With $18.7 Billion Lost in 2008, It’s Splitsville for Citi

Citigroup Inc. (C) announced Friday it would reorganize itself into two businesses, Citicorp and Citi Holdings, to tune its focus to its core business. Going forward, Citicorp will be a “relationship-focused” global and regional business and consumer bank, while Citi Holdings will take on non-core businesses of brokerage and asset management, local consumer finance, and a special asset pool that will manage the assets covered by the loss-sharing agreement struck with the Treasury Department, the Federal Deposit Insurance Corporation and the Federal Reserve Bank of New York. These non-core businesses “do not sufficiently enhance the capabilities of Citi’s core business, and in many ways compete for its resources,” officials said in a press statement. “Given the economic and market environment, we have decided to accelerate the implementation of our strategy to focus on our core businesses,” said CEO Vikram Pandit. “This will help in our ongoing efforts to reduce our balance sheet and simplify our organization, which will enable us to better serve our clients and customers in both businesses without disruption.” Citigroup’s split into two entities effectively undoes the ’98 merger between Citicorp and Travelers Group, which brought together two massive conglomerates of worldwide banking, financial, brokerage and insurance businesses. With The Travelers Companies Inc. (TRV) having spun off of the massive company in 2002, taking the insurance underwriting business with it, all that was left was a giant banking entity. Some critics argue this corporation became too large to manage. Considering the massive fourth-quarter losses reported Friday, those fears don’t seem entirely unfounded. Citi reported a net loss of $8.29 billion — or $1.72 per share — for the fourth quarter and an $18.72 billion — $3.88 per share — net loss for all of 2008. A 47 percent decline in investment sales and lower mortgage servicing revenue were chiefly at the helm of declining consumer banking. Cit also reported securities and banking revenues were negative $10.6 billion due to substantial write-downs and losses. Subprime-related direct exposures led to 44.6 billion in net write-downs, and Alt-A mortgage write-downs, net of hedges, came to $1.3 billion. Cit reported its expenses were down 12 percent due to a “significant decrease” in salary and compensation because of head count reductions. But the earnings statement was not all gloomy. Citi reported a reduction in risk and a lowered regulatory capital requirement will result from the loss sharing program with the government, which closed on Thursday and which “provides protection against the possibility of unusually large losses on an asset pool of approximately $301 billion in loans and securities backed by residential and commercial real estate,” according to a statement released by the Treasury. Citi also announced it had closed on the issuance of $7.1 billion of liquidation preference perpetual preferred stock and warrants to the Treasury and FDIC. The company reported an expected pre-tax gain of $9.5 billion with the closing of the Morgan Stanley Smith Barney joint venture later in 2009. Write to Diana Golobay at [email protected]. Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.