Citigroup's financial migraine worsens with asset shift
NEW YORK (AFP) — Citigroup's move to shift troubled assets on to its balance sheet marks a radical step to right its finances, but analysts said Friday that the banking giant's financial migraine had worsened.
Citigroup announced late Thursday that it had decided to move a vast 49 billion dollars in stressed investments on to its balance sheet as it seeks to stem multibillion-dollar losses largely tied to the US housing meltdown.
Moody's downgraded some of its credit ratings on Citigroup and analysts slashed their price targets on its stock after the financial colossus showed a change of heart over the big investment portfolio.
Citigroup is putting its balance sheet under more strain with the move, but analysts said its otherwise risked a fire sale of the assets, including soured mortgage investments, which could have been much more damaging.
The dramatic move comes after Citigroup had joined forces with other large banks to create a rescue fund for such ailing investments known as Structured Investment Vehicles (SIVs).
The plan had received the blessing of the US Treasury which is headed by Henry Paulson, a former chief executive of Wall Street investment bank Goldman Sachs.
Under US accounting laws, Citigroup was allowed to maintain the investment vehicles -- which were valued at 87 billion dollars in August -- off its balance sheet.
Citigroup and other big banks have been attempting to scale back their SIV holdings, which typically include a mix of complex securities including debt instruments known as commercial paper as well as mortgage-backed securities.
Investors have become wary about buying such investments, especially as banks continue to face increased investment losses.
"A rapid about-face after drawing a line in the sand that it 'will not take actions that require the company to consolidate the SIVs' makes us question how fully management comprehends the scope of its multiple and complex balance sheet exposures," analysts at Sandler O'Neill & Partners said in a briefing note.
Moody's said Citigroup's finances will remain under pressure.
"The company's failure to restore its capital ratios in the medium term would possibly lead to a further downgrade," Moody's cautioned, adding that Citigroup may have to cut its dividend payment.
America's second-biggest banking group by market worth still remains profitable -- it reaped a third-quarter profit of 2.4 billion dollars -- but its losses, especially from mortgage-backed securities, are ballooning.
Top executives warned last month that the bank is facing further investment losses of between eight and 11 billion dollars, largely due to mortgage investment writeoffs.
Fears have been exacerbated as other major banks, including European institutions, have also revealed big losses.
Swiss bank UBS announced a writedown of 10-billion-dollars on Monday, which it largely blamed on losses from US mortgage investments, and warned it might record a loss for 2007.
Other banks including Bank of America, Merrill Lynch and Wachovia as well as smaller firms are also fighting to halt losses from the US housing slump and mounting home foreclosures.
Economists fear the housing downturn and the stresses sweeping the banking industry could slow US economic momentum or even push the world's biggest economy into a recession.
Citigroup's move to bail out its SIVs came two days after it annointed a new chief executive, Vikram Pandit.
Some analysts believe Pandit may be forced to break up Citigroup to restore its stability.
Sandler O'Neill downgraded Citigroup's stock to a "hold" from a "buy" and dropped its stock price target to 34 dollars from 45 dollars.
Citigroup's stock closed down 1.0 percent at 30.70 dollars.
