George S. May Business Blog

Hot times, trouble in the Citi

As many expected, the financial ogre, Citicorp, announced yesterday that they intend to shrink the size of their company. The company has been in deep financial trouble and as a result will be reorganizing, simply to keep them afloat. So far these are the details that have emerged.

Citicorp will be splitting off its brokerage, Smith Barney, which will be taken over by Morgan Stanley.

They are then likely to sell their private label credit cards, its insurance division, (Primerica Insurance), and its illiquid mortgage assets.

This news is definitely disheartening for tax payers as the company has already received $25 billion in October and another $20 billion in November.

Sean Eagan, banking analyst – Eagan Jones Rating Co., comments:

“Tax payers have every reason to be infuriated. In this case, in the case of AIG, in the case of Fannie and Freddie, there’s an increasing realization that something is drastically wrong in the regulatory structure of this economy”.

It is astonishing how a company can receive $45 billion not three months ago and be worse off than they were before. In looking at their performance, or lack thereof, one can’t help but raise questions like: Who is watching the money? How is the money being spent within? Is the money just being wasted or is it actually going toward restructuring so that they become stronger in the future? In looking at the last three months the latter definitely is not likely to be true.

Further reports have come out that Federal regulators are the ones pushing them to shed the parts in such a quick manner. This makes all the more sense as economists across the country have been predicting that eventually the bank would go back to Washington asking for more money. If Citicorp doesn’t start showing good faith and taking the necessary steps to survive it is likely that the Federal Government will not give them another penny. Instead, they will just take full control of the company. Eagan expects that a move like this might happen sooner than later:

“The failure of Citicorp would be absolutely catastrophic for the economy. We wouldn’t be surprised if the Federal Government stepped in within 24 or 48 hours and took control”.

In further news, Citicorp plans to release its fourth quarter losses this week. Since it is earlier than expected, economists are guessing that their plan is to get all the bad news out in an attempt to not prolong the pain on Wall Street.

The report will be a painful one. Citi’s stock closed yesterday at $4.53, a far fall from December 27 of 2006, when it closed at $51.13.

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