Bad Bets Burn Bank for $10 Billion, Worst Loss in Company History

Bad bets on mortgages led to a $10 billion loss for Citigroup Inc. in fourth-quarter 2007, the largest loss in its 196 years of operation. Facing continued news of weak economic data intensified fears of a recession, Citigroup also was forced to slash jobs, cut its dividend and seek cash infusions from foreign investors. 
 
The nation’s largest bank felt the biggest hit from an $18.1 billion write-down in the value of its investment portfolio. In addition, the bank also set aside $4 billion to cover anticipated losses on loans to U.S. consumers -- a sign that deflated home prices, high energy and food costs, and rising unemployment are making it difficult for many consumers to keep up with their payments. 
 
The news resulted in an immediate 7 percent drop in Citigroup shares, eliminating almost $10 billion in market value on top of the $125 billion the shares already have lost over the past year. Citigroup's decline contributed to the 230-point-plus drop in the Dow Jones industrial average yesterday after government reports that retail sales fell in December and inventories of unsold goods piled up at manufacturers and wholesalers, seen as sure signs that consumers are pulling back their spending. 
 
Hard times aren’t over; Gary Crittenden, Citigroup's chief financial officer, says the bank doesn't expect the housing industry to stabilize soon. Crittenden says he predicts already slumping U.S. home prices could fall 7 percent further this year and by a similar amount in 2009. 
 
Crittenden’s comments have led some analysts to predict more write-downs could come this year. New Chief Executive Vikram Pandit acknowledged as much, saying "the environment continues to be uncertain" and that the company's results going forward "will definitely be influenced by the economy."  
Besides the housing slump, economists are growing more worried about the snowball effects of a shaky job market -- which has been exacerbated by the loss of tens of thousands of jobs in the mortgage and housing industries.  
 
Citigroup alone eliminated 4,200 jobs in the fourth quarter of 2007, besides the 17,000 layoffs the bank announced in the spring, with more layoffs likely in the future, says Crittenden. Most of the layoffs have and will continue to be traders and investors in markets and banking , the primary source of the bank's losses.  
 
The largest contributor to the $18.1 billion write-down in the fourth quarter of 2007 was Citigroup's bad bets on mortgage-backed bond instruments known as collateralized debt obligations. The amount was substantially more than the $6 billion write-down it took in the previous quarter, and more than the $8 billion to $11 billion the bank had forecasted in October that it would take for the fourth quarter.  
Citigroup said as of Dec. 31, it had a total of $37.3 billion in direct subprime mortgage exposure, down from $54.6 billion three months prior.  
 
On the plus side, Citigroup recorded record results in its international consumer, transaction services and wealth management segments, but the bank’s gains there were not nearly big enough to offset its losses -- a downtrend that analysts say could continue if the U.S. economy weakens.