The Wall Street Journal-20080115-The Afternoon Report- Plumbing Citi- Online edition
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The Afternoon Report: Plumbing Citi; Online edition
A lively conference call cast light on the plumbing of Citigroup's "kitchen sink" earnings announcement this morning, affording a stomach-churning look at the sludge clogging the financial system.
Before the market opened, the financial behemoth reported a fourth- quarter loss of $9.83 billion. The company also said it plans to sell another $14.5 billion in preferred stock, cut its dividend 41% and sell noncore assets as it seeks to shore up the capital base of the largest U.S. bank by assets. Draining the bank's once-deep pools of capital, of course, have been the losses on investments linked to subprime residential mortgages. Today, Citigroup detailed another $17.4 billion write-down on the value of such investments for the fourth quarter, much steeper than the $8 billion to $11 billion Citigroup predicted in November and far in excess of the $2.2 billion subprime-related write-down it took in the third quarter. While Citigroup isn't alone in its suffering -- other Wall Street titans such as Morgan Stanley and Merrill Lynch have also been gotten sucked into the subprime morass -- ears were closely attuned to Citi's conference call today in hopes of getting some insight into how much longer banks will struggle with subprime fallout.
Executives offered some answers, although they likely aren't what investors want to hear. Here's a quick rundown: Are folks still defaulting on loans? When asked about credit quality deterioration in the U.S., especially in real-estate lending, Citigroup finance chief Gary Crittenden told analysts that credit deterioration has accelerated month to month. Are there still more write-downs ahead? At the end of the fourth quarter, Citigroup still had total exposure of $37.3 billion to subprime mortgages and investments backed by them on the books, making further write-downs a possibility. Has Citigroup raised enough cash to give it a comfortable cushion of capital? The company's Tier 1 Capital Ratio, a core measure of a bank's financial strength, was 7.1% in the fourth quarter, below the minimum of 7.5% that the company aims to keep above, though the new investments Citigroup disclosed today would bring the ratio up to 8.2%. The bottom line, per Goldman Sachs analysts, is that "the firm still has sizable exposure to subprime mortgage . . . which could result in additional write-downs in upcoming quarters should the environment continue to soften." In short, it likely ain't over yet.
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Stocks Stumble
Citigroup's earnings and worse-than-expected retail data swamped stocks. In midday trading, the Dow Jones Industrial Average was off 200.87 points, or 1.6%, at 12577.28. All 30 of its components were down, led by Citigroup, which tumbled more than 6%. The Standard & Poor's 500 was off 1.9%, or 27, at 1389.25. The tech-focused Nasdaq Composite Index fell 1.9%, or 45.95, to 2432.35. Bonds were mixed as some investors turned away from equities. Crude-oil futures tumbled as traders focused on a potential drop in demand due to the U.S. economy's softness. The dollar was mixed. Markets in Asia ended lower and European shares weakened.
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Merrill Gets $6.6 Billion Infusion
Merrill Lynch lined up investments totaling $6.6 billion from Korean Investment Corp., Kuwait Investment Authority and Japan's Mizuho Corporate Bank, as the U.S. firm tries to shore up its finances in the wake of massive mortgage-related write-downs.
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Tight-Fisted Consumers
Retail sales fell 0.4% in December, taking a holiday season tumble that suggested the housing slump and gasoline prices might have caught up with consumers. "Sales lost momentum in December, and that weakening pattern is showing strong evidence of continuing in January. As a result, the downside risks to real consumer spending growth continue to rise in the first quarter of 2008," wrote economist Brian Bethune, of Global Insight. Meanwhile, a slight decline in December U.S. producer prices wasn't enough to prevent them from posting the highest calendar-year increase in over a quarter century on the back of sharply higher energy, commodity and food prices.
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Justices Restrict Securities Suits
The Supreme Court handed corporations another securities-lawsuit victory. The court ruled 5-3 that investors can't bring private suits against third parties in corporate-fraud cases unless they relied on them when making investment decisions. The court ruled against investors who accused two suppliers -- Scientific-Atlanta and Motorola -- of colluding with Charter Communications to deceive Charter's stockholders and manipulate the price of the cable-television company's stock.
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Bush Talks Oil in Saudi Arabia
Bush said he has warned Saudi officials during his visit to the Mideast kingdom that high crude prices could hobble Western economies if producers don't boost supply. "I would hope, as OPEC considers different production levels, that they understand that if their -- one of their biggest consumers' economy suffers, it will mean less purchases, less oil and gas sold," Mr. Bush said. Separately, Secretary of State Condoleezza Rice made an unannounced visit to Baghdad, where she congratulated Iraq's prime minister on the passage of so-called de-Baathification legislation and encouraged him to speed along other benchmark laws sought by the U.S.
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Oprah to Get Own Network
Oprah Winfrey plans to start her own TV network next year in a joint venture with cable programming company Discovery Communications. Her syndicated talk show wouldn't migrate immediately
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U.S. Bancorp Net Plunges 21%
U.S. Bancorp reported a 21% drop in fourth-quarter net income as the bank-holding company was hit with charges while trying to navigate amid the credit crisis.
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Congress Wades Into Steroids Scandal
Congress began its public examination of the Mitchell steroids report by urging the Justice Department to investigate baseball star Miguel Tejada for possible perjury.
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Job Cuts at Nokia
Nokia said it may slash as many as 2,300 manufacturing jobs in Germany as it moves production to lower-cost European countries, such as Romania. The world's largest maker of mobile phones said the decision to close its production plant in Bochum, Germany, by mid-2008 was based on its lack of competitiveness. Job cuts are also on tap for Applied Materials, which said it plans to cut about 1,000 positions, about 7% of its work force, following a reorganization of its semiconductor business this summer.
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India, China Join Forces on Nuclear Power
China and India pledged to expand trade ties on the third day of Indian Prime Minister Manmohan Singh's visit to China. The quest for energy and the fight against possible environmental sanctions are starting to bring the longtime rivals together.
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Beirut Blast Apparently Targeted Americans
A bomb blast shook Beirut, in what Lebanese officials said was an attack against vehicles belonging to the U.S. Embassy. U.S. and Lebanese officials said the attack killed four Lebanese and injured a local embassy employee.
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The Associated Press contributed to this report.
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Write to Matt Phillips at [email protected]
