Citigroup on Tuesday named Richard Stuckey, who helped stabilize the Long-Term Capital Management hedge fund, to fix a troubled subprime mortgage portfolio expected to cause a fourth-quarter loss for the largest U.S. bank.
Stuckey will run the Sub-Prime Portfolio Group, which the bank formed after saying it would write down $8 billion to $11 billion for subprime losses and that Chief Executive Charles Prince had resigned.
Citigroup has $55 billion of subprime exposure, including $43 billion of "super-senior" collateralized debt obligations for which there are no buyers. These securities were once thought safe despite being linked to lower-quality mortgages.
The bank said its projected write-down might reduce net income by $5 billion to $7 billion, equal to three or four months of profit. It said the write-down might grow larger if market conditions worsen.
Stuckey, 51, is a managing director and head of finance in Citigroup's fixed-income, currencies and commodities unit. He will be assisted by Mark Tsesarsky, 45, head of special situations securitization in fixed income.
"He has an uphill battle," Timothy Ghriskey, chief investment officer of Solaris Asset Management in Bedford Hills, New York, said, referring to Stuckey.
"There is nothing he can do about the real estate market, and as home prices decline it will create more defaults and a lack of investor interest in buying mortgage securities," Ghriskey said. "Unlike Long-Term Capital, which stabilized quickly, this project will require an extended recovery."
Merrill Lynch last month took an $8.4 billion write-down largely caused by mortgage exposures. That prompted the Oct. 30 ouster of its chief executive, Stanley O'Neal.
Citigroup shares fell 80 cents to $35.10 in morning trading on the New York Stock Exchange. They had fallen 36 percent this year through Monday, nearly double the 19 percent decline in the 24-member Philadelphia KBW Bank Index.
Confidence Must Be Restored
Stuckey was part of a group that 14 financial companies established to unwind Long-Term Capital, which suffered billions of dollars of losses after borrowing heavily to make investments that went bad. Regulators at the time feared the collapse would cause upheaval in global financial markets.
"We will review our credit businesses to better align them with the future opportunity," a Citigroup memo announcing the appointments said. A spokeswoman confirmed its contents.
Gary Crittenden, Citigroup's chief financial officer, told investors during a Monday conference call there were "no observable trades" in the $43 billion subprime portfolio.
"A year from now, two years from now, three years from now, the real question is going to be how much cash do we receive from these securities?" he said. "We may liquidate some of these if market prices come back. We just simply don't know."
Ghriskey said Stuckey "needs to restore confidence in mortgage-backed securities broadly, so that there is liquidity and trading. Citigroup has a diverse array of business lines, but this will create long-term uncertainty for one part."
With Prince's departure, Robert Rubin, the former U.S. Treasury Secretary who led the bank's executive committee, was named chairman. Sir Win Bischoff, who led the bank's European business, was named acting chief executive.