance sheet. As widely expected, the company said it would eliminate 4,200 jobs and cut its quarterly cash dividend by 41% to 32 cents from 54 cents.

And the company raised another $12.5 billion via the private placement of convertible preferred securities, including a $6.88 billion investment from the Government of Singapore Investment Corp.

Among the other investors: A foundation headed by former Citi CEO Sandy Weill, and longtime Citi investor Prince Alwaleed bin Talal. The Saudi investor said his Citi investment shows his belief in the company's long-term success and profitability and stake remains below 4.9% ownership threshold.

The company also announced a public offering of an additional $2 billion in convertible preferred and another offering of straight preferred securities, all in response to public demand. The company also plans to sell non-core assets.

In a conference call with analysts and investors Tuesday, Citi said it saw its U.S.

credit quality deteriorate at an accelerating rate throughout the fourth quarter. The company said deflated home prices, high energy and food costs, and rising unemployment are weighing on consumers’ ability to keep up with their payments.

After the call, Standard & Poor's equity analyst Frank Braden cut his 2008 earnings per share estimate for Citi to $3.58 from $3.74 to reflect his view of rising credit losses in the company’s U.S. consumer segment. “Headcount was not reduced as much as we expected,” he wrote in a note Tuesday, though Citi says that such reductions will be ongoing.

Braden says the $14.2 billion infusion helps Citi's capital base, in his view, but notes the company still maintains $37.3 billion in total direct subprime exposure.

Goldman Sachs analyst William Tanona wrote in a note Tuesday that he believes Citi still has sizeable exposure to subprime mortgages, which could result in additional write-downs “should [the] environment continue to soften.” Tanona says Citi’s higher reserves for credit costs signal tougher times ahead in the U.S. consumer channel, which has accounted for 30%-40% of Citi's recent profits.

The Street is still waiting for more answers from Citi on whether there are more problems on its balance sheet, and exactly which assets CEO Vikram Pandit will dump to help ease its capital crunch.

"Our financial results this quarter are clearly unacceptable," said Pandit in a press release.

And if that wasn't enough drama for one morning, Standard & Poor's Ratings Services lowered its long-term counterparty credit ratings on Citi to AA- from AA, reflecting the company's severe losses.

Some on Wall Street hope more news from the financial sector – even bad news – will help clear up the vast uncertainty surrounding the size of the credit problem. However, Bank of America analyst John McDonald says Citigroup's prospects for profits long-term remain unclear. "Amid increasing credit costs, balance sheet restructuring, capital raises and an uncertain banking and capital markets environment, Citi's core earnings power remains unclear and we believe the stock will continue to trade on its book value," he wrote.

Citi shares fell 7.3% Tuesday.

Meanwhile, another member of Wall Street's mendicant order announced new financing. Merrill Lynch (MER) said it had reached agreements to issue $6.6 billion of mandatory convertible preferred stock in private placements to long-term investors, primarily from Korean Investment Corp., the Kuwait Investment Authority, and Mizuho Corporate Bank.