Citi shares sink despite Saudi prince's investment

[November 21, 2008]  NEW YORK (AP) -- Citigroup Inc. shares tumbled below $5 a share Thursday to their lowest level in more than 15 years, a sign that a Saudi prince's decision to boost his stake in the bank has failed to galvanize confidence among increasingly anxious investors.

Prince Alwaleed bin Talal, a longtime investor in Citigroup, said he plans to increase his stake in the bank to 5 percent from less than 4 percent. He also expressed "his full and complete support" of the bank's management -- including Vikram Pandit, who has been CEO for less than a year.

It wasn't clear whether his roughly $350 million investment -- calculated based on Citigroup's current market capitalization -- would be used to buy new shares issued directly by Citigroup, or to buy stock from other shareholders in open market transactions. In either case, it was seen as paltry compared with the more than $20 billion in losses Citigroup has racked up over the past four quarters, and the expectation that it will post another large loss in the fourth quarter.

"It's not a significant strategic investment statement," said Peter Kenny, managing director in institutional sales at Knight Equity Markets. "And the question Wall Street is asking is, is this good money after bad?"

The stock plunge also raised the question of whether Citi will have to go begging for more cash from outside investors to calm its shareholders.

"I think they'll have to raise a lot more money," said Christopher Whalen, managing director of Institutional Risk Analytics.

A pledge of support for Citigroup management from Prince Alwaleed may not resonate so much with shareholders these days. Back in October 2007, he made a similar pledge of "full support" for Charles Prince -- Citigroup's CEO at the time, who was shuffled out a month later and replaced by Pandit in December.

On Thursday, shares of Citigroup plummeted to as low as $4.39 in afternoon trading before closing down $1.69, or 26 percent, at $4.71 -- the lowest close since February 1993. Citigroup stock is down about 84 percent since the beginning of the year, and down about 92 percent from its trading record of $57 a share in December 2006.

Citigroup is considered the most vulnerable among the major U.S. banks, failing to turn a profit in the past four quarters when rivals such as JPMorgan Chase & Co. and Bank of America Corp. managed to do so.

Concerns are growing that the deteriorating economy and still-turbulent markets will slam Citigroup with more write-downs in the coming quarters. What began as a subprime residential mortgage crisis last year has ballooned into a full-blown debt crisis, escalating defaults in everything from leveraged loans to credit card debt to commercial real estate loans.

As worries grow, investors sell -- and in the current Wall Street environment, selling has been leading to more selling. It's a pattern that felled the Wall Street investment bank Lehman Brothers Holdings Inc., and led to the shotgun buyouts of Bear Stearns Cos. and Merrill Lynch.

"It's almost like a self-fulfilling prophecy," said Kenny. The worry now is, "how many future losses can Citi withstand, as a direct proportion of market cap?"

Citigroup spokesman Michael Hanretta declined to comment on the company's falling stock, and issued the following statement: "Citi has a very strong capital and liquidity position and a unique global franchise. We are focused on executing our strategy, including our targeted expense and legacy asset reductions, and we believe the benefits will be seen over time."

The bank has been rushing to get leaner and wind down its assets backed by risky debt. On Monday, Citigroup said it will be eliminating 53,000 jobs, on top of 22,000 cuts previously announced, to reduce costs. Then on Wednesday, the bank said it is acquiring the remaining $17.4 billion in assets held by complex debt products known as structured investment vehicles that it previously ran off its balance sheet.

But as Citigroup made these announcements amid increasing nervousness in the broader market about the fate of U.S. automakers, the cost to insure against a default by Citigroup surged. That cost on Thursday was at $395,000 per year to protect $10 million of debt -- up from $357,000 on Wednesday, and up from $215,000 on Friday before Citi announced its massive job cuts, according to Phoenix Partners Group.

Citigroup's sell-off appeared to be aggravated by short-selling, analysts said. A short sale is a bet that a stock will fall; investors borrow shares and sell them with the expectation that they'll go down in value, so they can pay for the shares later at a lower price and make a profit.

Hanretta declined to comment on media reports that the bank is trying to get the Securities and Exchange Commission to reinstate a ban on short selling. The SEC also declined to comment on the reports. The SEC temporarily banned short selling on certain financial institutions' stock for three weeks in September.

Scott Talbott of the Financial Services Roundtable, a trade group representing Citigroup and other companies in the financial services industry, said the group has been in ongoing discussions with the SEC about temporarily halting short sales again.

Prince Alwaleed's connection with Citigroup goes back to the early 1990s, when he took a stake in Citigroup's predecessor, Citicorp, coming to its rescue after the bank made some losing bets on U.S. real estate and Latin America.

The stake owned by Prince Alwaleed through his investment company Kingdom Holding Co. has fluctuated over time. It fell below 4 percent over the past year as Citigroup raised more than $50 billion in private capital -- including a small portion from Prince Alwaleed himself. Citigroup is also getting $25 billion from the U.S. government's bank investment program.

This year, Prince Alwaleed ranked No. 19 on Forbes' list of the world's billionaires, with net worth of $21 billion.

[Associated Press; By MADLEN READ and STEPHEN BERNARD]

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