According to Goldman, Citigroup, Merrill Face More Writedowns.

Citigroup Inc., JPMorgan Chase & Co. and Merrill Lynch & Co. may write down an additional $34 billion in securities linked to the collapse of the subprime mortgage market, according to Goldman Sachs Group Inc.

Citigroup, the biggest U.S. bank, may reduce the value of its holdings by $18.7 billion in the fourth quarter and cut its dividend 40 percent, Goldman analyst William Tanona said in a Dec. 26 report on the New York-based companies. JPMorgan Chase & Co., the third-largest U.S. bank, may write off $3.4 billion, double Goldman’s previous estimate. Merrill Lynch & Co. may reduce its holdings by $11.5 billion, he wrote.

My Comment: By the time Citi is done shoring up its balance sheet it is highly doubtful it remains the largest US bank. It is possible it does not remain an independent US bank at all.

“It will be a couple of quarters before the current credit crisis is fully digested by the markets,” wrote Tanona, who has a “sell” rating on Citigroup’s stock and a “neutral” rating on JPMorgan and Merrill. “Given the magnitude of the writedowns we assume and Citi’s remaining exposure, we believe the firm has a serious need to preserve or raise additional capital.”

My Comment: Tanona is an optimist. It can easily be two years (not quarters) before the credit crisis is “digested”. Heck, it could be much longer than that judging from what happened in Japan. No one is counting on a hard recession, an implosion in commercial real estate, sharply rising unemployment, and huge defaults on credit cards. I think all four of those will happen.

Citigroup tumbled 8.1 percent on Nov. 1 after CIBC World Markets analyst Meredith Whitney said it may have to trim its dividend. Deutsche Bank AG analyst Michael Mayo also predicted a dividend cut, saying the investment from Abu Dhabi is “probably not enough” to absorb credit losses.

My Comment: A dividend cut is all but guaranteed.

MarketWatch is reporting Citi, HSBC eye sales of branches, divisions.

Banks including Citigroup (C) and HSBC Holdings (HBC) are considering sales of everything from branches to entire units, The Wall Street Journal reported Friday, citing analysts and unnamed executives. Citi could sell 80%-held Student Loan Corp (STU), its North American auto-lending unit, its 24% stake in Brazil credit card operation Redecard (RDCL) and the bank’s Japanese consumer finance business, the report said.

New Citigroup CEO Vikram Pandit is considering laying off as many as 20,000 employees and shedding business lines, the report continued, citing people familiar with the matter. HSBC may sell its auto-finance business, the report added.

Citigroup Forced To Sell Assets

Some thought I was a little over the top with Citigroup Fighting For Its Financial Life back on November 5th, and Question of Solvency at Citigroup on November 1st but here we are.

Citigroup is not considering these actions because it wants to, it is so capital impaired that it is forced to. The same can be said for a reduction in force. 20,000 jobs (assuming the number is correct) is quite a lot. Where are those who are let go going to find jobs in this market?

The problem for Citigroup and other lenders is that housing is just the first of the tsunamis that is going to hit shore. An implosion in commercial real estate, sharply rising unemployment, and huge defaults on credit cards are all on the way. Furthermore, the housing tsunami is not even played out yet. Two more waves of the housing tsunami are on the way: Alt-A and Pay Option ARM resets.

If Citigroup survives it will be a mere shadow of its former self.

Mike “Mish” Shedlock
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