New Citi leader will inherit sprawling mess

NEW YORK Mon Dec 10, 2007 3:29pm EST

Men walk past a Citibank sign outside its Tokyo branch November 5, 2007. Citigroup's next leader will inherit a balance sheet battered by exposure to subprime assets, a work force bracing for major job cuts and a consumer lending business that could be slugged by a U.S. economic slowdown. REUTERS/Toru Hanai

Men walk past a Citibank sign outside its Tokyo branch November 5, 2007. Citigroup's next leader will inherit a balance sheet battered by exposure to subprime assets, a work force bracing for major job cuts and a consumer lending business that could be slugged by a U.S. economic slowdown.

Credit: Reuters/Toru Hanai

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NEW YORK (Reuters) - Citigroup's (C.N) next leader will inherit a balance sheet battered by exposure to subprime assets, a work force bracing for major job cuts and a consumer lending business that could be slugged by a U.S. economic slowdown.

What's more, it could take Citigroup (C.N) nearly three years to recoup losses on any further substantial write-downs of its collateralized debt obligations, according to analysts at CreditSights Inc., an independent fixed-income research firm. CDOs are debt structures backed by assets such as risky subprime mortgages.

Citigroup's board meets this week and a new CEO for the largest U.S. bank by assets could be announced. Frontrunners include Citi executive Vikram Pandit, who oversees trading, investment banking and alternative investing, and former Citigroup President Robert Willumstad.

Citigroup has been without a permanent leader since November 4, when chairman and CEO Chuck Prince was ousted. That same day, Citigroup said the value of $55 billion in U.S. subprime-related exposure had seen significant declines since the end of September.

Analysts say Citigroup's balance sheet problems could spark a major asset sale at the bank. CreditSights takes that thinking a step further, speculating that smaller rival JPMorgan Chase & Co (JPM.N) could buy Citigroup and boost earnings substantially by cutting operating expenses.

"The prospect of having to stomach Draconian marks against outsized CDO and SIV exposure could put Citi in a precarious position in terms of capital levels," CreditSights said.

As a result, Citigroup could have to consider a dividend cut, a major asset sale or even a takeover by a stronger bank, CreditSights said.

JPMorgan is seen as potential acquirer because its management team, led by CEO Jamie Dimon, has worked at Citi. Dimon also is seen as someone who could combine the two banks for big cost savings, CreditSights said.

A 15 percent reduction in operating expenses could increase profit by more than $6 billion, CreditSights said.

JPMorgan and Citigroup declined comment.

Such a takeover would be huge, approaching a $200 billion price tag. Citigroup's current market capitalization is about $172 billion.

"Following the ouster of CEO Charles Prince, Citi is yet to unveil a new CEO," CreditSights said. "One of the options would be to sell the company to JPMorgan."

Some investment bankers do not think such a big deal is likely, given the global turmoil in credit markets.

Bear Stearns banking analyst David Hilder said in a research note that bad news in the U.S. housing market suggests that overall real estate-related problems may continue until at least the second half of next year for big banks.

Hilder said Citigroup was among a group of four banks that saw the largest increases in delinquencies of first mortgage loans in the third quarter. Citigroup's ratio increased 29 basis points to 1.09 percent, Hilder said. In contrast, Bank of America Corp (BAC.N) nonperforming loan ratio on first mortgages was 0.43 percent, he said.

Meanwhile, estimates by CreditSights said it would take Citigroup 2.7 years to earn back the money lost on a 25 percent write-down on its CDO exposure of about $46 billion.

Citigroup's potential problems become even more worrisome when you consider its roughly $66 billion exposure to SIVs.

"One key question is whether Citi can continue to support its SIVs by purchasing their short term obligations without demonstrating recourse that could require the company to bring the assets on its balance sheet," CreditSights analysts said in their report.

Goldman Sachs analyst William Tanona said the recent move by HSBC Holdings Plc (HSBA.L) to bring $45 billion of SIV exposure onto its balance sheet increases the likelihood that Citigroup may have to follow suit.

(Reporting by Tim McLaughlin, editing by Dave Zimmerman)

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