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$2.8 Billion Third-Quarter Loss for Citigroup

The nation’s second-largest bank by assets, Citigroup announced its 2008 third-quarter net loss of nearly $3 billion. The New York-based bank continues to struggle from exposure to derivatives and bad bets on mortgage-related securities. It is Citigroup’s fourth consecutive quarterly loss.

The banking giant’s latest earnings results pale in comparison to its financial standing for the same period one year ago when it earned $2.2 billion. In addition to its poor third-quarter performance, Citigroup has eliminated 11,000 jobs between the current quarter and the previous one, bringing the total number of layoffs to 23,000 so far this year. On the company’s earnings call Oct. 16, 2008 Gary Crittenden, Citigroup’s chief financial officer, referred to the latest round of layoffs as “right-sizing.”

Citigroup’s dismal earnings follow another recent setback for the bank when it failed to beat out Wells Fargo for ownership of Wachovia Corp. With financial assistance from the Federal Deposit Insurance Corp. (FDIC), Citigroup initially wanted to put up $2 billion, or $1 a share, for Wachovia’s banking operations, with the FDIC taking on some $270 billion of Wachovia’s most troubled assets.

The deal was thwarted, however, when Wells Fargo upped the ante and agreed to buy all of Wachovia’s operations for $15 billion, or $7 a share, and without help from the FDIC. The deal was confirmed by the Federal Reserve on Oct. 14, 2008.

As is the case for the majority of financial institutions, 2008 has been a rocky year for Citigroup:

• Citigroup’s losses over the past 12 months have surpassed $20 billion.

• The company has written down the value of investments tied to bad mortgages and other toxic debt by more than $50 billion;

• In May, Citigroup’s CEO announced that the company must rid itself of at least $500 billion in assets in order to get out of businesses tied to risky mortgages and other low-quality debt;

• In August, Citigroup – which is the largest underwriter of auction-rate securities – agreed to buy back roughly $7.5 billion worth of the securities it sold to some 40,000 retail investors. The bank also paid a $50 million civil penalty to the State of New York and a $50 million penalty to the North American Securities Administrators Association; and

• Legal issues continue to heat up from angry investors in Citigroup’s ASTA and MAT Funds. Both the ASTA Fund and MAT Fund were highly leveraged
municipal bond funds that borrowed approximately $8 for every $1 raised.

Ultimately, the funds suffered massive losses, with both funds losing approximately 90% of their original value. Investors, meanwhile, were repeatedly told by Citigroup that the funds would rebound. Among other things, investors claim Citigroup did not disclose accurate and true information about the funds and their potential risks and failed to institute appropriate risk management practices to prevent the funds’ management from investing in risky and highly speculative investments.

Citigroup has a long road to haul before its financial issues turn the corner. The newly announced plan by the federal government to inject capital into U.S. banks may help. Citigroup – as well as JPMorgan Chase, Bank of America Corp. and Wells Fargo – is set to receive $25 billion.