Citigroup Inc., the profit engine built by Sanford "Sandy" Weill, has seized up.
The New York-based company also said that Charles O. "Chuck" Prince III, Weill's hand-picked successor, stepped down. Former Treasury Secretary Robert Rubin will become chairman, and Citigroup's most senior executive in Europe, Win Bischoff, will be interim CEO.
Citigroup shares sank in Monday trading after the company revealed that subprime mortgages and related securities lost as much as $11 billion of their value in the past month, a decline that may wipe out half of the firm's profit so far this year.
"Chuck Prince took over with all the tools," said Peter Sorrentino, who helps oversee $13 billion at Cincinnati-based Huntington Asset Management, including Citigroup shares. "Citigroup hasn't delivered. They didn't knock it out of the park when things were good, and now they find themselves staring at the barrel of some of the more onerous losses that this whole episode will deal out."
Also Morgan Stanley strategists told clients Monday that Wall Street's system of repackaging debt into bonds is broken, threatening U.S. economic growth.
"I'm probably as negative as I've been in a number of years," Greg Peters, head of credit strategy at New York-based Morgan Stanley, said on a conference call. "Economists and the like underappreciate how important this has been as a key driver, not only to the financial system but to the overall economy."
More than $125 billion of subprime-mortgage securities have been downgraded this year, according to Deutsche Bank AG, after ratings companies failed to account quickly enough for rising mortgage defaults. In an effort to catch up, some securities including collateralized debt obligations have had their top AAA ratings cut to below-investment grade within months of being sold.
"The bottom line problem is that there's zero confidence in what a rating means," Peters said. "There's zero confidence in what AAA means, more importantly."
With Citigroup Inc., Merrill Lynch & Co. and other banks unable to offload risk through securitization and losing money on debt they hold, lending capacity to consumers is shrinking, Morgan Stanley analysts said. They said economists are underestimating how important cheap consumer credit has been to the U.S. economy.
"It's just going to get harder to get credit ... and the consumer probably needs cheap available credit today more than at any point in time over the past couple of years," Peters said.