NEW YORK (Reuters) - Citigroup Inc <C.N> and Merrill Lynch & Co Inc <MER.N> said they raised another $20 billion of capital from investors in Asia, the Middle East, and elsewhere, as the subprime mortgage crisis forced additional massive asset write-downs and devoured more of banks' capital.
By Dan Wilchins
NEW YORK (Reuters) - Citigroup Inc <C.N> and Merrill Lynch & Co Inc <MER.N> said they raised another $20 billion of capital from investors in Asia, the Middle East, and elsewhere, as the subprime mortgage crisis forced additional massive asset write-downs and devoured more of banks' capital.
Citigroup shares, down 7.6 percent in late afternoon trading, led a decline in financial stocks as investors worried that banks would have to raise more capital and write down more assets.
"The market clearly believes these banks have more confessions ahead of them," said Matt McCormick, portfolio manager and banking analyst at Bahl & Gaynor Investment Counsel in Cincinnati, Ohio.
!ADVERTISEMENT!Adding to turmoil in the financial sector, asset manager and trust bank State Street Corp <STT.N> reported a 28 percent decline in fourth quarter earnings and said it expected 2008 earnings to be at the lower end of its target range.
U.S. Bancorp <USB.N>, the sixth-largest U.S. bank, said fourth- quarter profit fell 21 percent after a legal settlement and losses from loans and money market funds.
Still, those banks posted profits.
Citigroup recorded $18.1 billion in pre-tax write-downs and credit costs on subprime mortgage assets, which contributed to a $9.83 billion net loss in the quarter.
Some analysts questioned whether Citi wrote down its assets enough, even after recording about $25 billion of write-downs over the last two quarters. Citi still has $37.3 billion of mortgage-related assets on its balance sheet, and the mortgage crisis is showing signs of spreading to areas such as credit cards.
Jeff Harte, an analyst at Sandler O'Neill, wrote in a note to clients that while no two portfolios were identical, Citi's capital increase coupled with aggressive markdowns by some peers made them wonder if management could not have used more aggressive assumptions to write down the portfolio.
Massive write-downs cut into Citi's already depleted capital base during the fourth quarter, spurring the bank to sell $12.5 billion of convertible preferred securities to investors including Singapore's and Kuwait's governments, Saudi Prince Alwaleed bin Talal, and former Citigroup Chief Executive Sanford "Sandy" Weill.
Citi plans to sell another $2 billion of convertible preferred securities to the public, and also expects to issue conventional preferred shares.
The over $14.5 billion of fresh capital is a second round for Citi, which in November agreed to sell a $7.5 billion stake to the Gulf Arab emirate of Abu Dhabi.
Citi said on Tuesday it has taken other measures to cut costs and preserve capital. including cutting 4,200 jobs and its dividend by 40 percent.
"The fact that Citi is raising this much capital and cutting its dividend and doing a big expense reduction initiative signals their core earnings power is not enough to get them to their target capital levels," said Charles Peabody, analyst at independent research firm Portales Partners.
IN A BIND
Merrill Lynch, once the largest underwriter of collateralized debt obligations (CDOs) in the United States, said it raised $6.6 billion from a group including U.S., Japanese and Kuwaiti investors in a capital-raising transaction of its own.
The size of the capital infusion signals that Merrill's mortgage-related losses in the fourth quarter could be at the high end of estimates of $15 billion, Lehman Brothers analysts said in a research note.
Within the past month, the world's largest brokerage has announced plans to raise $12.8 billion from outside investors after taking an $8.4 billion write-down in the third quarter, and with expectations it will take an additional, larger hit when it reports year-end results, scheduled for Thursday.
Merrill Lynch found itself in a bind after bets on securities underpinned by risky subprime mortgages imploded under the watch of then-Chief Executive Stan O'Neal. Merrill's gross exposure to subprime and CDOs is about $27.2 billion.
Merrill Lynch shares were down 4.16 percent to $53.64 on the New York Stock Exchange late Tuesday afternoon.
(Additional reporting by Jonathan Stempel and Tim McLaughlin; Editing by Toni Reinhold)
