Citigroup Downgraded to `Sell' at Goldman Sachs

Nov. 19 -- Citigroup Inc., the largest U.S. bank by assets, was lowered to ``sell'' by a Goldman Sachs Group Inc. analyst who predicted that the lender's writedowns of collateralized debt obligations will total $15 billion over the next two quarters.

```Given the dislocations in the credit markets, we have become more pessimistic,'' New York-based analyst William F. Tanona wrote to investors today, downgrading New York-based Citigroup from ``neutral.'' ``Citigroup will likely face an increasingly challenging operating environment which is likely to pressure results in many of their businesses.''

Tanona said rising mortgage delinquencies may cut into earnings. He also reduced his price targets for Merrill Lynch & Co., Morgan Stanley, Lehman Brothers Holdings Inc., Bear Stearns Cos., JPMorgan Chase & Co. and E*Trade Financial Corp. Tanona lowered his earnings estimates for Merrill on Sept. 26, projecting writedowns announced a month later spurring the ouster of Chief Executive Officer Stan O'Neal.

The analyst lowered his estimate of Citigroup's earnings per share next year to $3.80 from $4.65 and his price estimate to $33. Citigroup fell $1.21, or 3.6 percent, to $32.79 at 10:05 a.m. in New York Stock Exchange composite trading. The shares have dropped 41 percent this year.

`Lack of Leadership'

Citigroup Chief Executive Officer Charles O. Prince III stepped down Nov. 4 as the bank's writedowns on the value of subprime mortgages and collateralized debt obligations mounted. An $11 billion writedown may decrease fourth-quarter net income for the New York-based bank by $5 billion to $7 billion, the company estimated.

``The lack of leadership at this point in Citi's storied history could not have come at a worse time,'' wrote Tanona, who joined Goldman from JPMorgan two years ago. ``It will likely take the new CEO some time before he or she decides on the appropriate course of action to undertake.''

Citigroup also has problems in the short-term debt market as investors remain reluctant to buy commercial paper issued by structured investment vehicles, Bank of America analyst John McDonald wrote in a note to clients today.

``SIVs face the possibility of selling assets at distressed values thereby exacerbating potential losses,'' wrote McDonald, who rates Citigroup shares as ``neutral.'' Citigroup said this month it provided $7.6 billion of financing to SIVs it runs after they were unable to pay maturing debt.

`Subprime Woes'

While the bank's exposure to SIVs is unlikely to ``severely impact'' the level of risk and leverage related to its bonds and long-term debts, the lack of liquidity in commercial paper could add to losses from CDO writedowns, McDonald wrote.

By contrast, Citigroup recommended that investors buy U.S. bank stocks. New York-based analyst Tobias Levkovich raised his rating on the companies to ``overweight'' from ``market weight'' because of ``compelling valuation, depressed earnings revision data and awful investor sentiment.''

``The banks group has taken some sharp hits due to the subprime woes, and there appears to now be a pile-on effect that seems to be overdone,'' Levkovich wrote in a note dated Nov. 16.

Citigroup's losses and the departure of Prince came after New York-based Merrill, the biggest brokerage, said writedowns exceeded $8 billion.

Citigroup, with more than $2.35 trillion in assets, stumbled after racking up some $55 billion of risk in businesses that invested in subprime mortgages or CDOs, stored them for resale or accepted them as collateral for loans.

Tanona cut his price estimate for Merrill to $59 from $66, and for Morgan Stanley to $61 from $66. The estimate for JPMorgan was lowered to $46 from $51, and Bear Stearns was decreased to $106 from $118. Lehman's was reduced to $70 from $71, while E*Trade was slashed to $6 from $15.