Citigroup chief quits as sub-prime losses rocket

Citigroup chief quits as sub-prime losses rocket
“It is my judgment that, given the size of the recent losses in our mortgage-backed securities business, the only honorable course for me to take . . . is to step down,”

November 6, 2007

The financial impact of the sub-prime crisis on Citigroup has spiralled to as much as $17bn (£8.5bn) in a matter of weeks, plunging the world’s biggest bank into turmoil and prompting the resignation of chief executive Charles Prince.

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  • Citigroup late last night detailed the size of the hit it will take in the fourth quarter, alongside news that chief executive Charles “Chuck” Prince is to be replaced by Robert Rubin and Sir Win Bischoff as chairman and temporary chief executive respectively.

    In addition to the $5.9bn of write-downs it took in the third quarter, Citigroup will take a further $8bn to $11bn of write-downs as a result of the reduced value of the sub-prime and leveraged loan assets sitting on its balance sheet.

    The financial hit means Citigroup is by far the biggest victim of the global credit crisis to date.

    It is understood that in recent weeks, Mr Prince, backed by chief financial officer Gary Crittenden and investment banking and alternative assets head Vikram Pandit, moved to ensure a full revaluation of all of its assets.

    As a result, it became increasingly clear that the write-downs required in the fourth quarter are far more substantial than anyone in the industry had previously estimated.

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  • In a separate statement to that which detailed Mr Prince’s resignation, Citigroup revealed that it has approximately $55bn tied up in sub-prime related exposures.

    In a separate statement to that which detailed Mr Prince’s resignation, Citigroup revealed that it has approximately $55bn tied up in sub-prime related exposures.

    The lender went on to say that it estimates the reduction to its revenues as a result of the reduced values of these assets ranged from $8-11bn, or $5-7bn in net income after tax.

    “These declines in the fair value of Citi’s sub-prime related direct exposures followed a series of rating agency downgrades of sub-prime U.S. mortgage related assets and other market developments, which occurred after the end of the third quarter,” the statement explained.

    The bank, the world’s largest by assets, is to establish a new unit to solely focus on managing sub-prime mortgage related assets and their exposures.

    It is to be kept entirely separate from the other parts of Citigroup’s capital markets and banking business, in part to ensure the valuations of such assets are kept entirely independent.

    However the bank was at pains to point out that, contrary to a research note from CIBC World Markets analyst Meredith Whitney last week, it expects to keep its capital ratios within the range of targeted level by the end of the second quarter 2008.

    It also stressed that it has no plans to reduce its current dividend level, countering claims by Ms Whitney.

    Messrs Rubin and Bischoff are due to detail their plans for Citigroup during a conference call with analysts and the media in New York, scheduled for 8am (1pm GMT).

    Mr Rubin, the former US Treasury Secretary, is now Citigroup’s permanent chairman, and has pledged to work with the board to return Citigroup to stability.

    “We will continue to focus on taking the steps necessary to help our employees realize their full potential, serve our customers with distinction, and build superior value for all of our shareholders.”

    Sir Win, the former chairman of Schroders and, until last night, chairman of Citigroup’s European business, said he wanted to grow Citigroup by executing its existing plans.

    Mr Rubin will form part of a four-man special committee, appointed by the wider board, who will search for a permanent chief executive.

    The other members are Time Warner chief executive Richard Parsons, Alcoa chairman Alain Belda, and Franklin Thomas, a consultant for TFF Study Group.

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