Nov 2, 2007

Forbes on Citigroup: "Widows and orphans beware"

Regulators view banks as well capitalized if they maintain leverage ratios at or above 5% and total capital at or above 10%. Citigroup, in the third quarter, had a leverage ratio of 4.1% and total capital of 10.7%, down from 11.8% in January 2006. Tangible capital, which measures the ratio of tangible equity to tangible assets, is at 2.8%, where most banks are closer to 5%.

Problem is, Citigroup's balance sheet has ballooned in assets, bloated by more than $26 billion worth of acquisitions since last year and the return of off-balance-sheet assets brought back on since the summer's credit crunch.

A so-called "superfund" designed to alleviate the pressure on certain off-balance-sheet investment conduits (Citi has among the biggest individual exposures, at $80 billion to $100 billion) organized by Citi, JPMorgan Chase (JPM) and Bank of America (BAC), seems to be struggling to get off the ground.

Citi could raise capital levels by selling assets or relying on earnings to rebuild capital, but any move it makes is likely to take a dent out of its share price.

The company wouldn't comment, and some other analysts said they thought a dividend cut would be an extreme step. Certainly, it's never a great sign when a bank--the stalwart of an income investor's portfolio--cuts its dividend. Widows and orphans beware.

~ Liz Moyer,, "Credit Crunch: More To Come," November 2, 2007

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