Citi Breakup in Sight (Reuters)

by Chris Sturr | January 14, 2009

This just in from Reuters; Robert Rubin’s departure from Citigroup appears to have been a prelude to this. The concept of a “bad bank” is intriguing—wouldn’t that be a matter of interpretation, though?

Reuters updated the article (and ratcheted up the worry) while I was working on this post; here are the first few paragraphs of the milder version, with the first few paragraphs of the more dire one “Worries Over Citi Mount”) afterwards, with a link.

By Dan Wilchins and Joseph A. Giannone

NEW YORK (Reuters) – Citigroup Inc agreed to merge its Smith Barney brokerage with Morgan Stanley’s wealth management unit on Tuesday, and is expected to make further asset sales to raise capital and to isolate toxic assets from the rest of the bank.

Citigroup, once the world’s largest bank, may announce plans on January 22 to formally shed the “financial supermarket” approach once championed by former Chief Executive Sanford “Sandy” Weill, but which is now being disavowed by Chief Executive Vikram Pandit. It is expected the same day to post a big fourth-quarter loss.

Citigroup is planning to adopt the equivalent of a “good bank, bad bank” structure, in which it would slim down to a business model recalling the former Citicorp, a person familiar with the plan said.

The plan envisions focusing on corporate, investment and retail banking and keeping a slimmer trading business, while moving unwanted assets and businesses such as complex debt to a separate structure, the person said on condition of anonymity.

Citigroup’s “bad bank” would have about $600 billion of assets, close to one-third of Citigroup’s balance sheet, which could eventually be sold or spun off, the person said.

Here’s the scarier Reuters post, updated a few minutes ago to reflect Citi’s tumbling stock prices today:

Worries over Citigroup mount
NEW YORK (Reuters) – Citigroup Inc shares tumbled Wednesday as investors and analysts worried about whether the bank can be profitable and function effectively as it unravels its business model.

The bank on Wednesday said it will report fourth-quarter results on January 16, six days earlier than originally planned. It is expected to post a multibillion-dollar loss.

Rival JPMorgan Chase & Co also moved up its earnings release six days and is due to report on Thursday.

Once the world’s largest bank, Citigroup is expected to shrink by about a third as it focuses on corporate, investment and retail banking and trims its trading operations, a person familiar with the plan said.

Citigroup will also put businesses and assets it no longer wants into a separate structure with an eye toward eventual sales, the person said.

The disposals will mark an about-face for Chief Executive Vikram Pandit, who had endorsed retaining large parts of the “financial supermarket” created by former CEO Sanford “Sandy” Weill, who created Citigroup in a 1998 merger.

A drumbeat of analysts and investors has questioned whether Citigroup or market developments will give Pandit, who became chief executive in December 2007, time to finish the job.

Citigroup has received two lifelines from the U.S. Treasury Department’s Troubled Asset Relief Program, getting $25 billion in October and $20 billion in November. The second infusion involved an agreement by the government to share in some losses, in exchange for preferred stock and warrants.

On Tuesday, Citigroup announced plans to combine its Smith Barney brokerage and other businesses with Morgan Stanley’s wealth management unit, bolstering capital.

Morgan Stanley will pay $2.7 billion to Citigroup and take a 51 percent stake in the joint venture, with the ability to buy all of it after five years.

“There is no other way to view this move, in our opinion, than as a way for Citigroup to raise cash prior to its fourth-quarter earnings release,” Oppenheimer & Co analyst Meredith Whitney wrote. She said she expects further asset sales or spinoffs as Citigroup’s balance sheet losses mount.

But in tight credit markets, Citigroup’s ability to spin off assets may be limited, and the bank is still exposed to a deteriorating economy that is expected to cause credit losses, such as in credit cards, to soar further.

David Trone, an analyst at Fox-Pitt Kelton, said major asset sales are “not even feasible” in this environment. He said the only option is to split Citigroup into separate, publicly-traded companies.

“By overhyping Citi’s intentions, all today’s reports will do, in our view, is establish false expectations in the market,” he wrote. “When the market realizes that management has no intention or no ability to find buyers in any event, we see Citi’s stock falling in disappointment.”

Eight analysts who issued estimates in the last week forecast, on average, that Citigroup would report a fourth-quarter loss of $1.00 per share, according to Reuters Estimates.

In morning trading, Citigroup shares fell 82 cents, or 13.9 percent, to $5.08 on the New York Stock Exchange.

Read the rest of the article.

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