The Irish Independent reports that little-known Irish investment firm Cardinal Asset Management has assembled a €2.5bn-€3bn private equity bid to recapitalise Bank of Ireland -- which could ultimately see investors cede 60pc of the country's second biggest lender.
The firm, with offices in Dublin and London, is understood to have lined up high rollers in the UK and Ireland and oil-rich sovereign wealth funds from the Middle East to take part in a broader coalition of investors.
The consortium, which includes US funds Carlyle and KKR, has also offered the Government a chance to take part in any deal, informed sources said.
Finance Minister Brian Cowen has been coming under pressure in recent weeks to unveil a recapitalisation of the banking sector as it faces billions of euro of bad loan write-offs as the economy deteriorates.
Cardinal Asset Management was set up in 2004 by Irish financiers Nigel McDermott and Nick Corcoran. They are understood to have assembled the consortium, which is also advised by New York investment firm Sandler O'Neill.
Another private equity house, JC Flowers and two other funds, are involved in another investment proposal being considered by the finance minister. There was strong speculation yesterday evening that the JC Flowers-led consortium may join up with the Cardinal Asset Management team.
Major shareholders in Irish banks indicated to the Irish Independent earlier this week that they would orchestrate a revolt if existing investors, most of whom are sitting on huge losses, are not allowed to participate in a fresh cash injection.
Others have raised concerns about how the short-term focus of private equity could be aligned with the long-term interests of the Government. Private equity houses typically seek to sell down their investments within five to seven years.
Under the Cardinal-assembled plan, the consortium is proposing to invest €2.5bn to €3bn. The structure of the proposed deal has not been finalised, but one scheme being considered consists of the investors buying preference shares in the bank. These would carry an annual coupon, or interest rate, in the region of 10pc to 13pc.
The preference shares would be converted into ordinary shares in three lots -- after three years, four years and five years. Preference shares carry no voting rights, but after the last bundle is converted following five years, new investors would control 60pc of the group.
Another plan under consideration would involved both preference shares and ordinary shares.
Bank of Ireland's top executives are understood to be aware of the bid. The group declined to comment.
The Government is thought to be keen to push through mergers and acquisitions among lenders as part of a broader recapitalisation plan for the sector.
As a 'deal sweetner', the consortium has pitched a potential merger between Bank of Ireland and Anglo Irish Bank.
The Irish Independent also reports that Irish Life & Permanent is in preliminary takeover talks with EBS, which could result in the building society giving up its 73-year history of mutuality.
The Irish Independent understands that discussions have been taking place at a senior level for some months, though some sources have played down the prospects of a deal emerging. "Everybody is talking to everybody in the current environment," said one.
EBS has long defended its mutual status. It successfully lobbied for a compromise in the Building Societies (Amendment) Act 2006, which paved the way for rival Irish Nationwide Building Society (INBS) to put itself up for sale, while protecting EBS's own mutuality. INBS withdrew from an auction process earlier this year as the financial markets deteriorated.
EBS is currently restricted by the act from selling itself for five years after demutualisation. Any deal would require a change of legislation and vote of its 400,000 members.
The society's chief executive Fergus Murphy said earlier this week it would be "irresponsible" of management not to look at all its options, given the current economic and financial climate.
EBS warned it expects to post a loss in the second half of the year as a result of rising bad-debt losses on its €2.4bn commercial loan book. It posted a €66m pre-tax profit last year.
However, it said: "With a strong balance sheet -- 89pc of lending relates to lower-risk, prime residential lending -- and a Tier 1 capital ratio of 7.8pc, well in excess of regulatory requirements, EBS is well placed to adjust to the changed environment."
Irish Life & Permanent, which has the highest capital buffer among the four listed lenders, has been surrounded by market chatter in recent months that it could be forced into the lap of either Bank of Ireland or Allied Irish Banks as part of a grand consolidation plan being contemplated by the Government.
However, the group -- which has a Tier 1 capital ratio of 10.1pc -- has already indicated it would resist any such attempts.
EBS and IL&P already have commercial links. In 2006, EBS became a tied insurance agent of Irish Life for the provision of life and investments products. All investment products sold through EBS are managed by Irish Life Investment Managers.
EBS and IL&P both declined to comment on their talks. IL&P said: "We do not comment on market speculation. But we have regularly stated our comfort with our capital position, low-risk business model and ability to see through the current challenges."
EBS, which gave short shift to an approach from Allied Irish Banks two years ago, has also reportedly held talks in recent times with Dutch financial powerhouse Rabobank, which also owns ACC Bank in Ireland.
Mr Murphy was previously chief executive of ACC.
The Irish Times reports that Minister for Finance Brian Lenihan has signalled in discussions with the six guaranteed banks and building societies that he expects mergers to take place to strengthen the Irish banking sector in a move that could dramatically reshape the industry.
Mr Lenihan met the heads of the six institutions yesterday amid growing speculation that the banks would be recapitalised in a scheme that could involve multi-billion euro cash investments by foreign private equity firms.
The recapitalisation, which could involve co-investments by the State, is expected to take place in tandem with consolidation in the sector that may eventually lead to two enlarged banks based around the biggest players in the market - AIB and Bank of Ireland.
The smaller institutions are likely to resist attempts to be "shoe-horned" into mergers with larger banks that would lead to a duopoly and reduced competition.
The Minister met Irish Life Permanent chief executive Denis Casey and chairwoman Gillian Bowler; EBS chief executive Fergus Murphy and chairman Mark Moran; and Irish Nationwide chief executive Michael Fingleton and chairman Michael Walsh, in meetings at Farmleigh in the Phoenix Park yesterday.
Yesterday evening, Mr Lenihan met AIB chief executive Eugene Sheehy and chairman Dermot Gleeson, Bank of Ireland chief executive Brian Goggin and governor Richard Burrows; and Anglo Irish Bank chief executive David Drumm and chairman Seán Fitzpatrick in further meetings.
Asked at the publication of the Finance Bill whether his discussions would result in consolidation in the sector, Mr Lenihan said: "I am not going into issues which are currently under discussion." Later he said: "The public should be assured that the Government is determined to continue efforts to stabilise and reform the banking sector to ensure it provides credit for Irish small and medium-sized enterprises as well as consumers."
The talks took place as it emerged that a consortium of private equity firms, including US companies JC Flowers and the Carlyle Group, had expressed an interest to Government in investing cash in return for a stake in Bank of Ireland and possibly a merged entity joining the bank with Irish Life Permanent.
The banks had no comment.
The consortium, named Maulabracka, is being led by Nick Corcoran and Nigel McDermott of Dublin firm Cardinal Asset Management. It's not clear how the Government views the overture, though talks have taken place.
A Department of Finance spokesman declined to comment.
Mr Lenihan declined to comment on the likely outcome of his discussions with the banks.
"The structured dialogue has to be constructive it has the purpose to ensure that there is ample credit available in the Irish economy," he added.
Mr Lenihan made his comments as the six institutions submitted revised business plans to the Financial Regulator showing how they intend to reduce risks facing them under the two-year guarantee to ensure the insurance policy would not be called upon.
AIB became the first Irish bank to raise funding selling two-year Government-insured bonds using the guarantee for the first time.
The bank raised €2 billion from 125 investors in the debt issue, paying 0.55 per cent over the mid-spread rate - the base cost on which bonds are priced. This is 10 times the spread paid by France last week for three-year funding for loans to the country's banks.
A spokesman for the bank said: "We're very satisfied with how well the deal has been received. We had orders for €3.9 billion. We took €2 billion and we've left plenty of demand out there for the other Irish banks."
The Irish Times also reports that the international financial crisis has given a new spin to an old saying in Germany. When it comes to its banks, "success has many German fathers, but failure is an Irish orphan".
Since the near-collapse last year of the Irish subsidiary of Sachsen LB, Dublin's IFSC has earned the dubious reputation in Germany as the financial wild west of Europe, a frontier of gung-ho capitalism where normal rules don't apply.
In this narrative, the Irish financial regulator is the feckless bean an tí who earns money from strangers' sons and daughters but turns a blind eye when they run amok.
When they crash and burn, Ireland lets the foreign parents pay for the funeral.
So when German bank Hypo Real Estate (HRE) faced collapse last month, not once but twice in the space of a week, because of liquidity problems of its Irish subsidiary Depfa, it was tempting to point the finger at Dublin.
Documents seen by The Irish Times, however, suggest that concern about Depfa, and the consequences for the HRE group, were well known to German authorities. Last summer, government regulators delivered a "grave appraisal in particular in the risk management area" to HRE managers in Munich and passed on their concerns to Berlin.
Nearly all HRE managers in Munich have been fired, with at least two preliminary criminal investigations into the near-collapse. But the question of political and regulatory responsibility has yet to be addressed, in particular: might the need for a €50 billionplus bailout have been prevented if the information available earlier this year had been acted on?
Hypo Real Estate Holding is Germany's fourth-largest bank, managing assets worth €400 billion. It was created five years ago after Hypovereinsbank spun off parts of its real estate financing business.
The Munich-based HRE group focuses on three areas: commercial real estate, infrastructure and public finance, and capital markets-asset management. Last year it spent over €5 billion to acquire the Dublin-based Depfa group, which lends to governments for big infrastructure projects.
These projects are refinanced in turn by means of short-term loans.
In February, the Bundesbank contacted the Irish financial regulator to ask for permission to send over six auditors to examine Depfa's operations. All involved say this is regular practice, but the run-of-the-mill audit produced notable results.
The Bundesbank sent several preliminary reports back and, based on this information, Germany's financial regulator BaFin noted in its second-quarter report that Depfa's operations for 2008 were "burdened" and "below expectations". Standard Poor's Depfa downgrade from A+ to A would "burden even further the already fraught liquidity position of the group".
"Critical is, in particular, the considerable short-term unsecured refinancing of the Irish Depfa Bank,"noted the report."A further downgrading . . . would have severe consequences for the refinancing of Depfa."
Concerns about individual company sectors meant, the banking regulator said, that the organisation of HRE group business "could not be described as in line with" the relevant paragraphs of German credit laws.
A spokesman for HRE confirms that government auditors met board members including chief executive Georg Funke "sometime before May" to discuss their concerns about the Dublin operation.
The BaFin report was forwarded to the finance ministry in Berlin. The relevant section head was on holiday and, according to the ministry, his deputy passed the report on to another official who filed the report away, seeing no need to bring it to the attention of any superiors.
"The impression I have is that they had very good information, they knew about the liquidity problems with Depfa. The head of BaFin himself told us they had a very clear picture,"said Volker Wissing, finance spokesman for the opposition Free Democrats (FDP) and a member of the parliamentary finance committee.
"I don't see a responsibility for this in Ireland, only with BaFin and the finance ministry . . . only the organisation supervising the holding company can understand what all the subsidiaries are doing."
With BaFin's Depfa report safely filed away in the finance ministry, what happened next is well known. Fears about Depfa's reliance on unsecured short-term capital were realised when short-term liquidity markets dried up after the collapse of Lehman Brothers on September 15th.
Berlin - convinced HRE was "too big to fail" - hurriedly agreed with German banks to underwrite a €35 billion guarantee. When, days later, HRE admitted it actually needed €50 billion, a furious finance minister Peer Steinbrück ponyed up the extra guarantee.
The price was the head of Funke, of other senior managers and of members of the HRE supervisory board. This week, Funke's successor said the bank will need further guarantees and had already applied to the general bank bailout fund agreed by Berlin last month.
Officially, HRE is restructuring its business, but there is speculation in official circles in Berlin that the business will be wound up.
As the financial story retreats, the political story remains unresolved, in particular the question of action - or inaction - by German authorities.
The Bundesbank points out that Depfa has an Irish licence and, as such, the Irish regulator has the initial responsibility for monitoring the company. But, as this year's audit and last month's bailout show, German authorities are well aware of their responsibility for the Munich- based group.
There appears some confusion over the limits of German auditors in Ireland. A 1993 agreement allows German authorities, with Irish permission, to visit German subsidiaries in Ireland and examine their operations.
But a finance ministry report to the parliamentary finance committee last week implied that the 1993 agreement does not allow German inspectors examine the liquidity position of foreign subsidiaries.
"The latter falls under the jurisdiction of national regulatory authorities, in this case, the Irish authorities,"the report says.
Experienced officials with experience of such audits said that, as a core business indicator, liquidity is always closely examined in these cases. Regardless, the report says that Depfa sent weekly liquidity reports to the German regulator from February. In June, it was put on the regulator's "watch list" and was later required to file daily liquidity reports.
A spokesman for HRE confirms that Depfa's liquidity data would have been available to HRE bosses in Munich.
Although BaFin's second-quarter report describes Depfa's refinancing situation as "critical", the finance ministry report says there was no indication that Depfa would have payment difficulties, "neither at the time of the report, nor later".
The finance ministry report concludes that HRE is "supervised in only a very limited fashion" by BaFin and the Bundesbank because as a holding group, "it isn't a bank in the sense of the credit legislation".
Reading the documentation, it's hard not to be reminded of pass the parcel, first between BaFin and the Bundesbank, which share responsibility for bank regulation in Germany. Then, both insisting they did their job correctly, they passed the parcel to the finance ministry, which denies failing to recognise the report's implications.
"It's the typical blame game and it's opportune for politicians to blame other countries for not paying enough attention,"said Hans Obermeier, spokesman for the HRE group in Munich.
As the Depfa dust settles, opposition parties smell a political rat. Behind the government's unwillingness to talk is, they believe, a simple explanation.
"The head of the department that received the Depfa report and didn't act on it is now a state secretary in the finance ministry, Peer Steinbrück's right hand," said Wissing of the FDP. "And who wants to cut off their right hand?"
The Irish Examiner reports that half of small businesses surveyed have been refused loans and overdrafts over the past few weeks.
This marks a dramatic change since August when just one in five firms said they were refused access to finance. Many of these firms have been in business in Ireland for more than 20 years.
ISME, the representative body for small businesses in Ireland, said the credit crisis was leading to company closures and job losses, adding that the situation was worse than reported by banks.
ISME has slammed the Government for its “lack of initiative” in addressing small business concerns about availability of finance.
Chief executive, Mark Fielding, said: “The crisis affecting small businesses is deteriorating on a daily basis and is so serious that companies, who have successfully traded through previous recessions and downturns, are indicating that they will have no option but to reduce staff or, in some cases, close up shop unless they get badly needed finance.”
Of the 46% of firms that were successful in securing finance over the past few weeks, 38% said they could not meet the conditions attached by their banks to secure additional funding. Half of these firms have been in existence for more than 10 years, with 74% in business for more than 20 years.
The association has received an unprecedented number of calls from members outlining the withdrawal of support from banks.
“The seriousness of this situation cannot be underestimated. Not only are profitable businesses finding it difficult to get paid by customers, but they are being given the cold shoulder by their banks and are being refused badly needed finance. This is creating huge cash flow problems, with companies having difficulty meeting wages at the end of the week.
“The refusal to lend is being perpetrated by institutions who only a few short months ago were irresponsibly lending to big property developers, which contributed to the current crisis.
“The Government has acted, through the guarantee scheme, to ensure that we continue to have a banking sector. They now need to ensure that banks lend, or we will not have a small and medium business sector. It is no exaggeration that the very fabric of the business sector will be destroyed, with many towns and villages throughout the country stripped of businesses and bereft of employment,” said Mr Fielding.
The Financial Times reports that plans to make banks hold greater capital reserves and limit the amount they can borrow have been outlined by the world’s leading banking watchdog in an effort to prevent a repeat of the credit crisis.
The proposals from the standard-setting Basel Committee on Banking Supervision are an attempt to salvage a global regulatory framework for the industry.
The move comes after a string of state-backed rescues in the US and Europe as governments have injected capital into their banks in an bid to shore up confidence in the financial system.
The crisis has triggered calls from some policymakers to scrap the Basel II framework for global bank regulation, which is seen as having contributed to the crisis by allowing banks to operate with relatively low capital reserves.
However, some regulators believe that the Basel framework, which took nine years to put in place, can be salvaged.
The Basel Committee yesterday signalled that over the long term it would encourage banks to make provisions for bad debts throughout the economic cycle. This would boost banks’ capital reserves while also providing a brake on growth in new lending.
The watchdog also signalled it might introduce rules to limit the absolute amount of debt a bank can take on relative to its capital base.
This measure, known as a leverage ratio, had been fiercely resisted by European banks but was recently introduced by the Swiss regulator following the meltdown at UBS.
Nout Wellink, president of the Dutch central bank and chairman of the Basel Committee, has defended Basel II, arguing that the framework had only come into force in many countries at the beginning of 2008.
However, he acknowledged that the crisis had created the need for fundamental reform. “Ultimately, our goal is to help ensure that the banking sector serves its traditional role as a shock absorber to the financial system, rather than an amplifier of risk between the financial sector and the real economy,” he said in a recent speech.
Basel officials believe the new rules, details of which will be drawn up over the next year, would provide a basis for reestablishing privately owned financial institutions. However, they stressed that the Basel Committee had no intention of forcing through new measures until the crisis has eased.
“We’re not going to jack up all the minimum capital requirements in the middle of a crisis,”one said.
The FT also reports that the Suez Canal, the international waterway crucial to Egypt’s economy, faces the threat of a dramatic decline in traffic as shipping companies shift to other sea routes to avoid Somali pirates.
AP Møller-Maersk, Europe’s biggest ship owner, said on Thursday it had decided to divert its fleet of 83 tankers to the longer and more expensive sea route around the Cape of Good Hope in southern Africa.
The Suez Canal is Egypt’s third source of foreign currency revenues after tourism and remittances and earned Egypt a record $5.2bn last year (€4.2bn, £3.5bn). Even before the piracy threat, the Canal was facing a decline in traffic amid a slowdown in international trade.
The hijacking last week of a Saudi supertanker, the Sirius Star, loaded with $100m-worth of crude in the Indian Ocean has refocused attention on the threat of piracy by well-armed Somali bandits operating in the Gulf of Aden and off the coast of east Africa.
On Monday Odfjell, a Norwegian company, ordered its more than 90 chemical tankers to take the longer route around Africa. Another Norwegian group, Frontline Shipping, the world’s biggest tanker operator, said on Thursday it was considering whether to stop using the canal. Somali pirates were reported to be demanding $25m in ransom to release the Saudi supertanker. Saud al-Feisal, the foreign minister, said in London that Riyadh was opposed to negotiations.
In Egypt, six Arab countries that share the Red Sea held an emergency meeting to forge a united response to the upsurge in piracy. Officials said ahead of the Cairo meeting that it would consider establishing a warning system for ships and setting up a piracy monitoring centre. But Cairo appeared to rule out taking part in any naval force deployed to secure the sea route.
The New York Times reports that as a new bout of fear gripped the financial markets, stocks fell sharply again on Thursday, continuing a months-long plunge that has wiped out the gains of the last decade.
The credit markets seized up as confidence in the nation’s financial system ebbed and people rushed to put money in Treasuries, the safest of investments. Some markets are now back to where they were before Congress approved the $700 billion financial rescue in October.
The Dow Jones industrial average fell nearly 445 points, or 5.6 percent. The broad market sank to its lowest level since 1997 — before the dot-com boom, the Nasdaq market bust and the ensuing bull market that drove stocks to record heights.
With Thursday’s rout, $8.3 trillion in stock market wealth has been erased in the last 13 months.
Investors are growing increasingly worried that big banks like Citigroup, JPMorgan Chase and Bank of America, which have all received billions of dollars from the government to bolster their finances, are still too weak. The price of Citigroup’s shares plunged 26.4 percent on Thursday and other financial shares fell to fresh lows.
Citigroup, which is under pressure from some investors to split itself or sell businesses, plans to hold a meeting on Friday to update executives on the company’s condition.
The Standard & Poor’s 500-stock index fell 6.7 percent, leaving that benchmark down about 52 percent from its peak in October 2007. The Dow Jones industrial average closed at 7,552.29, barely above its low in October 2002 during the depths of the last bear market. The Nasdaq fell 5 percent, to 1,316.12.
“This is a response to real fear,” said Marc D. Stern, chief investment officer at Bessemer Trust, an investment firm in New York. “We each have to look inside and say, is the fear warranted?”
The fear was reflected in a stampede for the safety of government securities. The Treasury’s benchmark 10-year bill rose 2- 22/32, to 106- 10/32 and the yield, which moves in the opposite direction from the price, was at 3.01 percent, down from 3.32 percent late Wednesday.
The sell-off in equities gathered force over the last several days and brought an abrupt end to what had been a modest improvement in financial markets. After the Federal Reserve began making short-term loans directly to businesses last month, a semblance of normalcy returned to credit markets, and the stock market, although volatile, held above its old lows.
But investor confidence, which has been shaky since the bankruptcy of Lehman Brothers, was dealt a severe blow when the Treasury Department announced last week that it would not buy troubled mortgage assets using the $700 billion that Congress approved in October. Economic reports showing rising unemployment, falling consumer prices and disastrous retail sales compounded the damage. The risk that one or all of the Detroit automakers might go bankrupt added to the gloom.
“The profit drag on corporate America is widening and deepening, and this is leading to more layoffs and cutbacks in capital spending, which is extending and deepening the recession,”said Stuart Schweitzer, global markets strategist for J.P. Morgan Private Bank. “We’ve gotten into a full-blown, self-feeding downturn.”
More bad economic news arrived on Thursday morning the Labor Department reported that new claims for unemployment benefits rose to a seasonally adjusted 542,000 last week, the highest level since July 1992. Unemployment is also climbing at a rapid clip in Europe, and the once-sizzling economies in Asia and Latin America are starting to sputter. Early on Friday, Singapore reported that its third-quarter gross domestic product fell at a 6.8 percent annualized pace.
In Asian trading early Friday, stocks were down nearly 3 percent in Japan, Australia and New Zealand. On Thursday, most European markets closed down more than 3 percent for the day.
The global nature of the slowdown is a reason that oil prices have fallen spectacularly in recent months. On Thursday, oil futures, which had touched $145 this summer, settled below $50 a barrel for the first time since 2005.
The sell-off in markets has been all the more severe because of forced selling by hedge funds, mutual funds, insurance companies and banks, all of which are being compelled to sell at the same time because of pressures from investors, lenders, regulators and rising insurance claims.
There have been spectacular declines in investments like commercial mortgage-backed securities, which are collections of loans backed by shopping malls, office buildings and apartments. Prices of those securities have fallen 20 percent just this month, mostly in response to a report about anticipated defaults on just two loans. The price of insuring against a default on commercial mortgages has more than doubled in less than a week.
“Where the credit markets are trading, it’s all but implying a 1929 scenario,” said Joe Balestrino, fixed income strategist at Federated Investors, who added that he thought prices had fallen too far in many cases.
The troubles in the credit market are not limited to risky assets. The mortgage finance companies Fannie Mae and Freddie Mac, which the government took over in September, have had to pay a steep premium over rates at which the Treasury borrows because policy makers have not explicitly guaranteed their debt.
Investors said the weak condition of many large banks had exacerbated the pain in the financial system because those institutions served as critical intermediaries in the trading of securities, particularly in the credit markets, where securities do not trade on exchanges. Because they need every spare dollar to shore up their own health, those banks are not as willing to make markets in securities that may be even slightly risky.
Shares of Citigroup, for instance, have fallen more than 50 percent this week, to $4.71. Earlier in the week, the bank said it would nearly double previously announced layoffs to 52,000, or 14 percent of its total staff. Other big institutions like Goldman Sachs and Morgan Stanley have been reducing their reliance on borrowed money because they have decided to become bank holding companies subject to regulation by the Federal Reserve.
“They are the middleman, and they have just gotten killed,”Andrew Feltus, a bond fund manager at Pioneer Investments, said about big banks and securities firms.
Still, in a sign that some investors have not lost all faith, two dozen stocks in the S.& P. 500-stock index rose, albeit barely, and among them were two of the American’s troubled automakers.
General Motorsand Ford had a rare positive day on Thursday after Congressional leaders left open the door for federal aid to them and for Chrysler, which is privately held. Still, Democratic leaders criticized the executives of the companies and said they needed to make a more persuasive case that they would be responsible stewards of government money. G.M. and Ford were up slightly, though still close to their lowest levels in decades.
The NYT also reports that for months, the nation’s largest banks have struggled to regain investors’ trust. In the center of the vortex is Citigroup,whose precipitous stock-market plunge accelerated on Thursday, sending shock waves through the financial world.
The shares slumped 26 percent Thursday; the bank has lost half its value in just four days. The chief executive, Vikram S. Pandit, will hold a meeting for senior managers Friday to update them on the bank’s condition.
Investors and analysts have long pressured the bank to consider ways to lift its stock price, including splitting the company or selling pieces. While a few also say the company should consider selling itself outright, there is no certainty that any change would happen soon. Senior executives say the company is financially strong and has ample financing options. Moreover, there are few buyers who would be willing to pay a price that Citigroup would want for its most valuable assets.
Citigroup executives are seeking to stabilize the stock price, but at this point they are not actively exploring selling or splitting up the company, according to two people with direct knowledge of the discussions.
The bank has posted four consecutive quarters of losses, caused by billions in write-downs. Nine of its investment funds have cratered this year. And now the bank could face a tsunami of new losses in its once-lucrative consumer loan business as the global economy weakens.
Within the bank’s Manhattan offices, television screens have stopped displaying the company’s stock price. Traders have begun making jokes comparing Citigroup to the Titanic.
But there is a wide gap between what Wall Street investors and Citigroup’s executives believe about the company’s financial condition. Senior executives feel that Mr. Pandit has followed through on plans to aggressively shrink the company and control costs. The bank has sold tens of billions of dollars’ worth of risky assets, improved its capital position and announced plans to eliminate 52,000 jobs by next June. “We are entering 2009 in a strong position, much stronger than we entered in 2008,” Mr. Pandit said in a speech to employees this week. “We will be a long-term winner in this industry.”
Yet as the drumbeat of bad news about the bank grows louder, investors remain unconvinced. Even a decision by Prince Walid bin Talal of Saudi Arabia, who bailed out Citicorp in the 1990s, to raise his stake to 5 percent Thursday failed to restore confidence in the bank. Two senior Citigroup executives said the bank had not approached him about raising his investment. The Saudi prince’s initial investment soared as Citigroup turned out record profits, only to evaporate over the last year.
“The earnings power is there,” said Charles Peabody, a financial services analyst at Portales Partners. “It’s a question of getting through the credit issues.”
Other big banks, like Bank of America and JPMorgan Chase, also tumbled Thursday as the broad stock market sank again, wiping out more than a decade’s worth of gains. And Goldman Sachs, once the most sterling American investment bank, fell below the $53 price at which it went public in 1999.
Investors have long feared that the bad news for banks will get worse as the economy slows. But this latest rout in financial shares, which are now plumbing their lowest depths since the economic crisis broke out, reflects growing concern that banks like Citigroup will require vast sums of additional capital, possibly from the government, to cope with the pain to come.
Home mortgages, credit card loans, commercial real estate debt — all are likely to deteriorate further now that a recession is at hand. Banks that have already lost billions of dollars could lose billions more.
“All the danger signs are flashing red,”said Simon Johnson, a professor at the Sloan School of Management at the Massachusetts Institute of Technology.
Much of the fear centers on the unknowable. It is unclear just how bad banks’ losses on consumer loans, credit cards and mortgages will be as the economy weakens. Commercial real estate loans are deteriorating, and it is unclear whether banks have sold the worst of their holdings. Then there are all the investments that lurk off of banks’ balance sheets, in the so-called shadow banking system. And a new uncertainty has leapt to the forefront as the automotive industry teeters, sending investors scrambling to calculate how much banks are exposed to these loans.
Several big banks hit record lows. Bank of America fell 13.86 percent to $11.25, JPMorgan slid 17.88 percent to $23.38 and Goldman Sachs slumped 5.76 percent to close at $52. Morgan Stanley neared a record low, closing down 10.24 percent at $9.20, while Wells Fargo fell 7.66 percent to $22.53.
In a bid to calm nerves, Citigroup officials are meeting with other large shareholders. Last week, Citigroup’s chairman, Winfried Bischoff, traveled to Dubai and met with Sheik Ahmed bin Zayed al-Nahyan, the director of the Abu Dhabi Investment Authority, according to two executives briefed on the situation.
The renewed assault on financial stocks led the Financial Services Roundtable, an influential lobby group for the industry, to press regulators Thursday for another ban on short-selling, a strategy in which investors bet against declines in a share price.
The current rout appeared to have gained momentum after Treasury Secretary Henry M. Paulson Jr. announced last week that the government would abandon its original plan to purchase troubled bank assets. That sent prices of commercial mortgage bonds and other loans into a nosedive. Mr. Paulson also said the Treasury would let the incoming administration determine how to deploy the remaining $350 billion left in the program.
Yet investors have grown increasingly nervous about the appearance of a leadership vacuum in Washington as the financial markets burn, and some have begun saying that President-elect Barack Obama should move more rapidly to release a plan.
“We really need somebody to step in and show leadership,” said Wilbur L. Ross Jr., chairman of WL Ross and Company, an investment firm that has been looking for bargains in the banking sector. “Every day that’s wasted and that we stay in freefall is going to make the recession that much deeper and longer.”
That has workers in the financial industry bracing for more pain.
“Major financial institutions have been taking write-downs all year, and what do you do next? You lay people off, and that decreases your need for office space,”said Harold Bordwin of the real estate group at KPMG Corporate Finance.“It’s very scary.”