Citi facing even bigger write-offs than Merrill

Apparently because of the Merrill actions, Citi will probably follow suit... Citi facing even bigger write-offs than Merrill http://www.crainsnewyork.com/apps/pbcs.dll/article?AID=/20080729/FREE/746264946/1123/newsletter11 Bank could be facing $7 billion in additional write-downs if it is forced to value its mortgage-related debt at the heavily discounted price Merrill Lynch accepted for its... [more]

Apparently because of the Merrill actions, Citi will probably follow suit... Citi facing even bigger write-offs than Merrill http://www.crainsnewyork.com/apps/pbcs.dll/article?AID=/20080729/FREE/746264946/1123/newsletter11 Bank could be facing $7 billion in additional write-downs if it is forced to value its mortgage-related debt at the heavily discounted price Merrill Lynch accepted for its portfolio. Print Email Add a comment Aaron Elstein Merrill Lynch & Co.'s decision to purge its books of free-falling mortgage-related assets means Citigroup Inc. could be facing more painful write-downs. Citi now has the largest exposure to super-toxic instruments known as collateralized debt obligations, which are complex securities typically backed by mortgages. The bank, already battered by about $50 billion in mortgage and credit losses in the past year, could suffer another $7 billion of write-downs if it valued its $22.5 billion CDO portfolio at the levels Merrill got when it agreed to sell $30.6 billion worth of these securities on Monday, according to Deutsche Bank analyst Mike Mayo. Citi marked its portfolio at 53 cents on the dollar last quarter, Mr. Mayo says. Merrill, however, valued its CDOs at just 22 cents on the dollar when it unloaded them for just $6.7 billion to an affiliate of private investment firm Lone Star Funds. Merrill extended $5 billion of financing to help get the deal done. Goldman Sachs analyst Bill Tanona estimates that Citi faces a much larger loss. He believes that Citi could be facing additional write-downs of $16.2 billion. Mr. Mayo warns that Citi faces an additional $1 billion write-down related to its exposure to bond insurers. He now projects that Citi will post a third-quarter loss, which would represent its fourth consecutive quarter in the red, and said the bank may need to raise fresh capital from investors yet again. That would not only water down the stakes of existing shareholders, but damage the credibility of a management team that has insisted further capital-injections will not be needed. A Citi spokeswoman declined to comment. Goldman Sachs figures to be the main beneficiary of the misery at Merrill and Citi. Not only has the firm avoided massive write-downs, but it recently raised $10 billion to invest in distressed debt, observed J.P. Morgan analyst Kenneth Worthington. Vulture investors also figure to make a killing, although some have been badly burned trying to bottom-fish so far. They include Warburg Pincus, which in January made a dud investment in bond insurer MBIA. Citadel has watched E*Trade’s stock price sink since investing in the discount broker last year. Other Wall Street firms seem to have much less to lose from Merrill’s CDO fire-sale. Morgan Stanley has $1.5 billion of net exposure to CDOs, according to Sanford C. Bernstein & Co., while Lehman Brothers Holdings Inc. has $600 million of gross exposure, and Goldman has less than $300 million. Merrill paid a steep price to end a painful chapter in the firm’s 94-year history. Selling so many securities at a huge loss will force the firm to take a $5.7 billion write-down for the third quarter. It raised another $8.5 billion in cash to repair the damage to its balance sheet, something Chief Executive John Thain had repeatedly insisted he wouldn’t do. What’s more, the firm is not totally free and clear from the CDOs it agreed to sell, since it provided financing for 75% of the purchase price, putting it on the hook for any losses over $1.7 billion. Merrill also has exposure in other problem areas that could lead to additional write-downs, J.P. Morgan says, including a $45 billion portfolio of residential mortgages, $18 billion of investments in U.S. banks, and $18 billion in commercial mortgages. [less]