Citi Spirals Downward

NEW YORK (Reuters) – Citigroup Inc shares tumbled for a fifth straight day, as Chief Executive Vikram Pandit tried to downplay speculation the banking giant might sell major businesses to restore its health and investor confidence.

Pandit told employees on Friday that Citigroup, the second-largest U.S. bank by assets, does not want to change its business model and plans to keep its Smith Barney brokerage, according to two people who heard him.

He also said Citigroup had a solid capital position, and that employees should not focus on the bank’s falling share price because that is not what regulators and credit rating agencies worry about, the sources said.

In late-morning trading, the shares were down 85 cents, or 18 percent, at $3.86, after earlier tumbling as much as 24 percent to $3.58. They closed at $9.52 a week ago.

The cost to protect Citigroup debt against default rose, suggesting that fixed-income investors see increased risk.

“It’s fear and panic at this point,” said Gerard Cassidy, a banking analyst at RBC Capital Markets in Portland, Maine. “Investors have seen similar movies this year, and the endings are very unpleasant.”

Citigroup is looking at options including a sale of parts of the company, or a merger with another company, a person familiar with the matter said on Thursday.

Concerns are rising that the drumbeat of negative news about Citigroup could prompt customers or trading partners to flee.

“We worry if the lack of investor confidence leads to (a) lack of customer confidence,” wrote Barclays Capital analyst Jason Goldberg. “We believe the market may be implying some sort of regulatory intervention.”

Within the last three months, major U.S. lenders Wachovia Corp and Washington Mutual Inc suffered rapid outflows of deposits, as losses mounted on mortgages and other debt. Wachovia later agreed to be bought by Wells Fargo & Co, while Washington Mutual failed and its assets were bought by JPMorgan Chase & Co.

Earlier this week, Pandit set plans to shed 52,000 of Citigroup’s 352,000 jobs by early 2009, and to move tens of billions of dollars in troubled securities onto its balance sheet.

The bank is also pushing the U.S. Securities and Exchange Commission to reinstitute a temporary ban on short sales of financial stocks, a person familiar with the matter said.

The cost to protect its debt was $470,000 annually to protect $10 million of debt against default for five years, up from $395,000 annually on Thursday, according to Phoenix Partners Group. Banks in extreme distress that were eventually taken over by regulators had much higher credit default protection levels, signaling that credit markets foresee either a dilutive capital raise for Citigroup, or government intervention that does not hurt bondholders.

On Thursday, Saudi Prince Alwaleed bin Talal said he planned to increase his stake in Citigroup to 5 percent from less than 4 percent. The bank’s largest individual investor called Citigroup’s shares “dramatically undervalued.”

Citigroup’s market value was $25.7 billion as of Thursday’s close, down $48.7 billion this month, and down about a quarter trillion dollars since late 2006.

Thursday’s market value was barely above the $25 billion that Citigroup received as part of the government’s $700 billion financial industry rescue package. Citigroup said it has also raised another $50 billion of capital from other investors since the middle of 2007.

(Reporting by Jonathan Stempel and Dan Wilchins; Additional reporting by Joseph Giannone; editing by Jeffrey Benkoe)