Alan Kohler
Citi of lost souls
When Citigroup announced on November 4 that its sub-prime write-downs would be between $US8 and $US11 billion, someone obviously messed up the numbers in the press release.
It has turned out to be $US18.1 billion – same figures, just in a different order. If an Australian company was that wrong about such things so soon, the directors would be arrested.
But sub-prime is a drama that is still unfolding, and the November 4 announcement was made on previous chairman and CEO, Charles 'Chuck' Prince’s last day. He said then that given the size of the losses, the only honourable course was to step down. Given that the losses are actually twice what he said they would be, perhaps he should come back and step down again.
Sir Win Bischoff, ex-Schroders CEO in London, took over as acting CEO then, and on December 11 the board named Bischoff chairman and Vikram Pandit, head of the bank’s institutional group, as CEO. Separate chairman and CEO – good idea.
Pandit and Bischoff then set about clearing the decks or, as one New York fund manager put it, setting the table for 2008.
They examined the bank’s $US8 billion in sub-prime loan exposures and $US29.2 billion in collateralised debt obligation (CDO) exposures, and found that $US17.4 billion of them had to be written off – or 46.6 per cent.
So this “extraordinary institution”, as Vikram Pandit described it in December as he took over as CEO, had managed to lose nearly half of the money it lent on sub-prime mortgages. Extraordinary is right.
In addition Pandit has transferred another $3.3 billion to loan loss reserves because of increased delinquencies on all other US consumer loans – first and second mortgages, credit cards, personal loans and auto loans. That compares with $US127 million in the same period last year.
Total write-downs, new provisions and losses for the 2007 fourth quarter are $US22.2 billion and the net operating loss is $US9.8 billion. One thing shareholders of a company can be fairly sure of is that a new chief executive won’t skimp on write-downs when he takes over.
Inevitably, more capital is needed and existing owners have to take a dilution. In late November $US7.5 billion in convertible equity was sold to the Abu Dhabi Investment Authority, and Citigroup announced last night that another $US14.5 billion would have to be raised, bringing to $US22 billion the total new equity required – roughly equivalent to St George Bank.
And we now know that in the scramble for cash in November/December, Abu Dhabi got a great deal: the fixed coupon on its investment is an incredible 11 per cent, and the conversion price was then about the same as the stock price (it’s underwater now though). The dividend on the new lot of convertible preferred shares to be issued now is 7 per cent.
Presumably, the rate payable on the new money was kept down by the presence of Sandy Weill, the man from whom Chuck Prince took over in 2003 and who got him sacked last year.
Sub-prime mortgage lending and securitisation didn’t really get underway in earnest until 2003, so Weill is not only able now to say these losses would never have happened on his watch and to blame Charles Prince for everything, but also to average down his own investment in the bank with very favourable new stock.
He gets new convertible shares that carry a guaranteed dividend above the cost of the money and a 20 per cent conversion premium after Citi’s stock price has halved, from $US52 to $US26 in six months.
It was Sandy Weill, together with the then largest shareholder in Citigroup, Prince Alwaleed bin Talal of Saudi Arabia, who started the move against Charles Prince last year that ended with his sacking.
Last night’s announcement did not reveal how much Weill has put into the pot, but there is little doubt he would have been the first port of call for Pandit and Bischoff because his presence would have given the others tremendous comfort.
With Weill signed up, they were able to get $US6.9 billion from the Government of Singapore and the rest from Prince Alwaleed bin Talal, Kuwait, New Jersey’s investment division and Capital International.
Meanwhile, five minutes before the Citigroup’s fourth quarter results announcement, Merrill Lynch slipped out its own $US6.6 billion capital raising which was almost instantly ignored. That comes on top of $US5 billion raised from Temasek of Singapore three weeks ago.
Merrill Lynch’s new money comes from Korea, Kuwait, Mizuho Bank of Japan and, as with Citi, from Soprano country – New Jersey.
And there was no Sandy Weill to keep the cost of this money down: the coupon is 9 per cent and the conversion premium is 17 per cent.
But there’s no doubt who is the winner from sub-prime so far – Abu Dhabi.
