Citigroup Shakeup Provides More Questions Than Answers
The “retirement” of Citigroup chief Chuck Prince over the weekend comes as no surprise given the mounting speculation in recent weeks. Neither did the news that Citi may need to write down another $8 to $11 billion of subprime-mortgage-related losses.
The questions now become, “What’s next for Citi?” and “What is the extent of unrecognized losses at other banks?”
On the first point, Lex of the Financial Times does not agree with breakingviews.com’s suggestion that Citi may need to be broken up. Lex notes that other “financial supermarkets” are faring better than Citi. “Investors are not calling for JP Morgan Chase to be cut up into pieces.”
And it is not clear that Citigroup’s international business, for instance could be broken up without collateral damage.
Lex says it is easy to overlook the improvements Prince set in train to derive greater benefit from Citi’s scale and collection of assets – even if some of these, such as cost cutting, could have started earlier. “The challenge now is to find somebody up to running Citi.”
Elsewhere the FT offers a comprehensive analysis What’s The Damage?, that addresses the difficulty of getting an accurate handle on the extent of potential losses related to subprime mortgages and structured investment vehicles (SIVs.)
The other big problem that makes it hard to calculate the “real” scale of mortgage-linked losses at banks is that it is often fiendishly hard to get an accurate value for mortgage-linked assets – and thus determine how much prices have fallen so far.
The Wall Street Journal notes that Citigroup’s shake up has reasons beyond the subprime debacle. It questions the theory behind the “universal bank model” of former CEO Sandy Weill. Under that model, the breadth of Citi’s activities should have provided a cushion for problems in any one area.
Both the FT and the WSJ name John Thain, CEO of NYSE Euronext as a possible long-term replacement for Prince. The WSJ also mentions former Citigroup executive Robert Willumstad, now CEO of AIG, while the FT tags Vikram Pandit as the most likely internal candidate, noting that an external candidate is more likely. The New York Times concurs, noting that the fact that Citi’s independent directors needed to meet Sunday suggest “nobody was ready to step up.” The Times DealBook asks Who’s Watching Over Citi? in an analysis of the make-up of the CEO search commitee.
Breakingviews.com says “what Citi needs now is a confidence-inspiring leader who isn’t wedded to Mr. Weill’s legacy of expansion. Someone with an understanding of the plumbing of finance, such as NYSE Euronext’s John Thain, and a willingness to dismantle them to make them more efficient and valuable to the company’s long-suffering shareholders.
This will mean fully grappling with its exposure to asset-backed securities, not just on its balance sheet but through certain off-balance-sheet transactions known as structured investment vehicles. A full accounting of Citi’s liabilities may require write-downs beyond those already taken.
CreditSights says it is no coincidence that “the biggest negative effects were to the two leaders in CDO issuance for the last couple of years and year-to-date 2007.” With the rating agency downgrades of much of this structured product the fair values declined significantly.
Similar to last week’s rapid retirement of Merrill’s former CEO O’Neal, there seems to have been a major breakdown in the risk management process as these exposures were much too large to get out of hand the way they did, CreditSights says.
Accordingly, two of the largest U.S. financial companies are stuck in the CDO/subprime quagmire and are searching for CEO leadership to rebuild their operating profiles and risk management systems.
Standard & Poors today put Citgroup on Creditwatch “negative,” noting that “the magnitude of write-downs calls into question risk management,” while Fitch Ratings downgraded Citigroup to ‘AA’; Outlook Negative.
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November 9th, 2007 at 2:56 pm
[...] Citigroup Shakeup Provides More Questions Than Answers rounded out the top 5 posts and the topic continues to attract attention. The FT reported Thursday that a close reading of Citi’s 10Q accounts would have given investors some clues as to the bank’s exposure. [...]