Citi Shakeup Fails to Register

Updated from 8:30 a.m.

Citi (C) shares continued to swoon Monday in spite of a long-awaited management change.

CEO Chuck Prince resigned late Sunday, giving way to Bob Rubin as chairman and former Schroders chief Win Bischoff as interim CEO. The news of Prince's departure was expected after rumors started swirling Friday that Citi's board was planning an emergency meeting this weekend.

But while investors will surely be pleased that Prince's four-year reign is over, they aren't happy about what finally pushed him out. Citi said it would take writedowns of $8 billion to $11 billion to cover additional losses on mortgage-backed securities and collateralized debt obligations.

A writedown of that magnitude would make Citi Wall Street's biggest loser, at least so far, on this year's collapse of the markets for risky paper. Merrill Lynch (MER) last week ousted CEO Stan O'Neal after the firm posted a $7.9 billion writedown on CDOs and subprime mortgages.

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Shares of Citi were down $1.43 to $36.79 Monday morning after earlier setting yet another 52-week low.

But Wall Street analysts have said they believe there are more writedowns to come at Merrill -- and whether further debt-related losses are on the way at Citi will now become the biggest question surrounding the bank.

Indeed, the firm said in its press release announcing the writedown that "the impact on Citi's financial results for the fourth quarter from changes in the fair value of these exposures will depend on future market developments and could differ materially from the range above."

Investors have heard that one before. Citi reported a mere $1.6 billion of subprime and CDO writedowns back on Oct. 15, when the firm announced a 57% decline in third-quarter earnings. Earlier last month, when the bank previewed a disappointing third-quarter performance, Prince said -- to the amazement of practically everyone on Wall Street -- "While we cannot predict market conditions or other unforeseeable events that may affect our businesses, we expect to return to a normal earnings environment in the fourth quarter."

Since then, it has become clear that investors have grown tired of Prince -- and that the debt markets, far from clearing as some investors had hoped, have grown even more uncertain.

Last week, Citi shares plunged 7% in a day after a CIBC analyst predicted the bank would be forced to sell assets and cut its dividend to shore up its capital base as big losses loom. Citi stressed Sunday that it doesn't expect to cut its dividend, and the firm said its "capital ratios will return within the range of targeted levels by the end of the second quarter of 2008," even given what it called "significant uncertainty" in the markets.

Still, Citi said the writedowns come against a portfolio that totals a staggering $55 billion in U.S. subprime direct exposure -- $11.7 billion in lending and structuring exposure and $43 billion in CDOs.

That news will not be well taken by investors, who may well assume that even with the latest writeoffs, Citi isn't in the clear. Recent downgrades by ratings agencies have reflected steep declines in the values of CDOs, as defaults on subprime mortgages issued since 2005 have gone through the roof.

Analysts castigated Merrill execs on its call last month for not offering more clarity on the firm's remaining subprime exposure. Merrill pegged its remaining subprime exposure at $21 billion -- half of Citi's.

Investors are now keeping an eye on other securities firms for exposure to bad paper. Among the most closely scrutinized now are Goldman Sachs (GS), whose third-quarter profit was viewed by some as incredibly strong given the market conditions, and Bear Stearns (BSC), the firm whose internal hedge funds collapsed this summer, signaling the first casualties of the subprime mortgage storm.

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