Citigroup's bad news: Banks' worst period since Great Depression?

Posted Jan 15th 2008 2:10PM by Peter Cohan
Filed under: Earnings Reports, Forecasts, Bad News, Citigroup Inc. (C)

Bloomberg News reports a blizzard of bad news about Citigroup (NYSE: C). Its management team does not know what's going on with its Collateralized Debt Obligation (CDO) portfolio, and loan losses on the consumer side of its business are climbing fast.

I am most concerned about Citi's inability to quantify the CDO damage. According to DealBreaker, the conference call did not go well, with Citi's CFO "having to admit many times that he either wouldn't comment or didn't know the answer to detailed questions about credit market exposure. Merrill's Gary Moskowitz asked about what the original par value of the CDO portfolio. Crittenden said he didn't know. How about specifics on modeling versus market tests? Nope, just more hand-waving!"

Another analyst, Jon Fisher, who helps manage $22 billion at Minneapolis-based Fifth Third Asset Management said, "There are probably issues on their balance sheet that the management team, who's only really been running the company for about a month, doesn't even know about."

As I mentioned yesterday on CNBC, problems are starting to crop up in consumer lending. Today, Citi announced it was bitten by this bug. It set aside $5.2 billion to cover lending losses, including credit-card and auto loans, where delinquencies increased. And if CIBC analyst Meredith Whitney is right, this problem will get worse -- she estimated additional charges or loan losses at Citi of between $5 billion and $10 billion.

Bloomberg thinks this fourth quarter may be the worst earnings period for the financial industry since the Great Depression. With the combined deterioration of worthless securities -- the CDOs -- a deteriorating consumer lending portfolio, and risks in corporate bonds, I wonder if it could end up being worse.

Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He owns Citigroup shares.

Tags: banking, C, Citigroup, financial, inthenews