November 21, 2008 / 2:06 AM / 11 years ago

Citigroup shares drop; CEO plans to keep Smith Barney

NEW YORK (Reuters) - Citigroup Inc Chief Executive Vikram Pandit tried to downplay speculation the banking giant might sell major businesses to restore its health and investor confidence, but shares still tumbled for a fifth straight day.

Citigroup Chief Executive Vikram Pandit in a file photo. REUTERS/Peter Morgan

Pandit told employees on Friday that the second-largest U.S. bank by assets does not want to change its business model and plans to keep its Smith Barney brokerage, according to two people who heard him.

He also said Citigroup had a solid capital position, and that employees should not focus on the bank’s falling share price because that is not what regulators and credit rating agencies worry about, the people said.

Citigroup’s board is meeting Friday to discuss the bank’s options, a person familiar with the matter said.

The shares closed down 94 cents, or 20 percent, at $3.77, after earlier tumbling as low as $3.05. They closed at $9.52 a week ago.

Citigroup’s market value fell to $20.5 billion on Friday. That’s less than the $25 billion taxpayer-funded injection that Citigroup just received from the federal government, and a fraction of the $75 billion of capital that Citigroup has raised since the credit crisis began last year. The bank’s market value topped $270 billion in late 2006.

“It’s fear and panic at this point,” said Gerard Cassidy, a banking analyst at RBC Capital Markets in Portland, Maine. “Investors have seen similar movies this year, and the endings are very unpleasant.”

The cost to protect Citigroup debt against default rose, suggesting that fixed-income investors see increased risk.

Citigroup is looking at options including a sale of parts of the company, or a merger with another company, a person familiar with the matter said on Thursday. Analysts speculated that the bank may look to sell Banamex, Mexico’s No. 2 bank, in a deal that could raise as much as $15 billion for Citigroup.

Concerns are rising that the drumbeat of negative news about Citigroup could prompt customers or trading partners to flee.

“We worry if the lack of investor confidence leads to (a) lack of customer confidence,” wrote Barclays Capital analyst Jason Goldberg. “We believe the market may be implying some sort of regulatory intervention.”

REGULATORS HAVE INTERVENED BEFORE

Within the last three months, major U.S. lenders Wachovia Corp and Washington Mutual Inc suffered rapid outflows of deposits, as losses mounted on mortgages and other debt.

Wachovia later agreed to be bought by Wells Fargo & Co, after regulators pushed it to find a buyer, while Washington Mutual failed and its assets were bought by JPMorgan Chase & Co.

On Monday, Pandit set plans to shed 52,000 of Citigroup’s 352,000 jobs by early 2009, and to move tens of billions of dollars in troubled securities onto its balance sheet.

The bank is also pushing the U.S. Securities and Exchange Commission to reinstitute a temporary ban on short sales of financial stocks, a person familiar with the matter said.

The cost to protect its debt was $500,000 annually to protect $10 million of debt against default for five years, up from $395,000 annually on Thursday, according to Phoenix Partners Group.

Banks in extreme distress that were recently taken over by regulators had much higher credit default protection levels.

Citigroup’s debt protection costs signal that fixed-income investors expect either that Citigroup raises dilutive capital, or that the government intervenes in a way that does not hurt bondholders.

But the cratering stock price, on top of the job cuts had employees on edge.

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“Now I know what the people at Lehman Brothers felt like,” one bank staffer said, referring to the investment bank that filed for bankruptcy protection on Sept 15.

On Thursday, Saudi Prince Alwaleed bin Talal said he planned to increase his stake in Citigroup to 5 percent from less than 4 percent. The bank’s largest individual investor called Citigroup’s shares “dramatically undervalued.”

Reporting by Jonathan Stempel and Dan Wilchins; Additional reporting by Jennifer Ablan, Megan Davies, Joseph A. Giannone and Ciara Linnane in New York and Noel Randewich in Mexico City; editing by Jeffrey Benkoe, Bernard Orr

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