Subprime Meltdown Continues: Citigroup To Take $15 Billion Hit?

Goldman Sachs has downgraded Citigroup, the nation’s largest bank, estimating that it will have to take a $15 billion hit due to its exposure to the subprime meltdown. Two weeks ago, Citigroup estimated that its mortgage related write-downs would total from $8-$11 billion as its CEO, Charles Prince “resigned.”

Goldman analyst William Tanona wasn’t thrilled with Citigroup’s decision to pink-slip its CEO:

“The lack of leadership at this point in Citi’s storied history could not have come at a worse time,” Goldman analyst William Tanona wrote in a note to clients. “With deteriorating consumer and housing metrics, Citigroup is facing mounting pressure across many businesses.”

Citigroup’s stock is down 39% on the year, and Tanona fears that the subprime debacle may be spreading to the consumer credit markets:

Goldman estimated Citigroup will have to book $15 billion in write-downs over the next two quarters related to its $43 billion in exposure to complex securities called collateralized debt obligations. Citigroup already has said it expects to see a loss of $8 billion to $11 billion on those positions. Goldman expects the bank to take the full $11 billion hit and then another write-down of $4 billion in the first quarter, an estimate based on weakness in indices that serve as proxies for the value of mortgage-related securities.

The situation isn’t very sunny outside of the investment-banking unit, either. Citigroup will feel “the pain” of a worsening consumer-credit environment in its retail banking and cards divisions, the Goldman note said.

Gosh. It sounds like Citi needs a hug.

Goldman Says Citigroup Faces $15 Billion CDO Write-downs


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  1. zibby says:

    While it wouldn’t stun me to see that amount, it’s worth mentioning that the $15b figure is one analyst’s estimate – not a fact yet as the headline implies.

  2. Dibbler says:

    I guess I just don’t understand business. Why can’t they just take those billions of dollars they made last year from fees and higher interest rates and pay off the loss? Same thing with insurance companies… when Katrina hit they did nothing but talk about how bad they were hit but the year earlier the big news was how much money they were making and all the record profits. I just have such a hard time understanding and/or feeling sorry for Chase and Allstate.

  3. rphoenix says:

    It is interesting to me that Conseco Insurance/Finance went bankrupt because of subprime mortgages in 2002 and it is never mentioned in this crisis. It was the third largest bankruptcy in US history and its bankruptcy was due to subprime lending in its Greentree Financial division. Greentree was eventually purchased for about $700 million with somewhere around $40 billion in paper assets. Even in 2002, the market could see the value (or lack thereof) of subprime loans. Interestingly, there were two divisions at Conseco Finance, the first was Greentree and the other was a credit card division. The credit card division sold for about $300 million even though it had about $2 billion in paper assets. It was still a bargain, but the discrepancy in the selling prices is telling.

    I find it fascinating that people in the mortgage industry claim that they couldn’t see this coming.

  4. dmolavi says:

    lovely…my (low, fixed-rate) mortgage is through citibank. while i doubt that this will affect me in any way, you never know in these times….

  5. iamme99 says:

    @RPHOENIX – I find it fascinating that people in the mortgage industry claim that they couldn’t see this coming.

    You’re not alone. So did the NY Times. The truth is everyone was happy to keep the Ponzi scheme going as long as they were making money.
    NY Times
    November 16, 2007
    High & Low Finance
    As Bank Profits Grew, Warning Signs Went Unheeded

    We should have known something was strange. The banks were doing a lot better than they should have been doing.

    When the history of the financial excesses of this decade is written, that will be a verdict of financial historians. There were signs that banks were either lying about their results or were taking large risks that were not fully disclosed, but investors were oblivious.

    What were the signs? Consider how banks make money. They pay low rates on short-term deposits and charge higher rates on long-term loans. So they love what are known as positively sloped yield curves. And they like to see big credit spreads, where risky borrowers are charged much more than safe ones. Put them together, and banks should clean up.

    Full article:

  6. rphoenix says:

    Interestingly, when GE bought Conseco’s credit card division they liquidated all of the subprime accounts they purchased in the transaction. At the time (I was working there at the time), the executives running the division were not happy about it because the subprime accounts were so profitable, but GE management was adamant that they would not allow subprime lending in the division. In hindsight, it seems at least one financial giant saw the writing on the wall. Having said that, I do not know what other exposure GE has as a company. If they kept away from subprime lending in general they must be feeling pretty smart about now…

  7. rekoil says:

    @rphoenix: It’s not so much that no one saw this coming – just about everyone did – but everyone manages to convince themself that they’ll be smart enough to have cashed out by the time the music stops and someone else will be holding the bag. Of course, it never works out that way, unless someone’s trading on insider information…

  8. rphoenix says:

    REKOIL, I am sure you are right. My comment is more a reaction to the tone of many articles and comments from officials at the FED that act as though the meltdown was not forseeable.

  9. iamme99 says:

    “We’re freaking doomed!” sez The Mogambo Guru

  10. Mr. Gunn says:

    They “think” it’s going to affect the consumer credit market? What planet are they living on?

  11. Mr. Gunn says:

    It’s no problem though, all those people cut from citigroup will be able to get a job in the military. They always need people.

  12. redclear55 says:

    let’s keep in mind that goldman sachs is a competitor of citigroup, so the harsh comments from their analyst can be expected. a lot of institutional investors (majority owners in the stock market) need to own stocks in the financial sector in order to maintain a market weight in the sector. this allows them to show relative out-performance versus the appropriate benchmark which is how hire/fire decisions are made when qualifying money managers to oversee your billions in invest able assets. so if GS is telling you to sell C, then who are they suggesting you buy?

    also, the range of 8-11 (or 15 as the analyst predicts) is completely dependent on how the market will be in the future IF citi has to sell assets to meet their balance sheet requirements. i don’t think any one person on the street can predict the future that well. it’s just someone trying to make their reputation by going against the street.

    finally, the stock is currently trading on balance sheet metrics and not the business valuation. most money managers price the stock between 60-70 per share when looking at citi’s profitability. while the sub-prime exposure does exist and was made transparent when Prince resigned, citi is a LARGE company and does not have the same exposure that their peers have. while $15B is a big number, it’s not as big when you value Citi’s entire balance sheet.