NEW YORK (Reuters) - Citigroup Inc faced a crisis of confidence on Wednesday as investors questioned the survival prospects of the U.S. banking giant, and its shares tumbled 23 percent to a 13-year low.
The second-largest U.S. bank by assets has been reeling on concerns that mounting losses from credit cards, mortgages and toxic debt could overwhelm its efforts to slash costs and add deposits. Last month, Wells Fargo & Co dealt a blow by derailing Citigroup’s bid to buy Wachovia Corp.
Citigroup shares closed down $1.96 at $6.40 on the New York Stock Exchange and have fallen 33 percent this week as some investors concluded that Chief Executive Vikram Pandit’s plan to shed 52,000 jobs and cut expenses by one-fifth won’t restore the bank to health.
“People are looking at their business model and wondering how on earth they’re going to be able to survive,” said William Larkin, a fixed-income manager at Cabot Money management in Salem, Massachusetts.
Citigroup said in a statement it has a strong capital and liquidity position, and is focused on executing its strategy, which it believes will pay off over time.
Earlier Wednesday, Citigroup agreed to buy $17.4 billion in assets remaining in some funds known as structured investment vehicles. The SIVs were among the earlier investments to implode when the global credit crunch began last year.
While shares of the New York-based bank are down 78 percent this year, trading Wednesday brought new urgency as investors viewed the bank’s prospects in terms of other companies that either failed or went to the brink.
Worries about Citigroup were a key factor in U.S. stocks falling broadly Wednesday to a 5-1/2-year low.
“The whole thing echoes quite frankly of Bear Stearns,” said David Dietze, chief investment officer of Point View Financial Services in Summit, New Jersey.
Bear Stearns narrowly avoided failure this year when JPMorgan Chase & Co bought the investment bank in a government-backed sale. “(The Bear problems) all started with them liquidating hedge funds,” Dietze said. “It’s quite an eerie echo.”
William Smith, a portfolio manager at Smith Asset Management, referred to insurer American International Group Inc, which got a $152 billion government bailout. “It’s simple. Break it up before it turns into another AIG,” he said about Citigroup, which operates in more than 100 countries.
The U.S. Treasury Department declined to comment, citing its policy of not discussing individual companies.
Regulators have shown a willingness this year to intervene when banks appeared to struggle. They pushed Wachovia Corp into finding a buyer and arranged for JPMorgan to buy Washington Mutual Inc’s banking assets after worried customers began to yank deposits.
“If the government stepped in, they would rescue the senior bondholders and probably the subordinated holders too, but equity is far less likely to be saved,” said Sean Egan, principal of Egan-Jones Ratings Co in Haverford, Pennsylvania.
Wednesday’s decline drove Citigroup’s market value down to about $34.9 billion, allowing U.S. Bancorp to surpass it as the nation’s fourth-largest bank by market value. U.S. Bancorp’s asset base is about one-eighth as large.
Citigroup’s market value is down from more than $270 billion just two years ago. It is also less than one-half the $75 billion of new capital that Citigroup has raised since the credit crisis began, including $25 billion through Treasury Secretary Henry Paulson’s financial industry rescue package.
Other bank shares also declined, including 11.4 percent at JPMorgan, 10.3 percent at Wells Fargo and 14 percent at Bank of America Corp, the largest banks by market value.
US Bancorp fell 8.2 percent. Wachovia fell 13.1 percent, and Merrill Lynch & Co Inc, which Bank of America plans to buy, fell 15.8 percent.
Investor worries about the banking sector swirled after Credit Suisse analysts said two big, new commercial loans were near default. That fanned fears that credit deterioration that has already saturated the residential mortgage market and worsened in credit cards was heading to a major new sector — commercial real estate.
New government data showed that consumer prices dropped in October at the fastest pace ever, while housing starts that month were the fewest on record. And minutes released Wednesday of the Federal Reserve’s October 28-29 meeting show that the central bank believes the economy could contract next year.
“The financial industry is under assault,” said Tom Sowanick, chief investment officer for Clearbrook Financial LLC in Princeton, New Jersey. “It looks like the short-sellers are squeezing the hell out of Citi shares.
“The way the stock is trading today,” he continued, “it is clear that investors have lost confidence in what chief executive Vikram Pandit has to say and confidence in how he picks stocks including his own. Last week Pandit bought 750,000 common shares in Citi, days before he announced problems at a Citi hedge fund and 52,000 layoffs. Good going Vikram.”
Fixed-income investors grew less confident that Citigroup can pay its debts.
The cost to insure $10 million of Citigroup debt against default for five years rose to $360,000 annually from $240,000 on Tuesday, according to Phoenix Partners Group.
Citigroup’s 6.5 percent notes maturing in 2013 yielded 5.86 percentage points more than U.S. Treasuries, up from 5.19 percentage points, according to MarketAxess.
Citigroup, JPMorgan and Bank of America are in the Dow Jones industrial average. They have lost close to $500 billion of market value from their recent highs — Bank of America in November 2006, Citigroup the next month, and JPMorgan in May 2007.
Reporting by Jennifer Ablan, Karen Brettell, Elinor Comlay, Joseph A. Giannone, Emily Kaiser, Jonathan Spicer and Dan Wilchins; editing by Jeffrey Benkoe