November 20 2008
By ERIC DASH and LOUISE STORY
For months, the nation’s largest banks have struggled to regain investors’ trust. In the center of the vortex is Citigroup, whose precipitous stock-market plunge accelerated on Thursday, sending shock waves through the financial world.
The shares slumped 26 percent Thursday; the bank has lost half its value in just four days. The chief executive, Vikram S. Pandit, will hold a meeting for senior managers Friday to update them on the bank’s condition.
Investors and analysts have long pressured the bank to consider ways to lift its stock price, including splitting the company or selling pieces. While a few also say the company should consider selling itself outright, there is no certainty that any change would happen soon. Senior executives say the company is financially strong and has ample financing options. Moreover, there are few buyers who would be willing to pay a price that Citigroup would want for its most valuable assets.
Citigroup executives are seeking to stabilize the stock price, but at this point they are not actively exploring selling or splitting up the company, according to two people with direct knowledge of the discussions.
The bank has posted four consecutive quarters of losses, caused by billions in write-downs. Nine of its investment funds have cratered this year. And now the bank could face a tsunami of new losses in its once-lucrative consumer loan business as the global economy weakens.
Within the bank’s Manhattan offices, television screens have stopped displaying the company’s stock price. Traders have begun making jokes comparing Citigroup to the Titanic.
But there is a wide gap between what Wall Street investors and Citigroup’s executives believe about the company’s financial condition. Senior executives feel that Mr. Pandit has followed through on plans to aggressively shrink the company and control costs. The bank has sold tens of billions of dollars’ worth of risky assets, improved its capital position and announced plans to eliminate 52,000 jobs by next June. “We are entering 2009 in a strong position, much stronger than we entered in 2008,” Mr. Pandit said in a speech to employees this week. “We will be a long-term winner in this industry.”
Yet as the drumbeat of bad news about the bank grows louder, investors remain unconvinced. Even a decision by Prince Walid bin Talal of Saudi Arabia, who bailed out Citicorp in the 1990s, to raise his stake to 5 percent Thursday failed to restore confidence in the bank. Two senior Citigroup executives said the bank had not approached him about raising his investment. The Saudi prince’s initial investment soared as Citigroup turned out record profits, only to evaporate over the last year.
“The earnings power is there,” said Charles Peabody, a financial services analyst at Portales Partners. “It’s a question of getting through the credit issues.”
Other big banks, like Bank of America and JPMorgan Chase, also tumbled Thursday as the broad stock market sank again, wiping out more than a decade’s worth of gains. And Goldman Sachs, once the most sterling American investment bank, fell below the $53 price at which it went public in 1999.
Investors have long feared that the bad news for banks will get worse as the economy slows. But this latest rout in financial shares, which are now plumbing their lowest depths since the economic crisis broke out, reflects growing concern that banks like Citigroup will require vast sums of additional capital, possibly from the government, to cope with the pain to come.
Home mortgages, credit card loans, commercial real estate debt — all are likely to deteriorate further now that a recession is at hand. Banks that have already lost billions of dollars could lose billions more.
“All the danger signs are flashing red,” said Simon Johnson, a professor at the Sloan School of Management at the Massachusetts Institute of Technology.
Much of the fear centers on the unknowable. It is unclear just how bad banks’ losses on consumer loans, credit cards and mortgages will be as the economy weakens. Commercial real estate loans are deteriorating, and it is unclear whether banks have sold the worst of their holdings. Then there are all the investments that lurk off of banks’ balance sheets, in the so-called shadow banking system. And a new uncertainty has leapt to the forefront as the automotive industry teeters, sending investors scrambling to calculate how much banks are exposed to these loans.
Several big banks hit record lows. Bank of America fell 13.86 percent to $11.25, JPMorgan slid 17.88 percent to $23.38 and Goldman Sachs slumped 5.76 percent to close at $52. Morgan Stanley neared a record low, closing down 10.24 percent at $9.20, while Wells Fargo fell 7.66 percent to $22.53.
In a bid to calm nerves, Citigroup officials are meeting with other large shareholders. Last week, Citigroup’s chairman, Winfried Bischoff, traveled to Dubai and met with Sheik Ahmed bin Zayed al-Nahyan, the director of the Abu Dhabi Investment Authority, according to two executives briefed on the situation.
The renewed assault on financial stocks led the Financial Services Roundtable, an influential lobby group for the industry, to press regulators Thursday for another ban on short-selling, a strategy in which investors bet against declines in a share price.
The current rout appeared to have gained momentum after Treasury Secretary Henry M. Paulson Jr. announced last week that the government would abandon its original plan to purchase troubled bank assets. That sent prices of commercial mortgage bonds and other loans into a nosedive. Mr. Paulson also said the Treasury would let the incoming administration determine how to deploy the remaining $350 billion left in the program.
Yet investors have grown increasingly nervous about the appearance of a leadership vacuum in Washington as the financial markets burn, and some have begun saying that President-elect Barack Obama should move more rapidly to release a plan.
“We really need somebody to step in and show leadership,” said Wilbur L. Ross Jr., chairman of WL Ross and Company, an investment firm that has been looking for bargains in the banking sector. “Every day that’s wasted and that we stay in freefall is going to make the recession that much deeper and longer.”
That has workers in the financial industry bracing for more pain.
“Major financial institutions have been taking write-downs all year, and what do you do next? You lay people off, and that decreases your need for office space,” said Harold Bordwin of the real estate group at KPMG Corporate Finance. “It’s very scary.”
They will be begging the tax payers, yet again to help them out.
They created their own mess and got handed a Bailout on a silver platter.
They lobbied the Government to give them the ability to, totally destroy the world financial markets.
They have accomplished that in living color. Their incompetence is obvious.
I see yet another Pity Party coming soon.
Are they really worth saving?
I wouldn’t invest in any one of them either. Seems they can’t be trusted.
Barack Obama should come up with a plan to fix what the Banks and The Bush Administration” created, should he?
Well now I think the Banks should be cleaning up their own dirty laundry. They are after all responsible for the disastrous, financial crisis. All in the name of Greed and profiteering.