Citigroup, Fed Said to Weigh Plan to Limit Losses

By Bradley Keoun, Alison Vekshin and Christine Harper

Nov. 23 (Bloomberg) -- Citigroup Inc. and U.S. regulators are in talks to limit the bank’s potential losses on more than $100 billion of toxic assets after the stock’s plunge last week sparked concerns about the company’s fate, four people familiar with the matter said.

The Federal Reserve and Treasury Department have been locked in discussions with Citigroup and other regulators throughout the weekend and a deal may be reached as soon as today, according to the people, who declined to be identified because the negotiations are confidential. The plan under consideration calls for the assets to remain at Citigroup, with the government agreeing to assume losses beyond a specified amount, two of the people said.

The holdings that may be guaranteed are a portion of the $400 billion pile of mortgages, bonds, auto loans and corporate loans that Chief Executive Officer Vikram Pandit pledged in May to shed within three years, the two people said. While the amount to be covered under the plan is under discussion, the talks are focused on about $100 billion to $200 billion of the assets, they said.

“If anybody’s too big to fail from the financial system’s point of view, it’s Citi,” said Brian Barish, president of Cambiar Investments LLC in Denver, which manages about $6 billion and doesn’t own Citigroup stock. “The government doesn’t need to be in this to make money. If they lose a few bucks on this, but save the system, it’ll be worth it.”

Share Decline

Citigroup lost 60 percent of its market value last week as investor confidence in the New York-based company’s prospects faltered after four consecutive quarterly losses. Unless the bank takes steps to halt the slide, the share-decline may rattle Citigroup’s customers, counterparties and employees, threatening the operations of the second-biggest U.S. bank by assets, according to a report by David Hendler, an analyst at CreditSights Inc. in New York.

“We sense that Citi’s board will also recognize the difficult chain of events which can be brought about by its low stock price, and prefer to take action,” Hendler wrote in the report yesterday.

Federal Reserve Board spokeswoman Michelle Smith and Citigroup spokesman Michael Hanretta declined to comment today. Citigroup Chief Financial Officer Gary Crittenden and Chief Risk Officer Brian Leach are leading the negotiations for the bank, one person familiar with the matter said.

‘Breathing Room’

The aid plan under consideration would give Citigroup “a little bit of breathing room, but long-term things may deteriorate” in areas of the company that wouldn’t be covered, said Peter Kovalski, a portfolio manager at Alpine Woods Capital Investors LLC in Purchase, New York, which manages $8 billion including Citigroup stock. “The Achilles’ heel with Citi also is their exposure to emerging markets and what’s going to happen when emerging markets turn down, as they’re doing now.”

Pandit, 51, told employees on a Nov. 21 conference call that he doesn’t plan to break up the company. He and Crittenden said they don’t expect to sell the Smith Barney brokerage unit, two people who listened to the call said at the time.

Citigroup’s board, led by Chairman Win Bischoff and independent director Richard Parsons, met the same day to discuss the bank’s options.

Citigroup issued a statement last week saying the company has “a very strong capital and liquidity position and a unique global franchise.”

Interventions

The proposal under consideration is a variation on a theme that has played out in government interventions during the past year, including JPMorgan Chase & Co.’s purchase of Bear Stearns Cos., Citigroup’s failed effort to buy Wachovia Corp. and the Swiss government’s rescue financing of UBS AG. In each case, the government required the bank to absorb initial losses and agreed to guarantee deficits beyond that amount.

JPMorgan took the first $1.15 billion of losses on a $30 billion portfolio of Bear Stearns’s devalued assets, with the Fed agreeing to finance the rest.

In September, Citigroup agreed to suffer the first $42 billion of losses on Wachovia’s loan porfolio, with the Federal Deposit Insurance Corp. taking the rest, in a deal that was canceled after Wells Fargo & Co. stepped in to buy Wachovia.

The Swiss government required UBS in October to inject 6 billion Swiss francs ($4.91 billion) into a special purpose vehicle backed with $54 billion of central bank loans to allow the bank to carve off about $60 billion of assets.

To help shore up Citigroup, the FDIC could provide loan-loss support or the U.S. Treasury could contribute money from the $700 billion Troubled Asset Relief Program passed by Congress in October, Hendler’s report said.

Credit Ratings

“The FDIC does not comment on open and operating institutions,” Andrew Gray, a spokesman for the agency, said in an e-mailed statement today.

Citigroup’s debt remains on review for downgrade by both Moody’s Investors Service and Standard & Poor’s. Moody’s rates Citigroup’s senior unsecured debt Aa3, while S&P has an AA- rating. A downgrade to A1 by Moody’s or to A+ by S&P is possible as the bank’s falling stock price could be deemed to hamper the company’s “financial flexibility,” the report said.

A single-A rating at the parent-company level should be manageable as long as the company’s banking subsidiaries maintain double-A ratings, CreditSights said. JPMorgan, now the biggest U.S. bank by assets, managed to endure with single-A ratings earlier in the decade, the report notes.

To contact the reporters on this story: Bradley Keoun in New York at bkeoun@bloomberg.net; Alison Vekshin in Washington at o avekshin@bloomberg.net; Christine Harper in New York at charper@bloomberg.net.