Citigroup Shares Drop on Analyst’s ‘Sell’ Advice

Citigroup Inc. shares tumbled more than 10% on Tuesday after a prominent Wall Street analyst advised investors to sell the stock, in part on worries about the firm’s liabilities in the Enron and WorldCom scandals.

Shares of the biggest U.S. banking company dropped $3.36 to close at $29.39 on the New York Stock Exchange after analyst Michael Mayo of Prudential Securities cut his rating to “sell” from “hold.”

Mayo, who has been one of Wall Street’s most bearish analysts on banks this year, noted that Congress and state and federal regulators are investigating the role Citigroup and its Salomon Smith Barney securities unit played in the collapses of energy trader Enron Corp. and telecom giant WorldCom Inc.

“In mid-September, Congress will likely hold more hearings into the practices of Citi and others with regard to Enron/WorldCom, which could place Citi in a negative light,” Mayo told clients.

Citigroup’s slide helped fuel a broader sell-off on Wall Street on Tuesday. It was the biggest loser in the Standard & Poor’s 500 index, which suffered its biggest one-day decline since last September and contributed to a 5.4% fall in a key index of 24 bank stocks.

Under subpoena, Salomon last week gave the House Financial Services Committee documents showing how WorldCom executives who were Salomon clients were favored for allocations of hot initial public stock offerings in the late 1990s. Critics of Wall Street say Salomon doled out the IPO shares to win investment banking business from the executives’ companies.

A court ruling is expected this month on whether lawsuits alleging that the company helped Enron hide debt can move ahead, Mayo said. Claims in those suits approach $50 billion, he said, and Citigroup could be on the hook for a higher percentage of damages than other defendants if the plaintiffs are successful.

Regulators face a special challenge in investigating Citigroup: How far are they willing to go if the threat is that they could bring down the nation’s largest bank?

“This is not a safety and soundness issue,” Mayo said in an interview, referring to Citigroup’s ultimate survival. “We’re still talking of seat-of-the-pants estimates,” but given Citigroup’s size, it should be able to absorb any regulatory fines, he said.

Securities lawyers agreed Tuesday, citing an old industry saying that banks the size of Citigroup are “too big to fail.”

“They are not going to let someone off because they are so big, but regulators are mindful of collateral damages,” such as layoffs of thousands of employees and disruption to the broader economy, said David Martin, a Washington securities lawyer formerly with the Securities and Exchange Commission.

More worrisome, experts said, is the stock market’s vulnerability to any hint of corporate scandal.

“The market has been so skittish,” Martin said. “The mere mention of an investigation is enough to make the market wary.”

This is the first time in three years that a “sell” recommendation has been placed on Citigroup stock, said Boston data firm Thomson First Call. Citigroup is rated a “strong buy” by 13 analysts, a “buy” by two analysts and “hold” by one, according to Thomson. The last time Citigroup, formed in 1998 through a merger, was downgraded to “sell” also was by Mayo, in 1999, Thomson said.

Citigroup stock is down 37% this year, but the price remains above the July 23 low of $25.18 a share. Mayo said he expects Citigroup shares to fall to $28, a change from his earlier target of $42.

Citigroup spokeswoman Leah Johnson said the firm does not comment on analyst reports.

Citigroup, led by Chief Executive Sanford Weill, has responded to recent scandals in ways that only contribute to the firm’s problems, Mayo said.

“Management has recently practiced what we term ‘just-in-time corporate governance.’ Its failure to more aggressively acknowledge and address the issues facing the company increases the degree of risk,” he said in his report.

In addition to facing corporate governance issues, Mayo said, Citigroup may lose money on $11 billion in loans and other commitments in Brazil, where the leading presidential candidate in an election scheduled for Oct. 27 has suggested he may not honor debt agreements.

Mayo cut his 2002 profit estimate to $2.85 a share from $2.90, and his 2003 estimate to $3.30 from $3.50.

One side effect of the recent slide in Citigroup’s share price has been the steady erosion of the value of the company’s stock and cash offer for Golden State Bancorp Inc., the San Francisco-based parent of California Federal Bank.

When Citigroup made its offer in May to acquire Golden State for $16.40 in cash and 0.5234 of a share of Citigroup stock for each share of Golden State, the deal was valued at around $40.10 a share, or about $5.8 billion.

At Tuesday’s closing price for Citigroup’s stock, however, the deal’s value had fallen below $32 a share, or about $4.4 billion.

Shares of Golden State, whose shareholders approved the merger Aug. 22 with 87% voting in favor, fell $1.62 on Tuesday to $32.88.

Bloomberg News was used in compiling this report.