Thursday, December 27, 2007

Citi may double housing-related writeoff

A little over a month ago, Citi said it was probably going to have to write off about $8 billion in bad loan debt, much of it housing related. Turns out the real answer (for now, anyway) is going to be more than twice that much.

Citigroup Inc. could write off as much as $18.7 billion in the fourth quarter, wrote Goldman analysts William F. Tanona, Betsy Miller and Neil C. Sanyal in a note to investors late Wednesday. If it does, they say, the bank may be forced to lower its dividend by 40 percent.

Citi has about $55 billion in exposure to subprime mortgages, about $43 billion of which are collateralized debt obligations, or CDOs, that have mortgages underlying them.

“We still believe it will be a couple of quarters before the current credit crisis is fully digested by the markets,” the Goldman analysts wrote.

After the November announcement, the Abu Dhabi Investment Authority bought a $7.5 billion chunk of the bank, a 5 percent investment. If the writedown is this bad, Citi will probably need another investment at least that large.

Of course, with that type of bleeding, that means it will be a buyer’s market for any chunk of Citi. And, that’s true in spades if Citi, as is likely, also has to cut its dividend significantly.
CIBC World Markets Corp. analyst Meredith Whitney has said for months that Citi's dividend should be on the chopping block. Earlier this month, she wrote that along with cutting the dividend, Citigroup should raise at least $30 billion in additional capital and sell at least $100 billion in assets.

And, it’s not just Citi. The same Goldman analysts expect Merrill Lynch to have to write off an additional $11.5 billion. Of course, the more these investment banks bleed, and the more their value drops, the more it becomes a falling spiral.