Analyst's warning on Citi sends markets plunging

Citigroup's shares slumped to a four-year low yesterday, sending the Dow Jones plunging 362 points, after a high-profile analyst said the US banking giant could be forced to cut its dividend or sell assets to shore up its capital.

Meredith Whitney of CIBC World Markets said in a note to clients that Citi went on a takeover spree after the Federal Reserve lifted a ban on its acquisitions last year. The deals boosted assets while Citi's equity base failed to grow, leaving Citi dangerously short of capital, Ms Whitney said. The bank will need to address this either by raising capital, reducing its assets or both, she added.

In her note, Ms Whitney wrote: "We believe over [the] near term, Citi will need to raise over $30bn [£14.43bn] in capital through either asset sales, a dividend cut, a capital raise, or combination thereof."

Ms Whitney, 37, is well known as a regular commentator on the Fox News channel and for her marriage to the business pundit and former professional wrestler John Layfield, whom she met on a Fox show in 2003.

She downgraded Citi's shares to "market underperform". Analysts at Morgan Stanley and Credit Suisse also downgraded the bank's stock.

The note compounded fears about Citigroup that had been spreading since Merrill Lynch announced $8bn of write-downs from the credit crunch two weeks ago – a massive increase on its previous estimate. Citi wrote down $6bn last month.

A dividend cut or a shock capital raising would put extra pressure on Chuck Prince, Citi's chief executive, who presided over the acquisitions and the bank's expansion of credit products such as structured investment vehicles. Investors have been losing patience with Mr Prince because of a series of gaffes, the bank's exposure to the credit crunch and the bank's high costs.

Citi shares fell 8 per cent to $38.51. Fears spread from Citi to the wider US market, where the Dow Jones Industrial Average ended down 362.1 – or 2.6 per cent – at 13,567.9. Investors have become increasingly concerned about the effects of the credit crunch after taking solace from reassuring statements and results for the third quarter of the year. The market fears a new wave of write-downs.

The credit crunch claimed its most senior victim this week when Stan O'Neal was forced to quit Merrill Lynch. Along with Mr Prince, the US bank boss now under the greatest pressure is James Cayne, the chief executive of Bear Stearns. Mr Cayne wrote a letter to employees yesterday, denying allegations made about him in The Wall Street Journal.

In the memo to staff, Mr Cayne said: "The article... alleges I engaged in inappropriate conduct outside the firm. As I stated in the story, this is absolutely untrue."

The Journal alleged that Mr Cayne spent 10 of 21 days away from the bank's office while two of the company's hedge funds collapsed. Asked generally whether he smoked pot during bridge tournaments or on other occasions, he said he would only respond "to a specific allegation", the Journal story said.

The implosion of the hedge funds, which invested in bonds backed by US sub-prime mortgages, was one of the earliest signs that defaults by mortgage customers were spreading throughout the financial system.

Fears spread from the US to the London market, where the FTSE 100 fell 2 per cent to 6,586.1. Barclays shares fell 5.4 per cent. Barclays has reassured investors on a number of occasions that its Barclays Capital investment bank has weathered the credit crunch well. But the market remains concerned because BarCap was at the forefront of developing structured credit products and the bank has given no specific information about its exposures or potential write-downs.