Citigroup's loss of 'only' $7.2bn cheers markets

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Citigroup, one of the banking giants hardest hit by the credit crisis, said it suffered another $7.2bn (£3.6bn) in losses on its mortgage portfolio in the past three months, but such is the misery to have engulfed the industry that this figure was actually a piece of good news.

The company's shares shot higher and Wall Street analysts applauded the results, which showed an overall second-quarter loss of $2.5bn, its third straight period in the red. In the preceding three months, Citigroup had lost twice as much, and written down the value of its portfolio of mortgage investments by more than $12bn.

Vikram Pandit, Citi's chief executive, hired at the end of last year after the ousting of Chuck Prince, is selling or winding down some $350bn of the company's businesses in a bid to reduce its need for capital. It shed $100bn in the second quarter alone. It has also shed 14,000 jobs worldwide since the start of the year.

Mike Mayo, a bearish analyst at Deutsche Bank, abandoned his sell rating on Citigroup shares yesterday, saying the results help ease fears that it would have to tap investors for more money, diluting existing shareholders. "The lingering issue is the degree of additional possible future writedowns on remaining high- risk exposures, a still negative trend in credit, and how much of this quarter's revenues are one-time," Mr Mayo told clients.

Mr Pandit said: "While there is still much to do, we are encouraged by our progress in delivering on our commitment to the re-engineering efforts." Citigroup shares were up 7.7 per cent at $19.36 in late afternoon trading in New York.

With the exception of a disappointing set of figures from Merrill Lynch late on Thursday night, the financial sector has delivered earnings this week that have outstripped the gloomy predictions of Wall Street analysts. Nervous investors who sent stock markets into bear market territory because of mounting fears over the effects of the credit crisis have found themselves surprised by news such as that from Wells Fargo, a big regional US bank, which actually raised its dividend earlier in the week.

As well as selling assets and shrinking their balance sheets, some financial institutions are now hoping that a period of calm on the markets may allow them to tap existing and new shareholders for funds.

In particular, Freddie Mac, the giant mortgage finance company which appeared this time last week as if it may need a government bail-out, was working yesterday on a $10bn recapitalisation plan that would bring in private capital rather than relying on taxpayers.

It filed papers with the Securities and Exchange Commission, the Wall Street regulator, that will free it up to ask shareholders for more capital, although such a fundraising remains fraught with other obstacles – not least, worry over what role the government may actually end up having within the company.

Last weekend, Hank Paulson, the Treasury secretary, promised the company – and its sister organisation, Fannie Mae – a bigger line of credit from the government and said the Treasury may buy shares if necessary.