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.

  • How Citi could not keep sub-prime at bay
  • Master of the universe falls back to earth
  • More news and analysis of the credit crisis
  • 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.

  • Rubin may have to eat his words
  • Citi’s London staff fear for their jobs
  • Comment: The music has well and truly stopped
  • 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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    Relative of Merrill Lynch Founder Predicts Stock Market Crash

    Relative of Merrill Lynch Founder Predicts Stock Market Crash

    Kerri Panchuk
    October 30, 2007

    In a market where fears over the subprime shakedown are spreading pessimism nationwide, Charles Merrill, the cousin of the man who founded Merrill Lynch & Co., is predicting a stock market crash that will put the 1929 crash to shame.

    Merrill, in an exclusive interview with a financial author, said, “There is going to be a major stock market crash, so protect your assets. Buy physical gold and hide it.”

    Merrill also discussed all the changes at Merrill Lynch that indicate a potential market crises—even alluding to the company’s chief executive officer, who stepped down this week.

    “Merrill Lynch is crashing, due to the ineptness of the CEO,” Merrill said. “No matter who is running Merrill Lynch & Co., it’s going to need a regimen of restraint and recuperation after getting badly bruised by the global credit market shakedown. I predict a house of dominos, and the whole stock market is going to crash.”

    Lynch’s less-than-encouraging remarks were part of an interview with writer Michael Grace, who is writing a book called, “The Final Great Depression.”

    During the interview, Merrill concluded, “There is so much wealth in Palm Springs … from inherited to funny money, and I’m advising my friends to buy gold. Grace’s book on the ‘final depression’ sounds like a novel or fantasy but unfortunately it is a picture of our horrible future here in America. My cousin Charlie must be turning over in his grave.”


    Oil Crisis in Summer ’09: War in Iran. Gasoline rationing. A military draft. A Chinese takeover of Taiwan. Double-digit inflation and unemployment

    Herald Tribune
    November 2, 2007

    WASHINGTON: War in Iran. Gasoline rationing. A military draft. A Chinese takeover of Taiwan. Double-digit inflation and unemployment. The draining of the strategic petroleum reserve.

    This is where current energy policy is going in the United States, according to a nightmare scenario played out as a policy-making exercise on Thursday by a group of former top government officials.

    Two bipartisan business-supported groups sponsored an elaborately staged role-playing game called Oil ShockWave that tried to dramatize the effect of American dependence on oil imported from unstable and unfriendly parts of the world.

    The organizers have an agenda: They hope to prompt Congress to act on energy legislation and to push the issue into the presidential campaign.

    Read Full Article Here


    CDS traders warn of ‘blood on streets’

    October 27, 2007

    The mood in credit derivatives markets turned ugly on Thursday, with the cost of insuring corporate debt hitting multi-week highs on both sides of the Atlantic.

    Speculation was rife that leading major investment banks were facing additional losses linked to complex mortgage-backed securities, while worries mounted over the health of major financial guarantors.

    “It’s scary out there — there’s blood on the streets,” a trader at a US brokerage said. “It’s a real mess.”

    In the US, the perceived risk of owning corporate debt jumped to a seven-week high, with the cost to insure a $10m portfolio of investment-grade debt reaching $67,000, data from Phoenix Partners Group showed.

    Confidence in Citigroup and Merrill Lynch, as measured by their credit default swaps, slumped to lows not seen since the height of the credit squeeze in August.

    Five-year credit default swaps tied to Citigroup widened to 60 basis points, meaning it cost $60,000 annually to insure Citigroup’s debt against default for five years. A couple of weeks ago, that figure stood at $27,000.

    Contracts on Merrill Lynch, which last week posted the largest quarterly loss in its 93-year history, rose $18,000 to $103,000. CDS on UBS rose 10bp to 51bp, Deutsche Bank said. The contracts stood at about 6bp in May. Contracts on Credit Suisse rose 4bp to 52bp from 10bp in June.

    Bond insurers, or monolines, were also hit hard.

    “[These triple-A rated companies are] exposed to the crumbling housing market,” said Gavan Nolan, an analyst at derivatives data provider Markit. “Investors in monolines will be waiting for the coming months of housing data with trepidation,” Mr Nolan said.

    CDS on MBIA Insurance rocketed to a four-year high, of 345bp, CMA Datavision said.

    Last week the insurer posted $36.6m net loss and halted its share buy-back programme.

    Contracts on the bond insurance unit of Ambac Financial climbed to a five-year high of 310bp.

    Gimme Credit, an independent research term, downgraded both MBIA and Ambac this week.

    In Europe, the iTraxx Crossover index of 50 mostly high-yield companies widened by 18 bp to 338bp, the biggest rise since August, according to Deutsche Bank data.

    The iTraxx Europe index, which tracks 125 investment-grade companies, rose 3.75bp to 41bp. It was the biggest one-day jump since early September.

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