Citigroup shares drop as concerns increase
Enron, WorldCom fallout and Brazil losses feared
By Riva D. Atlas
NEW YORK TIMES NEWS SERVICE
September 4, 2002
NEW YORK – Citigroup shares fell nearly 10 percent yesterday, as one analyst downgraded the stock and concerns grew about the bank's potential losses in Latin America and its liabilities related to Enron and WorldCom.
Michael Mayo, an analyst with Prudential Securities, released a report estimating Citigroup's legal and regulatory liabilities from its business with the two bankrupt companies and other corporate scandals at as much as $10 billion. Mayo qualified his projections by calling them "seat of the pants estimates," based on conversations with lawyers.
Separately, a House committee investigating the ties between executives at Citigroup and WorldCom released more documents yesterday, following last week's disclosures that a unit of Citigroup, Salomon Smith Barney, had awarded big allocations of initial stock offerings to WorldCom's top executives. The newest documents include an e-mail forwarded by Salomon's former top telecommunications analyst, Jack Grubman, to a WorldCom executive explaining that the stock was being cut from the firm's recommended list, though he continued to rate it highly.
Although there were no stunning revelations about Citigroup in Mayo's report or in the e-mails, any hint of deepening problems can spur nervous investors to sell Citigroup's shares, analysts and investors said.
"Some people may be thinking this is a good time to take profits," said Thomas Finucane, a financial services analyst with State Street Research in Boston.
Citigroup shares are down nearly 38 percent this year, with a sharp tumble in late July when Congress held hearings examining Citigroup and J.P. Morgan's dealings with Enron. The stock hit a low of $22.83 on July 24. Yesterday, its shares fell $3.36 to close at $29.39 a share. Although the overall market was down sharply, Citigroup fell far more than the 4 percent average decline.
Mayo, who put a "sell" rating on Citigroup's shares, said the bank had enough capital to pay any fines or legal judgments. "I'd be happy to have a bank account at Citi," he said. But he said that, given the risks in the near term, the stock looked expensive.
Investors in bank stocks noted that Mayo has long been negative on the banking industry. He is the only analyst out of 21 covering Citigroup and tracked by Bloomberg with a sell recommendation on the company's shares.
"We are bearish on banks overall," Mayo said, adding that Citigroup is confronting a wider range of problems than most banks.
Mayo's report listed several developments that could drag down Citigroup's shares in the next few weeks. He is expecting more congressional hearings this month, as well as a ruling by a federal judge in Texas about whether a lawsuit against Citigroup and other banks and their dealings with Enron can proceed.
Mayo said lawyers polled for his report estimated that banks could face $50 billion in liabilities from Enron and WorldCom litigation, and potential lawsuits related to other companies whose financial statements are facing scrutiny. Citigroup could be stuck paying $10 billion of the amount, given the volume of business it did with those companies, Mayo said.
Citigroup has yet to reach a settlement with New York's attorney general, Eliot Spitzer, who is investigating Salomon Smith Barney's activities as part of a broad investigation into stock research practices on Wall Street. Citigroup has announced several changes in practices relating to its research division, but they have not been enough to satisfy Spitzer, who appears to be broadening his investigation beyond Grubman to include top Citigroup executives.
Latin America also could prove troublesome to Citigroup, Mayo said, pointing to elections in Brazil in early October. "If the free-market candidate fails to advance past this round, the chance for a default by Brazil could increase, thereby placing more strain on Citi's Brazilian investments," Mayo wrote in his report.
Citigroup has $11.3 billion at risk in Brazil, including corporate loans, as well as Brazilian securities on its books, Mayo said.
Some owners of Citigroup's shares were critical of Mayo's report, saying that any estimate of the bank's liabilities was premature.
"I think it is somewhat reckless to throw out numbers as he has," said Thomas K. Brown, whose investment firm, Second Curve Capital, bought Citigroup's stock last July. "But when you are in a bear market, people will give credence to many stories."
In the meantime, Mayo's concern about further scrutiny of Citigroup by Congress proved true. Late yesterday, the House financial services committee released a series of e-mail messages related to its investigation of WorldCom.
Most of the messages show WorldCom's efforts to control the damage earlier this year as negative reports surfaced about its finances. But one exchange points to the close relationship between WorldCom and Grubman, Salomon's former telecommunications analyst.
Grubman forwarded a message in March to Scott Sullivan, then WorldCom's chief financial officer, letting him know that a Salomon strategist was removing WorldCom's stock from his recommended list. "This is our strategist, not us," Grubman wrote to Sullivan.
"He takes an almost apologetic tone," said Peggy Petersen, a spokeswoman for the House Committee, who said the message was further proof of the close ties between Grubman and WorldCom's executives. Grubman did not downgrade WorldCom until June, a day before the company announced that it had improperly accounted for $3.8 billion in expenses.
A spokeswoman for Citigroup, Arda Nazerian, said there was "nothing inappropriate" about the e-mail. She declined to comment on its tone. |
