NEW YORK (AFP) — The shakeup at the top of Citigroup underscores concerns that the banking sector has not yet seen the end of woes from soured investments in risky real estate loans, analysts said Monday.
With the resignation of chief executive Charles Prince on Sunday, the US banking titan said it would have to write off another eight and 11 billion dollars, far higher than the two billion dollars it saw in mid-October.
The write-offs would subtract between five to seven billion dollars from fourth-quarter net profit.
Early Monday, the company warned in a conference call that there was "still a lot of uncertainty about what will happen in the market" and the markdowns could be greater.
The credit ratings agency Standard & Poor's Ratings Services said Monday it had placed Citigroup on "credit watch" with negative implications.
Standard & Poor's credit analyst Tanya Azarchs called the latest news of writeoffs from Citi "unwelcome" news, but said it could get even worse.
"The magnitude of write-downs calls into question risk management," the analyst said.
Andrew Busch at BMO Capital Markets said Citigroup is at the "epicenter" of the problems facing the financial sector involving collateralized debt obligations (CDOs), which are repackaged pools of lower-rated securities backed by subprime loans.
"This situation with the investment banks is analogous to what the market went through when we had all the problems with Enron," Busch said.
"The market had severe doubts over the accuracy of the reporting of earnings and accounting."
Citigroup so far is bearing the heaviest cost of the shakeout in the mortgage sector.
Wall Street investment bank and brokerage Merrill Lynch revealed last month it would write off 7.9 billion dollars in soured mortgage-backed investments and CDOs, leading to the ouster of its CEO Stanley O'Neal.
Citigroup, like Merrill Lynch, had at first downplayed the losses it was suffering from securities backed by subprime mortgages, which are granted homebuyers with poor credit histories.
Amid rising interest rates and falling home prices, subprime borrowers struggled to make their mortgage payments and foreclosures spiked.
The subsequent credit crunch roiled markets in August as investors shied away from the increasingly worthless mortgage-backed securities.
Although markets have recovered somewhat since then, boosted by two Federal Reserve interest rate cuts in the past six weeks, speculation is mounting that the worst pain is yet to come.
Citigroup said Sunday that it had a "significant decline" in the fair value of roughly 55 billion dollars in direct US subprime-related exposure since September 30.
The writeoffs of some eight to 11 billion dollars follow a series of ratings downgrades of subprime US mortgage-related assets and other market developments, Citigroup said.
With the resignation of Citigroup's boss, the second headline exit within a week tied to the US housing slump, investors are worrying whether the global banking sector is heading for freefall.
Shares in Citigroup plunged in New York, down 4.80 percent at 35.92 dollars just before the market closed.
"The biggest problem here is the pervading sense of uncertainty as to what the value of the mortgage-backed securities really is," said Patrick O'Hare, an analyst at Briefing.com.
"The banks are in a position of having to make their best guesses, which is a bit unnerving in its own right considering they are supposedly staffed with some of the sharpest minds around."
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