Posted on 01/14/2008 8:32:03 PM PST by BlackVeil
NEW YORK (Reuters) - Citigroup Inc (C.N) is likely to announce on Tuesday a significant dividend cut, at least $10 billion of new capital and a writedown of as much of $20 billion, the Wall Street Journal reported on Monday.
The largest U.S. bank is also likely to announce more than 20,000 job cuts when it posts fourth-quarter results on Tuesday, the Journal reported, as new Chief Executive Vikram Pandit tries to cut costs.
"You have a new person at the helm. He's going to do what he can to clear the decks," said Ralph Cole, portfolio manager at Ferguson Wellman Capital Management in Portland, Oregon.
The new capital is expected to come from sources including the Government Investment Corp (GIC) of Singapore, the Kuwait Investment Authority, and Saudi Prince Alwaleed bin Talal, already one of the largest Citi shareholders, the Journal reported, citing people familiar with the plans.
Jennifer Lewis, head of communications at GIC, declined to comment. "We can only comment on transactions that have been done or announced," she said.
Citigroup is struggling with a widening subprime mortgage crisis that has forced it to write down billions of dollars of assets and pushed its capital ratios below target levels.
It is expected to report a fourth-quarter loss, its first since Sanford "Sandy" Weill put the financial conglomerate together in 1998.
But a dividend decrease would represent an about-face for Citi, which said in a November 4 statement it had "no plans to reduce its current dividend level."
Analysts, most notably Meredith Whitney of CIBC World Markets, have been forecasting a Citi dividend cut for several months. Cutting the 54-cent-a-share quarterly dividend in half would save Citigroup more than $5 billion a year.
Citigroup spokesman Michael Hanretta declined to comment.
The new capital comes after state-owned China Development Bank decided not to buy a $2 billion stake in Citi, the Journal reported, saying senior Chinese government opposition surfaced over the weekend but the reason for the decision was unclear.
"We are completely unaware of the issue," an official in the news department of China Development Bank said.
A China Development Bank source familiar with the situation but not directly involved had told Reuters on Monday that Citi and China Development Bank had been in talks toward a possible capital injection from the Beijing-run policy bank.
CUTS COMING
As for job cuts, Citigroup's investment bank will likely take the biggest hit, with roughly 6,500 positions eliminated, the Journal said. That would follow the bank's announcement last April that it was cutting 17,000 jobs. At the end of 2006, Citi had a workforce of about 327,000.
Cash-rich government investment vehicles from the Middle East and Asia have been taking multibillion-dollar stakes in ailing Western financial firms in recent months.
The Abu Dhabi Investment Authority invested $7.5 billion in Citi in November after the bank posted $6.8 billion of mortgage-related writedowns for the third quarter and CEO Charles Prince left as Citi said the fourth quarter could bring a further $11 billion of writedowns.
In December, China's new sovereign wealth fund, China Investment Corp Ltd, took a $5 billion stake in Wall Street's Morgan Stanley (MS.N).
(Reporting by Ritsuko Ando in New York, Tony Munroe in Hong Kong, George Chen in Shanghai and Zhou Xin in Beijing; Editing by Braden Reddall)
Chinese children could fill those postitions handily.
Chinese interests (and Gulf Arabs) are also buying up the stock, now that it is low.
Trade deficit in reverse....
I’m sure the execs will still keep their salaries from the years all this mess was created and will also keep their severance packages when they choose to leave.
Just like Mozilo from countrywide. What a country.
Who the heck is that??? I hope he knows what he's doing.
A little perspective. I am a little biased because I used to sell investments through one of their companies. Their stock is now a great long term investment.
Financial Highlights
Fiscal Year End: December
Revenue (2006): 146558.00 M
Revenue Growth (1 yr): 21.80%
Employees (2006): 337,000
Employee Growth (1 yr): 9.80%
http://biz.yahoo.com/ic/58/58365.html
Pandit was within Citi’s ranks, running a hedge fund that Citi bought in early 2007 and doing various other things.
Pandit was pushed up the ladder to be CEO because he was seen as the guy who could take the sort of action necessary to fix the problems that could since Citi the fastest. Some directors had their reservations about Pandit, because he has no experience with consumer banking, and about half of Citi’s revenues come from consumer banking operations, credit cards, etc.
Pandit started changing minds very quickly when he consolidated a bunch of SIV’s and Level 3 assets, coming clean about what the liabilities were. Then he started bringing in more external capital (from Kuwait and Saudi Arabia as well as Asian investors), announced the huge layoff, etc.
Cutting the dividend on the common had to be the next move. Citi needs to conserve cash, and slashing the common is one of the fastest ways to do this.
So far, he appears to know what he’s doing. It isn’t easy, it isn’t without detractors, but it is necessary. When he’s done, Citi is going to be a much smaller, simpler operation. Most likely, we’re going to see Citi split between the corporate debt/M&A/etc operations and the consumer banking operations. They could see off either piece, but I’d expect them to sell off the consumer side right now, because it isn’t broken and they’d get a higher valuation on the consumer operation than they’d get if they put the corporate side up for sale.
“Chinese interests (and Gulf Arabs) are also buying up the stock, now that it is low.”
Why? They have huge cash reserves that can’t all be dumped into development projects. Naturally they would invest inactive cash in American Bonds and Dividend Stocks. Ironic yes, since much of that cash was made via international trade with the US economy.
A little perspective. I am a little biased because I used to work in banking supervision at the Fed. This company MAY be a great long-term investment, but it also MAY be a candidate for an assisted merger. We don’t let big banks fail any more, but we do bail them out with behind-the-scenes mergers. (Countrywide is the latest example.) Citi’s losses on CDOs and the other crap with which they and other banks have polluted the financial landscape will leave lots of shareholders with huge, if not total, losses on their investments. Run, do not walk, away from this company if you are a stock holder. Bond holders are likely safe, and may do very well.
Cutting the dividend is about the last thing a CEO will do; it signals that the firm desperately needs to conserve/raise capital. Pandit was dealt a very bad hand, but he is doing all the right things. Too little, too late, I fear. Look for asset writedowns of $20 to $30 billion in the coming days. Staggering numbers.
That’s true — but Citi is there at the “last thing” stage.
Back last fall, when the size of the cash crunch started to become apparent (ie, during the second “Oops” call, the one which got Prince sacked), people were asking Chuck Prince whether Citi would cut its dividend.
Prince replied “No way.”
This level of stupidity is one of the reasons for the loss of confidence in Citi’s management.
The stock currently has a yield of over 7%, which is simply too high. Everyone knows it is too high, and that the company needs to conserve cash, or the only other alternative is to keep peddling new shares (or warrants or converts), which results in shareholder dilution.
Slashing the dividend by half would save about $5 billion per year.
Given where they are, Pandit doesn’t have many responsible choices besides slashing the dividend.
Here’s an interesting side-note on this very topic: There was one analyst who was smart enough and had dug into Citi’s books deeply enough to predict this back in November (ie, that Citi would end up having to slash the dividend by half): Meredith Whitney.
She’s received death threats as a result of her insightful analysis.
One wonders what some people on Wall Street are smoking when the one analyst who has done her homework and come to the correct conclusion receives intimidation as a result of making the right call in the midst of the crowd of sell-side analysts doing a flawless imitation of a bunch of sheep.
I’d expect them to sell off the consumer side right now, because it isn’t broken and they’d get a higher valuation on the consumer operation than they’d get if they put the corporate side up for sale.
How would that affect the consumer? (By consumer, I'm assuming you mean the typical person who has one or more accounts at Citibank.)
And what about foreign capital? Are they loans? Or actual ownership?
Answers: I don’t know and I don’t know.
If they sell off the consumer side, you’d likely get a letter (or letters) explaining what is going on. Then you’ll get letters from the buyer of the consumer banking operations “welcoming you to the Very Big Bank Family” and other such noise as they PR departments like to make.
After that, there will be a year or so while the buyer of the consumer banking will honor the agreements under which your account was operating when it was with Citi. After that, you’ll start to see your account parameters start to change.
As for the foreign capital: The parameters of the deal have not been released by Citi. The Kuwaiti sovereign fund isn’t talking at all. I suspect that since Islamic law prohibits paying or receiving interest, their preference would be to actually buy a chunk of the company. I don’t know how sharia treats dividends (ie, whether they’re seen as interest/usury), but if dividends are not illegal, Citi might issue a new class of preferred stock, which would allow Citi to get the capital, pay off a hefty dividend on a senior basis, but confer no ownership or voting rights.
Given that Saudi Prince Alaweed bin Talel is the single largest shareholder of Citi, and he’s not a guy to mess around in stock without voting rights, and I’d wager that he’s advising the Kuwaiti guys... I’m guessing that they’re going to end up with at least some piece of the common and some voting rights.
Good news. Couldn’t happen to a worse bunch of thieves, liars and con-men.
It’s very disquieting, selling off chunks of our corporations to foreign investors, especially Islamic ones. I think Islamics also own a chunk of Fox News. And who knows what else. Thanks, NVDave, you’re a font of information.
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