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Citi Downgraded on Subprime Exposure

Goldman Sachs sees $15 billion in Q4 & Q1 charges

November 19, 2007


Shares of Citigroup Inc., which said earlier this month it would take subprime related charges of as much as $11 billion, were downgraded by a Wall Street investment banking firm that forecasts even higher losses for the financial services giant.

Citigroup will likely have difficulty reaching its desired income targets because of its exposure to structured investment vehicles, collateralized debt obligations and subprime mortgages, according to an investment report issued by Goldman Sachs Global Investment Research. Other factors for the gloomy outlook include the difficulty expected in maintenance of capital ratios, projections of deteriorating consumer credit trends and the lack of leadership currently.

The report was authored by William F. Tanona, Betsy Miller and Neil C. Sanyal.

Goldman's report estimated the New York-based company's CDO losses at $15 billion during the next two quarters -- $4 billion worse than Citi itself estimated just two weeks ago when it also announced the resignation of Chairman and Chief Executive officer Charles Prince.

"The lack of leadership at this point in Citi's storied history could not have come at a worse time," Goldman's analyst wrote. "We do not expect there will be a 'quick fix' to some of Citi's issues and it will likely take the new CEO some time before he/she decides on the appropriate course of action to undertake."

In a statement issued today, Citi said most of its CDO exposure is tied up in the most senior tranches of its asset-backed CDOs and are not subject to valuation based on observable market transactions.

The higher charges projected for Citi's remaining $43 million CDO portfolio were based on activity in the ABX and TABX indexes, Goldman said.

"We have become more pessimistic on the group's outlook," Goldman said. "We recently reduced our 4Q 2007 and 2007 [full year] estimates to incorporate the firm's updated guidance; however, we are lowering our 2008 and 2009 estimates to $3.80 and $4.60 from $4.65 and $5.20. We are lowering our price target to $33."

Goldman's projection of bigger write downs sent shares of Citi down $1.92 in early afternoon trading to $32.08 and helped push the Dow Jones Industrial Average down more than 160 points. Citigroup shares had traded as high as $57.00 just 11 months ago.

Shares of Citigroup could rise when it hires a new CEO, if the Federal Reserve eases monetary policy or if there is a foreign investment. A restructuring or a floor valuation could also push the price higher.

"Our concerns for Citigroup go beyond subprime mortgages and CDOs as the firm has significant exposure to [variable interest entities] and SIVs that could potentially expose the firm to some of the $343 billion of assets that are currently off balance sheet," Goldman added.

The report warned additional capital contributions to SIVs could wind up worsening capital ratios. Goldman said options for Citi include a dividend reduction, an equity offering and asset sales.

But in its statement today, Citi explained it expects targeted capital ratios to return by the second quarter of next year without cutting its current dividend.

Sam Garcia worked in mortgage lending for twenty years prior to becoming publisher of MortgageDaily.com.

e-mail: [email protected]

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