Updated from 11:23 a.m. EST
Chief Executive Sanford Weill played Scrooge on Monday, saying the bank would take a $1.5 billion charge against fourth-quarter earnings to cover loan losses and lawsuits stemming from regulatory investigations of the firm's investment-banking practices.
Weill sought to portray the hefty charge as an opportunity for the nation's financial-services giant to wipe the slate clean after a dismal year for the bank's once-stellar reputation and widely held stock. The stock has fallen 20% this year.
But some say the Citigroup charge may not be nearly enough to cover its potential liability to lawsuits from brokerage customers and Enron shareholders. In fact, some suggest the charge, rather than turning the page on all the investigations, could be the first of many big litigation charges Citigroup and other banks and brokers will have to take over the next few quarters.
The charge, which will reduce the bank's after-tax fourth-quarter earnings by 29 cents, includes the cost of setting up a reserve account to pay for Citigroup's share of an industry-wide $1.4 billion deal with regulators, stemming from the yearlong inquiry into Wall Street's hyping of stocks in the 1990s. The reserve also will cover claims that Citigroup is expected to pay out in private lawsuits arising from that investigation, as well from its role in the
To some extent, the charge wasn't entirely unexpected following Friday's deal, which included Citigroup and nine other Wall Street firms. Indeed, Wall Street observers expect
J.P. Morgan Chase
and other financial firms that are part of the settlement to announce similar charges in the coming days.
Historically, the fourth quarter is the period when banks and other financial firms take so-called kitchen sink charges to clean up their balance sheets before the start of a new year.
"I think the market likes to see this," said Timothy Ghriskey, a money manager with Ghriskey Capital, a Connecticut-based hedge fund. "They're taking the charge and stepping up."
Nonetheless, others question whether the charge is big enough. Sean Egan, president of Egan-Jones Ratings, an independent credit rating service, noted that "$1.5 billion is far less than we would have expected, adding, "this may be one of several."
Similarly, Michael Mayo, Prudential Securities' bearish bank analyst, said in a research note that "it's not clear whether the legal reserve established by the company will be sufficient."
Indeed, many think Citigroup's ultimate liability to Enron's beleaguered shareholders could far exceed the $400 million it is paying in the stock hyping settlement.
On Friday, Citigroup and Wall Street firms were dealt a major setback in the Enron shareholder class-action suit, when a federal judge ruled that the banks should not be dismissed from the $29 billion lawsuit. The ruling enables the shareholders to press ahead with their claim that Citigroup, J.P. Morgan, Merrill,
Credit Suisse First Boston
and other Wall Street firms aided Enron's shady bookkeeping and helped bring about the energy-trading firm's collapse last year.
The Enron class action is seen as a major test of the extent to which courts will hold financial firms liable for the misdeeds of corporations, especially if the firms play an instrumental role in arranging a company's finances. Some legal experts have estimated that Wall Street firms ultimately may pay up to $10 billion in damages to resolve the dozens of shareholder lawsuits that have been filed in the wake of Enron's collapse.
Indeed, the Enron debacle may soon come home to roost for J.P. Morgan, one of Citigroup's main competitors.
Just a few hours after Citigroup announced the $1.5 billion charge, a federal judge in Manhattan issued a pivotal ruling that could force J.P. Morgan to take $1 billion charge against earnings because of its Enron exposure. The judge's ruling threatens to undermine a lawsuit J.P. Morgan has filed against 11 insurance firms, which had issued a policy guaranteeing some of the bank's financing deals for Enron.
The ruling by U.S. District Court Judge Jed Rakoff will permit the insurers to present some potentially damaging bank email messages to the jury that is hearing the lawsuit. If the jury sides with the insurers, J.P. Morgan will have to write off the $1 billion Enron insurance policy as a bad asset and take its own big charge against earnings.
Meanwhile, of the $1.5 billion charge Citigroup is taking, $1.3 billion will go into the litigation reserve. The remaining $200 million charge will cover an increase in the bank's loan-loss reserves, to cover an expected rise in bad loans.
Both Citigroup and J.P. Morgan shares were trading lower on the day. Shares of Citigroup fell 61 cents to $37.53, while J.P. Morgan's stock dropped 25 cents to $24.62.
But it wasn't all bad news for banks on Monday.
Bank of America
, the nation's third largest bank, said it expects full-year 2002 earnings to come in ahead of analyst estimates because of a tax settlement with the Internal Revenues Service. BofA now expects to earn at least $5.87 a share for the year because of the deal. Wall Street analyst had been expecting the bank to earn about $5.68 a share, according to Thomson Financial First Call.
Still, in a sign that economic problems continue to the roil the entire financial sector, BofA is increasing its reserves for bad commercial loans. The bank said it's raising its reserve for bad loans to $1.2 billion -- somewhat higher than had been expected -- because of weakness in the utility sector and the "bankruptcy of a major airline." The airline, presumably, is United Airlines, which has borrowed money from the bank.