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November 1, 2007

Citigroup fears send Wall Street reeling
Stocks plunge in London and New York on speculation that Citigroup could cut dividends or sell assets to raise $30bnMarcus Leroux and agencies
The Dow Jones plunged by nearly 200 points today on speculation that Citigroup may have to raise $30 billion in short-term finance.

The prospect was raised in a note from CIBC World Markets, which downgraded Citigroup to “sector underperformer” from “sector performer,” citing capital concerns.

The note sent Citigroup shares down 9 per cent, or $2.74, to $38.62 by late morning in New York - their lowest levels in more than four years.

Sentiment spread across the sector. Bank of America, the US's second-largest bank, fell $1.48 to $46.80, while Merrill Lynch was off $2.48 from $63.54.

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Meredith Whitney, an analyst from CIBC, said: "We believe Citigroup will need to raise over $30 billion in capital as a result of its tangible capital ratios falling to the lowest levels in decades, now standing at almost half their peer group average at just 2.8 per cent”.

The bank was also downgraded at Credit Suisse and Morgan Stanley. The CIBC analyst said Citigroup will be forced to sell assets, raise capital or cut its dividend to shore up its capital ratios, over the near term.

The mood dragged down London where the FTSE 100, already depressed during the morning, fell by almost 130 points.

Almost two weeks ago Citigroup's profits plunged 57% as credit crunch write-offs hit three parts of the business and the bank's renowned credit traders lost $636 million in three months.

Charles "Chuck" Prince, the bank's chief executive, said it was a "disappointing quarter, even in the context of the dislocations in the sub-prime mortgage and credit markets".

In the three months to the end of September, profits dropped 57 per cent to $2.38 billion. Mr Prince said a "significant amount" of this was a result of sliding revenues at the fixed-income business.

Revenues at that division plunged 70 per cent to $671 million in this year's third quarter, compared with $2.3 billion last time.

Citigroup blamed the trading loss on "significant market volatility and disruption of historical pricing relationships". The drying up of market liquidity during the summer meant it was virtually impossible in some cases for traders to mark their positions to market.

The bank took a $1.56 billion hit on sub-prime mortgages that it was preparing to use in highly-structured credit portfolios.

On top of that, Citigroup said investment banking revenues halved to $541 million, as it wrote off $901 million on leveraged loans it was expecting to make.

Similar writedowns of $451 million meant that lending revenues at the markets and banking arm were down 14 per cent to $412 million.

Last month, Citigroup sent a shiver through Wall Street investment banks as it said it was preparing to write off $5.9 billion and see profits fall about 60 per cent in the wake of the summer turmoil in the credit markets.

The losses have already led to high-profile departures at Citigroup including Thomas Maheras, who ran the fixed-income division and Randolph Barker, one of his close associates. A third colleague was moved to another job inside the bank.

Citigroup was not immediately available for comment.