Capital levels are tumbling at major banks and brokerages—not just Citigroup—which could crimp earnings and economic growthAfter Charles Prince III resigned as chief executive (BusinessWeek.com, 11/5/07) of Citigroup (C), the first question that analysts asked on a conference call to discuss the move wasn't about Prince's decision to step down, the interim CEO, or the hunt for a permanent successor. Never mind the leadership issues. Instead, analysts began the call on Nov. 5 by asking Chairman Robert Rubin and Chief Financial Officer Gary Crittenden about the financial giant's capital. "How do you feel about where the tangible equity ratio is?" said analyst Glenn Schorr of UBS (UBS). "It seems like an alarming number."
Rubin and Crittenden assured everyone on the call that things would be fine and that Citi's capital would be built back up. But the emphasis the issue received highlights a growing problem at Citi and in the banking industry as a whole. Citi's tangible capital is 2.8% of assets, about half the industry average of 5% (BusinessWeek.com, 11/107), according to Meredith Whitney, a bank analyst with CIBC World Markets (CM). And Citi's not alone. Banks and brokerages across the U.S. are taking writedowns to reflect the falling value of subprime debt and leveraged loans used in buyouts, and they've whacked away at the capital on their balance sheets in the process.
Dangerously Low Reserves
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