Citi to split after losing $8.29 billion; could get third bailout

Posted Jan 16th 2009 8:33AM by Peter Cohan
Filed under: Citigroup Inc. (C), Financial Crisis

Citigroup (NYSE: C) reported a loss of $8.29 billion, or $1.72 per share -- 39 cents worse than what analysts had expected. It also said it will split into two. Why the splitting makes sense is beyond me. Citi's two operating units will include:

Citicorp -- the parts it wants to keep: branch banking, corporate lending, securities underwriting, transaction processing and private banking
Citi Holdings -- the junk it wants to dump including CitiFinancial, Primerica Financial Services, brokerage, retail asset management, and a "special asset pool" consisting of the $306 billion in assets the U.S. government agreed in November to guarantee.

Citi's results suggest that the prospects for both parts don't look good. Overall, Citi shrank and fast. Its revenue fell 13% to $5.6 billion due to weak capital markets. Its global credit card business saw a 27% plunge in revenue due to weakness in North America. Its consumer banking revenues fell 22% after a 47% drop in investment sales. And its institutional clients group, securities and banking revenues were negative $10.6 billion -- thanks to net losses and write-downs of $7.8 billion.

For Citi to survive, it will take a big government capital infusion beyond the $45 billion it's already gotten and the $269 billion in loan guarantees. That's because there's more toxic waste in Citi Holdings than it can afford to write off without new capital and there is no appetite in private markets for buying the junk Citi wants to dump.

Citi will get what it needs to keep going. The question is whether all this government debt will end up boomeranging back on the U.S. in the form of massive inflation and higher interest rates. For the time being we have no choice but to keep bailing out the banks.

The alternative -- letting them fail -- is even more expensive (at least in the short run).

Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College and is the author of You Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing. He owns Citi shares.

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Reader Comments (Page 1 of 1)

1-16-2009 @ 9:36AM

JP said...

What's with Citigroup's umbrella? To prevent earnings from raining on the company?

And if their credit derivatives are losing so badly, who's on the winning side of the trade?