NEW YORK—Citigroup, Inc., the world's largest bank by market cap and a harbinger of U.S. economic health, is ailing.
Citi's Chairman and Chief Executive Officer, Charles O. Prince, resigned on Monday after the bank took a $6.5 billion hit for the third quarter, and announced additional $8 billion and $11 billion losses for the fourth quarter. Prince is the latest high-profile casualty in the recent subprime loan crisis, after Merrill Lynch CEO Stan O'Neal resigned last week.
Robert Rubin, former Goldman Sachs executive and U.S. Treasury Secretary during the Clinton administration, was named Chairman. Sir Win Bischoff, head of Citi's European operations, was named interim CEO until a permanent replacement is found.
The recent subprime lending meltdown has rocked the financial industry. A sharp rise in real estate foreclosure began in 2006 and eventually became a global crisis by the summer of 2007. The meltdown has led to bankruptcies of hundreds of companies, including New Century Financial Corp., once the second-largest subprime lender in the U.S.
Fallout from subprime loan defaults spread to investment banks and hedge funds which invested in the subprime mortgage-backed securities and other financial instruments derived from such loans. Banks such as Bear Stearns & Co., Merrill Lynch & Co., Lehman Brothers Holdings, and most recently, Citigroup, took heavy losses in 2007 related to the loans.
No obvious contenders for Citigroup's CEO position have surfaced so far, and analysts suggest that Citigroup could damage its corporate image and morale by dragging out its search for too long.
Citi's largest investor, Saudi Prince Alwaleed bin Talal, in an interview with CNBC on Monday, said that Citi should bring back former Chairman Sandy Weill to lead the company. Weill—who once headed the Travelers Group—orchestrated the merger between Citicorp and Travelers in 1998.
According to Fortune's Peter Eavis, few industry analysts expected the write downs to be this large.
"Citigroup estimated that the value of these assets has fallen since Sept. 30 by between $8 billion and $11 billion. The bank said these losses could hit net income by between $5 billion and $8 billion. That $8 billion would be equivalent to nearly 60 percent of Citigroup's net income in the first nine months of this year, and it could weaken Citigroup's capital ratios, which some analysts think are already weak," Eavis said in his report.
Additionally, Fitch Ratings this week cut Citi's credit rating to "AA" from "AA-Plus," citing consumer credit woes.
Investors and consumers are growing anxious. With the credit market crisis still unresolved, how well Citigroup and the rest of the U.S. banking industry weather the subprime storm will likely determine the future wellbeing of the U.S. economy.
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