What's Next for Citigroup?

Wall Street has never been a good place to pop a surprise. And if your surprise involves billions of dollars in fresh losses tied to risky, highly illiquid assets, it might also be your last.

Just ask Chuck Prince, the former head of financial giant Citigroup, who resigned Sunday, as the company announced it would take up to $11 billion of subprime-related write-downs on top of the nearly $2 billion it revealed in mid-October. To fill the leadership posts at the beleaguered company—Citi's stock is down some 37 percent this year—the board installed former Treasury Secretary Robert Rubin as chairman and promoted Win Bischoff from European chairman to interim CEO as it searches for a full-time replacement.

(Mario Tama/Getty Images)

Prince's exit comes shortly after the abrupt departure of Merrill Lynch's CEO, Stan O'Neal, who stepped down in late October after the investment firm unveiled $7.9 billion in subprime-related write-downs—nearly twice the amount it had said it would take just weeks earlier. Here's a quick guide to Citi and others' troubles and what might come next.

What do these huge write-downs mean?
The unexpected spikes in mortgage-related write-downs at two pillars of the financial establishment signals that the fallout from the subprime crisis—which had shown signs of abating—is far from over. That could lead to further tightening of credit markets and additional write-downs at companies across the industry. But with all the uncertainty surrounding the value of mortgage-backed assets, it's nearly impossible to say what the future losses may total. "There will be more losses [at Citigroup], but we don't have a clue as to what they will be," says Richard Bove, an analyst at Punk, Ziegel & Co.

Is anyone else on the hot seat?
Should other companies announce additional unexpected subprime-related losses, the CEO body count could certainly increase. One CEO who could find himself a casualty is James Cayne, the top executive at Bear Stearns. Cayne was put on the defensive by recent reports that he was at a bridge tournament in Tennessee this summer as two of his company's hedge funds were collapsing—a development that helped precipitate the current chaos in the mortgage market. Bear's stock is down about 17 percent since the beginning of October.

Another potential target is Countrywide CEO Angelo Mozilo, who pledged to turn a profitable fourth quarter after taking a $1.2 billion loss in the previous period. But the deteriorating conditions in the mortgage market may make it more difficult to pull that off, potentially setting up Mozilo to spring the same kind of news that took down Prince and O'Neal. Countrywide's share price has plummeted from about $42 to $15 this year.

Should Citigroup be split up?
Throughout his tenure at Citigroup, Prince faced repeated calls to split up the financial conglomerate—which consists of three business groups providing a broad spectrum of financial services ranging from retail banking to wealth management—into separate entities. With some $2.4 trillion in assets, Citigroup is the largest U.S. bank and employs more than 320,000 people worldwide. Critics of its financial supermarket model argue that Citigroup is too big and inefficient and that management could unlock shareholder value by selling off assets such as Smith Barney, its brokerage unit.

But Meredith Whitney, an analyst with CIBC World Markets, says that Citigroup will need to sell off assets for an entirely different reason: boosting capital ratios. Citigroup's so-called Tier 1 capital ratio—a broad measure of the amount of capital a bank holds to protect against unexpected losses—has fallen to 7.4 percent as it undertook a recent $26 billion acquisition spree. Although that's still well above the 6 percent needed to be considered "well capitalized" by federal regulators, Citigroup's tangible capital ratio—which represents the real capital banks hold for unexpected losses—has fallen to just 2.8 percent, significantly below its peers' averages. "Over the near term [Citigroup] will be forced to sell assets, raise capital, or cut its dividend to shore up its capital ratios," Whitney told clients.

Not everyone is so worried. Bear Stearns analyst David Hilder says that Citigroup could take as much as $26.6 billion in pretax write-downs or losses before it risks crossing the 6 percent threshold. In addition, Hilder says that the conglomerate structure benefits the company by diversifying risk and enhancing debt ratings. Furthermore, JPMorgan Chase has enjoyed years of success with a similar conglomerate structure, he says. "The path to value creation, we believe, lies in better management execution, not in creating new legal entities," Hilder told clients.