Interesting times at Citigroup

It continues to be interesting times for Citigroup. The bank has been the hardest hit by the financial and credit crisis and if one analyst is right, the rough times may continue. Meredith Whitney, the Oppenheimer and Company analyst who has been one of the more negative observers of the industry says that the credit problems will continue into 2009 and perhaps beyond. She also opines that as much as $170 billion of loan losses face major banks in the reminder of the year and the earnings estimates for banks are grossly overstated. Ms. Whitney's report claims that losses form credit cards, atuo loans and other persona loans will continue to perform poorly and suffer rising default rates that will eat away at the bottom lines of banks. If she is right (and she has been so far), Citigroup may face more tough times and a sliding stock price for some months to come.

Citigroup continues to cut assets and sell operations it deems non core. They recently announced that they would be closing two lending operations in the United Kingdom. The operations made subprime mortgage loans as well as unsecured personal loans. With the closings, total layoffs will reach over 650 employees. Citi is also said to be thinking of selling part or all of its German retail operations.

Legal woes continue for the bank as well. Trial has started in New Jersey as Citigroup is sued by Italian milk company Parmalat. The company, which emerged form bankruptcy in 2005, says that Citi officials ignored red flags and signs of fraud by corporate insiders at the company. The fraud eventually caused the collapse and bankruptcy filing of Parmalat. Officials are suing Citigroup for 42.2 billion and charge that the bank ignored the signs to capture advisory fees and investment banking bonuses. It was also recently announced that at least three major banks lost billions in one of Citigroup's hedge funds. Lawsuits have been stalled by Citigroup's promise to repay investors $.45 on the dollar and absorb additional losses provided investors do not file suit.

Citigroup stock continues to perform poorly in the wake of the flow of bad news. The stock is currently down almost 60% over the past 52 weeks. Although the shares have tried to rally several times, each time it is greeted by new waves of selling. Some analysts, including Ms. Whitney, have said that bank shares need to trade at tangible book value to be considered cheap. If this is accurate, Citigroup shares could face addtional losses of 50% or more before it will be an attractive candidate for purchase.

by Tim Melvin |  05/20/08  |  Stocks: C,