Two of Wall Street's biggest banks have raised $21bn (£10.7bn) in a single day, a vital step towards repairing their battered balance sheets and shoring up investor confidence in the face of mounting losses on the US mortgage market.
Citigroup said its former chief executive Sandy Weill – who created the conglomerate through a string of acquisitions – was on a list of investors who will pony up $12.5bn to help mitigate the $18.1bn write-down of mortgage investments that it also announced yesterday. In another sign of the increasing might of overseas government investment funds, the Government of Singapore Investment Corporation will put in $6.9bn.
A further $2bn will be raised in the coming days by offering new debt and other securities to existing Citigroup investors.
Meanwhile, Merrill Lynch is raising additional funds, some $6.6bn from a consortium of investors that includes the Korean government and the Mizuho Corporate Bank of Japan.
The Kuwaiti Investment Authority, an offshoot of the Kuwaiti government, was a major investor in both fundraisings, putting in more than $5bn. The US state of New Jersey was also putting government money into both fundraisings, $400m in Citigroup and $300m in Merrill Lynch.
It is the second capital raising in as many months for the two banks, after Citigroup tapped the Abu Dhabi government for $7.5bn in November and Merrill Lynch received $6.2bn in December from investors including Singapore's Temasek.
All the new money will eventually convert into shares in the companies. At least in the short term there will be higher dividend or interest rate payments than those being paid to existing shareholders. Citigroup shareholders' dividend will be cut by 41 per cent, although two months ago the board indicated that the pay-out was safe.
Citigroup's situation has deteriorated sharply in recent weeks, not just because of the sliding value of the mortgage-backed derivatives on its books but also because of growing problems with its consumer business, where customers are increasingly in arrears on car loans, credit card bills and mortgages, and where it took an additional $4bn charge. The company's overall loss in the fourth quarter of 2007 was $9.8bn, the worst in its history and higher than Wall Street feared.
Vikram Pandit, promoted to chief executive last month, has already laid off 4,200 of his 300,000-plus workforce. He said cost cuts would continue this year. There will be another strategy update in April, he said. It is believed that Citigroup will cut between 20,000 and 30,000 jobs this year.
The scale of the write-downs on Citigroup's mortgage derivatives portfolio disappointed the market. Although the final $18.1bn figure was higher than the company had earlier indicated, some analysts thought it could have gone further, since it is still valuing its remaining portfolio at $37.3bn. Citigroup said most of the remainder was backed by mortgages written in 2005 or earlier.Reuse content