Citi Faces $8B More in Writedowns: Analyst

After Merrill Lynch (MER Quote) sold a chunk of its most complex mortgage-backed securities at a steep discount Monday, investors should be prepared for the possibility of more writedowns at Citigroup (C Quote) this quarter, warns one analyst.

Deutsche Bank analyst Mike Mayo predicts that Citi will take third-quarter writedowns of roughly $8 billion on its collateralized debt obligations, according to a note published early Tuesday. He also says that Citi may have to raise capital sooner rather than later as a result of the writedowns.

Citi still has $22.5 billion of net CDO exposure as of the end of June. It "could have another $7 billion of writedowns," Mayo writes. "In addition, we estimate a $1 billion loss on its remaining $2 billion exposure with monoline insurers."

Mayo cut his estimates by $1 and now predicts Citi to post a third-quarter loss of 59 cents a share. For the full year, Mayo expects Citi to post a loss of 80 cents a share.

Merrill is selling the loans for about 22 cents on the dollar, vs. current markets at Citi of 53 cents on the dollar, Mayo says.

"Citi should still be able to absorb much of these charges and credit costs in general given estimated $20 billion of [second half 2008] pre-tax provision, pre-tax earnings and the sale of its German retail business," Mayo writes. "[B]ut the decision about raising new capital could be closer than we previously thought."

Mayo's note follows Merrill's announcement after the market close Monday that it had agreed to sell $30.6 billion of U.S. super senior ABS collateralized debt obligations to an affiliate of Lone Star Funds for $6.7 billion. The sale of the troubled loans, which reduces Merrill's exposure to the risky securities by $11.1 billion, will result in writedowns totaling $5.7 billion in the third quarter.

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