Citigroup, America's biggest bank, is now facing its toughest time for years as it battles a huge credibility problem and billions of dollars more in new write downs.
If anyone who doesn't think that the subprime mortgage and debt crisis is back with a vengeance, consider the toll now: three CEOs of world class investment banks, including the largest in the US and Europe, have now departed because of major miscalculations about investing in these dodgy securities and their associated derivatives.
Chuck Prince, the CEO and chairman of Citigroup, walked the plank with news of a further write down and losses ranging from $US8 to $US11 billion ringing in his ears.
Citigroup had already reported losses and write downs of $US6.5 billion before today.
That takes Citigroup's total losses in write downs to more than $US14 billion as a minimum and as much as $US18 billion as a maximum, or $A16 billion to $A21 billion, give or take a few hundred million.
That's equal to between three and four months profit, without any other losses from the business. With housing continuing to worsen; debts from credit cards and car loans have edged up in the US as homeowners default. As well as non-subprime mortgage foreclosures have been rising.
Wall Street analysts were speculating that US banks had another $US10 billion in write downs and losses to reveal for their fourth quarter: Citigroup has all but filled that estimate on its own, meaning others, like Merrill Lynch, UBS, Bear Stearns, Morgan Stanley, JP Morgan Chase and Goldman Sachs, plus the likes of HSBC, Deutsche Bank and Barclays in Britain, will be viewed with increased suspicion.
Citigroup will now have to raise new capital, cut lending and positions in a range of investments: parts of the bank around the world, such as the Australian banking, broking and investment banking business, could be on the market.
Mr Prince left a week after Stan O'Neal went at Merrill Lynch and months after the first head to roll was at UBS where the chairman flicked his chief executive.
Robert Rubin, the former US Treasury secretary and a former investment banker, will take over as chairman Citigroup. In his first major announcement he said "there are no plans to cut the dividend". That was a reference to speculation from analysts that Citigroup might have to cut the dividend to rebuild its financial position.
He said the board and senior management were united behind the strategy pursued by Mr Prince, quashing the hopes of some investors that a change of chief executive could lead to significant disposals or even a break-up of the group.
Sir Win Bischoff, former head of British investment bank and fund manager Schroders and now chairman of Citi Europe, will serve as interim chief executive and may become permanent.
The value of mortgage securities packaged into collateralised debt obligations has fallen further in recent weeks, sharply increasing the losses Wall Street and other investors and originators of these securities face. Stan O'Neal was last week forced out as chairman and CEO of Merrill Lynch, after it estimated it faced write downs of $US7.9 billion, almost double the figure it announced just over two weeks earlier.
After Merrill Lynch, Citigroup was the largest underwriter of CDOs last year and the credit squeeze has left both with large holdings of securities and CDOs. Citigroup has said it had $US 55 billion of subprime-related direct exposures in its securities and banking business. At $US11 billion, it's a 20% write down. Some classes of CDOs and mortgages have incurred larger losses than that. Some Double A rated bonds have losses as much as 50c in the dollar, some AAA rated bonds are down 20% and falling.
The write downs will move with future market conditions, but will further weaken Citigroup's capital position which is now under its target levels and won't now return to normal until next June at the earliest, instead of the first quarter of 2008.
Citigroup will have to stabilise its financial position, reassure staff and lenders and then try to carry on with a cost cutting program that is supposed to drop costs by a total of $US4.5 billion by 2009.
That is a big ask in this sort of market when preserving capital and rebuilding it will be much more important than cost cuts and redundancies which will add to the bank's losses.
Citigroup shares are now down 32% this year and will probably bounce higher with this news out of the way. That's twice the fall seen by shares of rivals Bank of America and JPMorgan Chase.
In his statement, Mr Prince mentioned a rarely stated reason for taking the sort of decision he did: 'honour'. No doubt it will be assisted by 'separation' payments that will comfort him for a long time. "It is my judgment that given the size of the recent losses in our mortgage-backed securities business, the only honorable course for me to take as chief executive officer is to step down,'' Prince said in the statement.
Citigroup has 327,000 employees, offices in more than 100 countries and $US2.2 trillion in assets,.
Bank of America is larger by market value at $US200 billion, topping Citigroup's $US188 billion.
