Tale of 2 Citis fails to impress investors

The breakup of Citigroup Inc.'s financial supermarket into core and non-core pieces was seen by investors Friday as accomplishing little.

Citigroup’s shares shrugged off Friday morning’s announcement that the sprawling financial supermarket would break itself up into two companies.

The stock opened at $4.22 and drifted downwards from there, hitting a low of $3.50 before rising to $3.81 at 1 P.M.

In addition to disclosing an $8.2 billion fourth quarter loss, Chief Executive Vikram Pandit outlined a new plan to consolidate the firm’s banking businesses into a new Citicorp unit. The remaining “non-core assets,” including $301 billion worth of mortgages, bonds, and other assets that Washington agreed to guarantee in November, will be herded into Citi Holding Corp.

Most industry experts said they were underwhelmed by the plan.

“Splitting the company in two is a step in the right direction, but it doesn’t change their business model,” said Roy Smith, a professor of investment banking at New York University and a former partner at Goldman Sachs. He said the new division only separates the two units on paper, and that Citi’s problem lies in the concept of trying to integrate an investment bank with a commercial bank. He called Friday’s conference call an exercise in “accounting flim-flam.”

The huge fourth quarter loss market the fifth consecutive quarterly dive into the red for Citi. For the quarter, the bank posted a loss of $1.72 per share, a modest improvement on the fourth quarter of 2007, when it reported losses of $9.8 billion, or $1.99 per share. Since then, however, the bank has received $45 billion in federal bailouts, plus the sweeping asset guarantees.

Many analysts also panned the plan. “Not many encouraging data points here,” wrote Glenn Schorr, industry analyst at UBS, in his Friday research note. “The split of the company can make sense long-term, but doesn’t solve the current financial situation,” he added.

Mr. Pandit and Citi Chief Finance Officer Gary Crittenden described the company’s strategy in upbeat tones on Friday. By spinning off brokerage unit Smith Barney to Morgan Stanley, Citi will gain $5.8 billion. Meanwhile, it will slide its default-ridden consumer auto and mortgage loan business, as well as its troubled credit card business, into Citi Holdings. Over time, Mr. Pandit said, the holding company will sell off those assets and raise capital.

The two executives faced a grilling from skeptical Wall Street analysts who zeroed in how the bank would account for its myriad write-downs.

Deutsche Bank’s Michael Mayo reduced the plan to “just separating out the bad stuff” and calling it a day. Guy Moszkowski, of Bank of America Merrill Lynch, said he thought the plan seemed “thin on details,” and thought the company would need to raise capital immediately in order to execute its new strategy.

Late last year, Citigroup received an infusion from the government’s Troubled Asset Relief Program. It is expected to need another soon.

“They have to go back to the government and get another round of funding,” said Mr. Smith, “and the next administration is going to be a lot tougher, and will no doubt put their people in.”

Contrary to market speculation, the company failed to announce any changes to the executive suite, a non-move that upset some shareholders. Citi shares plunged 77% last year and 43% in the year through yesterday. Angry investors have been calling for Mr. Pandit’s ouster for months.

“They should fire everybody,” says William B. Smith, president of SAM Advisors and a longtime Citi shareholder. “The board is supposed to act as a check and balance, but what have they done, really?”