A Citi That Gets No Sleep

On Friday, Moody's Investors Service downgraded Citigroup's long-term ratings, saying it expects continued losses related to mortgages and other complex securities. The action came a day after Citigroup resolved longstanding questions about troubled off-balance-sheet vehicles it sponsors.

The danger is that every time Mr. Pandit fixes one problem, the bank's balance sheet could spring another leak. Citigroup could quickly find itself in a capital squeeze; additional losses eat into capital even as downgrades of its assets force the bank to set aside more money to meet regulatory requirements.

This pressure could push Mr. Pandit to cut the bank's generous dividend. The $2.16-a-share annual payout costs the bank $10.8 billion a year, money which could go a long way towards shoring up capital. Citigroup's stock Friday fell 31 cents, or 1%, to $30.70, just above its five-year low. The shares yield slightly less than 7%.

CIBC analyst Meredith Whitney estimates the bank will need to raise $30 billion and will have little choice but to cut the dividend -- and do even more. She and other analysts expect Citigroup will have to raise additional capital from investors beyond the $7.5 billion in convertible bonds it recently sold to Abu Dhabi's investment arm and sell assets.

Sean Jones, the Moody's analyst who follows Citigroup, said he expects the bank to face write-downs on its collateralized-debt-obligation assets that exceed the $8 billion to $11 billion loss the bank already has forecast on this debt for the fourth quarter.

That could also spell trouble in terms of the $49 billion in SIV assets Citigroup is bringing onto its books, should those get downgraded. A change in the SIV assets' risk weighting "could translate into yet another capital challenge," Ms Whitney's report said.