M LEC IS A FAILURE - > BANKS ARE SHORTS BANKS ARE SHORTS

Citigroup said it will provide emergency support to seven structured investment vehicles if they can't find buyers for their short-term notes.

The move is being seen as a body blow for a rescue fund that several large banks have been working to develop at the urging of the Treasury Department.

"It says the super SIV is dead in the water. That shows it was a bad idea in the first place and as with (British bank) HSBC they have realized they have to sort their own problems and not seek help from someone else," said Alan Webborn at SG Securities in London.

The step also was followed by a downgrade of Citigroup's debt by a notch by Moody's Investors Service. The downgrade is the latest embarrassment for the largest U.S. bank, and it heightens pressure for Citigroup to shore up its shrinking capital base.


Moody's lowered Citigroup's rating to "Aa3," saying it doubted that the U.S. bank could rebuild its capital ratios any time soon, and said Citi's failure to restore its capital ratios in the medium term could lead to a further downgrade.

Moody's analyst Sean Jones said weak earnings at Citigroup would prevent it from restoring capital ratios quickly even after it raised $7.5 billion from the Gulf emirate of Abu Dhabi in November.

The agency suggested ways to rebuild included raising more outside capital and reducing its dividend. A growing number of analysts see Citi as likely to reduce its dividend, which costs the bank about $2.7 billion a quarter.

In bailing out the SIVs, Citigroup will bring $49 billion in assets on to its balance sheet. Moody's sees this as a further strain on the firm's capital levels.

In reaction to these steps, Asian stocks fell as investors saw the move as a sign that the global credit crisis could be worsening. But banking shares rose or were stable in Europe and Citigroup's bonds were unchanged.

The DJ Stoxx index of banking shares edged 0.11 percent higher. Germany's Allianz, whose banking unit Dresdner Kleinwort has a large SIV, was 0.12 percent lower.

Citi Bonds Unchanged

SIVS are off-balance-sheet vehicles set up by banks to invest in mortgage-backed securities whose value has been slashed by a collapse in U.S. subprime mortgages, which were loans made to people with poor or non-existent credit histories.

Citigroup's euro-denominated bonds were unchanged in early trading on Friday, a trader in London said.

"The downgrade will likely be met with some equanimity," analysts at Royal Bank of Scotland wrote.


The subprime mess has already hit ratings on a number of the world's leading banks and securities firms. UBS, Merrill Lynch and Bear Stearns have all had their credit ratings chopped by various ratings agencies.

Ratings downgrades can raise a company's borrowing costs in the corporate bond markets. Citi funds itself through the corporate debt markets to a greater extent than many of its peers, which have proportionately more deposit funding.


However, ratings analysts have said that many banks are entering the credit downturn from a position of strength, having spent the past few years shifting risk from their balance sheets to end investors.

Shares in Asian financial stocks were broadly lower on Friday, with the MSCI index of regional financial stocks down 1.5 percent.

Small Hong Kong banks were hit especially hard after the territory's top monetary official warned subprime exposure could drag some banks into the red.

"It's very indicative of the fact that we are nowhere near the bottom in the financial stocks. There is a lot more to come out, both in terms of write-downs and in terms of exposure beyond subprime," said Kirby Daley, strategist at the Fimat division of Societe Generale, referring to Moody's downgrade.

"It will be mid-2008 before we can begin to truly assess the situation at most of the majors."

SG's Webborn in London said Citigroup was starting to come seriously to grips with its problems by taking its SIV onto its books. "I don't think its Citi's most pressing problem but it's one thing that's out of the way before Father Christmas comes down the chimney," he said, referring to the end-year break.

Assets linked to subprime mortgages spurred some $6.5 billion of third-quarter writedowns at Citi, and could spur another $11 billion in the fourth quarter.

While Asian banks have reported far less exposure to subprime-related holdings than their counterparts in the United States and Europe, investors remain jittery.

Shares in Japan's biggest lender, Mitsubishi UFJ, slid 4.5 percent on Friday. The bank last month said losses on subprime-related investments cost it 4 billion yen ($35.6 million) in the six months through September, with current exposure to the risky subprime market at 260 billion yen.

Citigroup's Tokyo-listed shares shrugged off the news, rising 2.25 percent on Friday.