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Citigroup Breakup Speculation Sends Credit Default Risk Soaring

Interest-Rates / Corporate Bonds Nov 21, 2008 - 01:38 PM GMT

By: Mike_Shedlock


Best Financial Markets Analysis ArticleI have been saying for over a year that Citigroup would not survive in one piece. That option is looking increasingly likely as the Citigroup Board Weigh Options .

Citigroup Inc.'s board meets today to discuss the bank's options after Chief Executive Officer Vikram Pandit's efforts to rebuild investor confidence failed to halt the stock's descent to a 15-year low, a person with knowledge of the matter said.

The board, led by Chairman Win Bischoff and independent director Richard Parsons, will meet at Citigroup's headquarters in New York, said the person, who declined to be identified because the deliberations are private. The panel may choose to sell pieces of the bank or the entire company, the Wall Street Journal reported, citing unidentified people familiar with the situation. The New York Times reported that management isn't actively considering a sale or split up of the bank.

Citigroup, once the biggest U.S. bank, with a stock market value of $274 billion at the end of 2006, dropped yesterday to about $26 billion, slipping to No. 5 after Minneapolis-based U.S. Bancorp.

"Investors right now aren't convinced that we're done seeing dead bodies on the Citigroup balance sheet," said William Fitzpatrick, an equity analyst at Optique Capital Management Inc. in Milwaukee, which oversees about $1 billion and doesn't own Citigroup shares. "That's what the sell-off is, concern over more and more losses over the next couple of quarters."

Balance Sheet Blues

Concern over its balance sheet is indeed one of the issues. Credibility of Citigroup management is another issue. I discussed both yesterday in Citigroup Blames Short Sellers For Collapse and previously in Citigroup's Town Hall Meeting .

Credit Risk Rises On Breakup Speculation

Bloomberg is reporting Credit Risk Rises on Citigroup Breakup Speculation

The cost of protecting bonds sold by Wall Street banks from default rose amid speculation Citigroup Inc.'s board may consider a breakup of the company when directors meet later today.

Credit-default swaps on New York-based Citigroup jumped to a record on concern a break-up could leave debt holders with a weakened company. Contracts on other U.S. banks including Wells Fargo & Co. and Goldman Sachs Group Inc. also rose.

Citigroup directors, led by Chairman Win Bischoff, will discuss the bank's options after shares in what was once the biggest U.S. bank tumbled to a 15-year low, a person with knowledge of the matter said. The panel may choose to sell pieces of the bank or the entire company, the Wall Street Journal reported, citing unidentified people familiar with the situation.

Such scenarios imply that brokerage units Citigroup Global Markets and Smith Barney “would be peeled away from the banks,” said Ricardo Kleinbaum, a credit analyst at BNP Paribas in New York. That could be triggering concerns that credit-default swaps would be left tied to a weakened entity, he said.

Credit-default swaps on New York-based Citigroup climbed 65 basis points to 465 basis points, according to CMA Datavision. The contracts on Citigroup, which analysts forecast may report its fifth-straight quarterly loss in January, has surged from 10 basis points since the start of the credit crisis last year. A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

Citigroup To Offer Japan's Nikko Workers Early Retirement

In related news Citigroup Said to Offer Japan's Nikko Workers Early Retirement

Citigroup Inc., which this week said it's shedding 52,000 jobs, is seeking to reduce its workforce at its Japanese brokerage unit by offering earlier retirement to some employees, two people familiar with the situation said.

Nikko Cordial Securities Inc., which employs about 7,000 in Japan, made the proposal to employees over the age of 40 in a memo from President Eiji Watanabe yesterday, the people said, declining to be identified because a public announcement hasn't been made. The offer also includes about two years of pay, the people said.

"Some talented employees may leave the firm, yet people who underperformed may stick to the company as the job market is extremely tight now,'' said Makoto Haga, president of Wing Asset Management Co., a Tokyo-based hedge fund. "Citigroup cannot avoid a massive redundancy here in Japan as the global financial market is worsening further."

Citigroup Shares Hammered Again

Citigroup is down another 17% percent today after dropping 26% yesterday and 21% the day before. The new 52 week low is $3.57. Citigroup last traded at these prices in 1993.

Repeating what I said yesterday, "the market seems to believe Citigroup is insolvent and so do I". It remains to be seen if Citigroup does decide to break up and if so at what price for each piece, or if another bank can take them over completely.

By Mike "Mish" Shedlock

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Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.

When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at .

© 2008 Mike Shedlock, All Rights Reserved

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