From The Sunday Times
November 23, 2008

Citi trapped in mire of its own making
The embattled giant is faced with merger or sell-offs
Dominic Rushe in New York

IN THE dark hours after hearing 52,000 colleagues were about to lose their jobs last week, Citigroup traders awaited the axe with a little of the black humour Wall Street is famous for. Bankers joked that Somali pirates were offering 1 cent a share for the troubled bank, if staff agreed to wear eye patches. Those with any money left were betting on how much lower their employer’s shares would go. By Friday Citi shares had fallen 60% – in a week – to levels last seen when many of those traders were still in high school.

After one of the worst weeks in the bank’s history, Citi’s officials are spending the weekend drawing up plans to prevent a repeat. The government and big investors are being lobbied to make an investment that might soothe the markets. If they fail to find a blue chip backer, odds are that, come Monday, the slide will start again. It’s a frightening fall for a bank that was, until recently, the biggest, most powerful financial services firm in the world.

Citi boss Vikram Pandit started last week on an upbeat note, addressing the firm’s 350,000 staff worldwide via a teleconference, self-styled as a cosy sounding “town hall meeting”. “We will be the long-term winner in this industry,” he said. Then came the announcement of the job cuts. In New York the redundancies started in capital markets and investment banking but this is a global firm and thousands of jobs are going in India and Germany – and several hundred are on the block in London.

The sackings failed to appease the market and Citi’s share price kept falling. Even after Saudi investor Prince Alwaleed bin Talal, a big Citi backer, pledged his support for the bank and Pandit, the shares kept falling. They closed on Friday at $3.77, a price not seen since 1995. Last November Citi’s shares traded at over $30.

Even after last week there is no end in sight. Pandit said the last three months of this year would continue to be challenging and warned of more trouble in 2009. Mounting losses from mortgages, credit card loans, and complex debt instruments could cost the bank another $3 billion (£2 billion) in the fourth quarter, according to Fox-Pitt Kelton analysts.

Citi is hardly alone in its troubles. The stock markets have turned against the rest of the banking sector too, but critics argue Citi has made a bad job of handling a difficult situation.

Last month the company was left looking flat-footed in a bidding war for Wachovia, a financial services firm. Pandit was seen to have been outmanoeuvred by rivals Wells Far-go – further ammunition to critics who say he has neither the street smarts nor the experience to pull Citi out of a hole.

But even after this decline some analysts doubt Citi will go under. The bank has some $75 billion in liquid assets on its books. Unlike earlier victims of the credit crisis, Citigroup has access to the government bail-out programme. It also qualifies for bailouts from the Federal Deposit Insurance Corp (FDIC) and the Federal Reserve.

“We are not seeing anyone lining up to take their money out of Citibank. It’s not Northern Rock. Will counterparties trade with them? I haven’t heard any rumours to the contrary,” said Brad Hintz, analyst at Sanford Bernstein. Hintz said Citi was the victim of markets that are “relatively crazy”.

But if the likelihood of Citi going bust is small, so are its options for reassuring the market. One obvious option – a merger with another large bank – might be too much for regulators put off by the giants already created by the credit crisis. “You already have too many really large banks. Who would you merge it with? The other ones already have their own problems,” said Hintz.

Goldman Sachs is looking to grow its deposits but such a huge deal would fundamentally change its business. Would JP Morgan want, or be allowed, to swallow another bank after taking on Bear Stearns and Washington Mutual?

Hintz said regulators might simply advise Citi to “sell some things”. Citi’s back-office processing business or credit card division could go. The other option is to tough it out.

Citi has been toughing it out for some time. When Pandit took over last December he inherited a company in crisis. “If you want to blame someone, blame Chuck Prince,” said one Wall Street banker.

Prince, Pandit’s predecessor, was the appointed heir of Sandy Weill, the architect of Citigroup’s global ambitions. Through a series of ever larger mergers Weill built Citi into a financial behemoth spanning everything from credit cards to investment banking and wealth management. The idea was to create a company big enough to weather any storm. And if size was all that counted, Citi would be safe. Last year sales topped $124.4 billion, not far off the GDP of Morocco. The company operates in 140 countries and deals, in one way or another, with all of the top 500 companies in the world.

Prince, a lawyer by training, steadied the ship after Citi’s disastrous dance with World-Com, Enron and other notorious firms. But he failed to position Citi for the next boom while betting heavily on the next bust. Citi’s expenses got out of control, it failed to keep up with its rivals in the good times and still managed to make the same bad bets on sub-prime loans that have shaken the banking sector to its core.

The irony, not lost on the firm’s executives, is that in many ways the financial sector has swung back to Citi’s model of doing business. In the boom Citi’s rivals were smaller, more focused and nimble; Citi was a lumbering dinosaur. Now the credit freeze has acted like the ice age in reverse and left the dinosaur standing. Both Leh-man and Bear Stearns are bust and even Goldman Sachs has converted into a banking holding company.

“It may not be relevant to investors at this moment, but, ultimately, it will be recognised that the current executive team at Citigroup was not part of the decision-making group that got Citigroup into difficulty,” Ladenburg Thalmann analyst Richard Bove wrote ina note to clients last week.

He argued that Citigroup had done “quite a bit” to put its house in order. The bank was first to begin raising capital and taking writedowns to reflect the true value of its assets. “When the write-offs are over the strengthening of the institution will be evident,” wrote Bove.

Others are less kind. The betting on Wall Street is that Pandit is out in six months unless Citi’s fortunes change. “Prince failed to do anything except to get Citi into more trouble on the way up. Pandit doesn’t seem to have much ofa clue about what Citi should do on the way down. Where’s the leadership here? What is the plan?” said one rival banker.

He said the argument that stock markets were short sighted and missing Citi’s charms was “bogus”. “There’s a reason Citi is trading for a fraction of its old share price and it’s not all down to the credit crisis.”

if citi fails, any bank in the uae should pounce on the opportunity to pick up the MENA assets as they priceless. #1 card issuer, #2 private bank according to Euromoney, #1 for NRI (Non-Resident Indian)wealth management and a strong transaction and corporate team. Their books have little exposure to the UAE real estate mortgage market which is another bonus as they never forayed into this 95% loan to value nonsense.

HSBC and StanChart, the only 2 relatively unscathed banks should have their M&A people on standby just in case the citi does fall asleep.

It is so tempting to buy several thousand shares of C at under 4 dollars, but the shortened holiday week makes any potential short term trade very risky.

UAE third-quarter gold sales soar above previous year’s
Dubai: Gold sales in the UAE soared 56 per cent in the third quarter compared to the same period of 2007, the World Gold Council said on Sunday.

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For Immediate Release Citigroup Inc. (NYSE symbol: C) November 24, 2008 CITI ADDS $40 BILLION OF CAPITAL BENEFIT THROUGH AGREEMENT WITH U.S. TREASURY, FEDERAL RESERVE, AND FDIC Citi to issue preferred stock and warrants to U.S. Treasury and FDIC Strike price on warrants set at $10.61 Citi to receive capital benefits from government guarantee on $306 billion of assets Citi secures access to multiple additional liquidity facilities New York – Citi (NYSE: C) today announced that it has reached an agreement with the U.S. Treasury, the Federal Reserve Board, and the Federal Deposit Insurance Corp. (FDIC) on a series of steps to strengthen Citi’s capital ratios, reduce risk, and increase liquidity, as described below: CAPITAL • The U.S. Treasury will invest $20 billion in Citi preferred stock under the Troubled Asset Relief Program (TARP). • Citi will issue an incremental $7 billion in preferred stock to the U.S. Treasury and the FDIC as payment for a government guarantee on $306 billion of securities, loans, and commitments backed by residential and commercial real estate and other assets. • As a result of the asset guarantee, the $306 billion portfolio will have a new risk weighting of 20%, thus freeing up an additional $16 billion of capital to the company. • Citi will issue warrants to the U.S. Treasury and the FDIC for approximately 254 million shares of the company’s common stock at a strike price of $10.61. • Citi also has agreed not to pay a quarterly common stock dividend exceeding $0.01 (one cent) per share for three years effective on the next quarterly common stock dividend payment.
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2The program significantly strengthens Citi’s key capital ratios by generating approximately $40 billion of capital benefits as follows: • $20 billion from the TARP investment. • $3.5 billion, the portion of the $7 billion of preferred stock fee recognized for capital purposes. • $16 billion of capital benefits resulting from the asset guarantee. Citi’s Tier 1 capital ratio for the third quarter ended September 30, 2008, on a pro forma basis, for the October TARP capital injection and the new capital generated by today’s announcement, subject to Federal Reserve Board approval, is expected to be approximately 14.8% and its TCE/RWMA ratio would be approximately 9.3%. RISK REDUCTION Under the guarantee, Citi will assume any losses on the portfolio up to $29 billion on a pre-tax basis, in addition to Citi’s existing reserves; the government entities will assume 90% of any losses above that level and Citi will assume the balance. Citi will retain these assets on its balance sheet and realize the associated cashflow. LIQUIDITY In addition to its extensive access to existing liquidity sources, Citi has been provided expanded access to both the Federal Reserve’s Primary Dealer Credit Facility and the discount window, resulting in strong additional liquidity resources should they be needed. Citi also has access to the yet-unused Federal Reserve’s Commercial Paper Funding Facility and intends to issue debt under the FDIC’s Temporary Liquidity Guarantee Program. The agreement also provides that an executive compensation plan, including bonuses, that rewards long-term performance and profitability, with appropriate limitations, must be submitted to, and approved by, the U.S. government. “This weekend, the U.S. government and Citi worked together in an unprecedented way to address market confidence and the recent decline in Citi’s stock price,” said Vikram S. Pandit, Chief Executive Officer. “We reached an agreement based on an innovative market solution to further strengthen our capital ratios, reduce risk, and increase liquidity. We appreciate the tremendous effort by the government to assure market stability. “We are committed to streamlining our business and providing outstanding banking services to our clients around the world. We will continue to focus on opportunities and alternatives to further enhance the company’s overall position and value,” Mr. Pandit concluded.
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3The transaction has been unanimously approved by the Citi Board of Directors. For more details, please see the term sheet for the transaction at http://www.citigroup.com/citi/fin/index.htm CitiCiti, the leading global financial services company, has some 200 million customer accounts and does business in more than 100 countries, providing consumers, corporations, governments and institutions with a broad range of financial products and services, including consumer bankingand credit, corporate and investment banking, securities brokerage, and wealth management. Citi’s major brand names include Citibank, CitiiFinancial, Primerica, Smith Barney, Banamex, and Nikko. Additional information may be found at http://www.citigroup.com or http://www.citi.com. Forward-Looking Statements Certain statements in this document are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act. These statements are based on management’s currentexpectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from those included in these statements due to a variety of factors. More information about these factors is contained in Citi’s filings with the Securities and Exchange Commission. Media Contacts: Christina Pretto (212) 559-9560 Shannon Bell(212) 793-6206 Michael Hanretta (212) 559-9466 Investors: Scott Freidenrich(212) 559-2718 Fixed Income Investors: Maurice Raichelson(212) 559-5091 # # #