'Putting off day of reckoning'
Tuesday, 4 December 2007
Ben White from New York
SIXTEEN years ago, the largest bank in the US was on the ropes, its balance sheet crippled by bad debts, especially on commercial real estate and Latin American loans.
Citicorp, as it was then known, turned to a top client in the Middle East for help, securing a $600m investment from Prince Alwaleed bin Talal of Saudi Arabia for convertible shares paying a cumulative annual dividend of 11 per cent.
Now Citigroup, its balance sheet threatened by bad residential real estate loans and related securities, has once again turned to a top client in the Middle East.
This time it is receiving a $7.5bn cash infusion from the investment arm of the Abu Dhabi government for convertible stock yielding 11 per cent.
The comparisons do not end there.
In 1991, many investors and analysts questioned whether Citi was offering too-generous terms for a capital infusion that would not do much to shore up its balance sheet.
These people said the bank would be much better off selling assets rather than diluting existing shareholders' stakes.
This time, similar questions have been raised.
The $7.5bn is only about enough to offset the bank's estimated fourth quarter collateralised debt obligation write-off. And some analysts have again suggested that Citigroup could raise more capital more efficiently by selling assets such as its lucrative brokerage arm.
But while some of the circumstances and criticisms are the same as they were in 1991, there are major difference this time around.
Despite its real estate and Latin American setbacks, Citicorp was a bank on the rise in 1991.
It had a visionary young chief executive in John Reed, who had pioneered the group's rise into a dominant player in credit cards and other retail banking businesses.
Prince Alwaleed has earned a tenfold return on his original investment even after Citi's nearly 50 per cent share price decline over the last year.
Now, Citigroup is without a long-term leader, following the departure last month of Chuck Prince as chief executive.
It faces serious risks that its mortgage-related losses could rise even further.
More broadly, there is a commonly held belief that Citigroup, in its current form, is simply too big and complicated to be run successfully.
Cash infusions, such as the one made by the Abu Dhabi sovereign wealth fund, which has nearly $1,000bn to invest, only forestall the day of reckoning when certain businesses must be sold off, the argument runs.
Analysts who subscribe to this theory believe the recent small jump in Citigroup's stock price was due to relief that the dividend appears be safe, at least for the time being.
It was not, they say, due to any conviction that the bank has now embarked on the right track.
.............................................
— FT Syndication Service
SIXTEEN years ago, the largest bank in the US was on the ropes, its balance sheet crippled by bad debts, especially on commercial real estate and Latin American loans.
Citicorp, as it was then known, turned to a top client in the Middle East for help, securing a $600m investment from Prince Alwaleed bin Talal of Saudi Arabia for convertible shares paying a cumulative annual dividend of 11 per cent.
Now Citigroup, its balance sheet threatened by bad residential real estate loans and related securities, has once again turned to a top client in the Middle East.
This time it is receiving a $7.5bn cash infusion from the investment arm of the Abu Dhabi government for convertible stock yielding 11 per cent.
The comparisons do not end there.
In 1991, many investors and analysts questioned whether Citi was offering too-generous terms for a capital infusion that would not do much to shore up its balance sheet.
These people said the bank would be much better off selling assets rather than diluting existing shareholders' stakes.
This time, similar questions have been raised.
The $7.5bn is only about enough to offset the bank's estimated fourth quarter collateralised debt obligation write-off. And some analysts have again suggested that Citigroup could raise more capital more efficiently by selling assets such as its lucrative brokerage arm.
But while some of the circumstances and criticisms are the same as they were in 1991, there are major difference this time around.
Despite its real estate and Latin American setbacks, Citicorp was a bank on the rise in 1991.
It had a visionary young chief executive in John Reed, who had pioneered the group's rise into a dominant player in credit cards and other retail banking businesses.
Prince Alwaleed has earned a tenfold return on his original investment even after Citi's nearly 50 per cent share price decline over the last year.
Now, Citigroup is without a long-term leader, following the departure last month of Chuck Prince as chief executive.
It faces serious risks that its mortgage-related losses could rise even further.
More broadly, there is a commonly held belief that Citigroup, in its current form, is simply too big and complicated to be run successfully.
Cash infusions, such as the one made by the Abu Dhabi sovereign wealth fund, which has nearly $1,000bn to invest, only forestall the day of reckoning when certain businesses must be sold off, the argument runs.
Analysts who subscribe to this theory believe the recent small jump in Citigroup's stock price was due to relief that the dividend appears be safe, at least for the time being.
It was not, they say, due to any conviction that the bank has now embarked on the right track.
.............................................
— FT Syndication Service