Forced to contend with a frighteningly large write-down, the dramatic loss of a CEO and further financial turbulence, Citigroup, founded in 1812, is in the ordure. The bank - one of the world's largest - was hit by the autumn's US sub-prime mortgage meltdown, triggered by the downturn in the US housing market. It could be exposed to as much as $17bn in write-downs for its current year. Its chairman/CEO Charles O 'Chuck' Prince III said in November: 'Given the size of the recent losses in our mortgage-backed securities business, the only honourable course for me to take as CEO is to step down.' He was consoled with a $95m pay-off.
Citigroup is not the only bank suffering. Many others in Wall Street have had their troubles, not least Merrill Lynch, whose chief exec Stan O'Neal was also forced to quit over the sub-prime lending crisis. The banks had bought cunningly packaged debt products that appealed to their avarice rather than their common sense. They miscalculated the risk.
THE STRAIGHT TALK
'When you look at the trillions of dollars in assets that Citi has, and you're talking about potential exposure of maybe $15bn, it's bad but it's not the end of the world,' said Bill Smith of Smith Asset Management. Robert Peston, the BBC's business editor, wrote in his blog: 'Let's hope that the painful experience of Citi and other institutions leads bankers to once again show due respect for one of the golden rules of banking: you may be able to make money from merde, but don't pretend you're selling anything but merde.' Since the bad news broke in early winter, Citi has tried to pull a rabbit out of the hat by raising $7.5bn from the Abu Dhabi Investment Authority, which means the bank will now be close to restoring its capital ratios to target level, which it pledged to reach by June this year. It's a confidence boost, but it doesn't go all the way to allay investors' fears that there is more pain to come. And although it's good news for Citi's short-term cash balance, it's an expensive way of raising funds.
Vikram Pandit, the veteran banker who recently joined Citi, was named as new CEO last month, and Sir Win Bischoff is to become chairman. Known as a workaholic, Pandit has promised to address the group's issues 'head-on', to simplify the bank's organisation and reconfigure its businesses according to 'economic realities'. As an outsider, he is well placed to shake up the way things are done at Citi. And what it needs more than anything right now is a lot of tough love.