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The Zacks Analyst Blog Highlights: Citigroup, Bank of America, Goldman Sachs, JPMorgan Chase and RenaissanceRe Holdings

C BAC GS JPM RNR

 ZacksTrade Now

For Immediate Release

Chicago, IL – November 30, 2011 – Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include Citigroup Inc. (C - Analyst Report), Bank of America Corp. (BAC - Analyst Report), Goldman Sachs & Co. (GS - Analyst Report), JPMorgan Chase & Co. (JPM - Analyst Report) and RenaissanceRe Holdings Ltd. (RNR - Analyst Report).

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Here are highlights from Tuesday’s Analyst Blog:

Citigroup-SEC Settlement Revoked

U.S. District Judge Jed Rakoff rejected Citigroup Inc.’s (C - Analyst Report) $285 million settlement with the U.S. Securities and Exchange Commission (SEC). The settlement was to compensate investors for misleading them with a housing market related collateralized debt obligation (CDO).

Rakoff concluded that the facts and figures submitted by Citigroup were unsatisfactory. Moreover, he commented that the settlement was "neither fair, nor reasonable, nor adequate, nor in the public interest." Moreover, Rakoff has planned a trial on July 16, 2012, though Citi and the SEC might come up with a new settlement for the judge’s approval in advance.

According to the judge, absence of proper documents prevented him to give a green signal to the settlement. Moreover, he condemned regulators for depriving the general public from their right of knowing the details of Citi’s wrongdoing in the deal.

As per Rakoff, such protective shields provided to banks by regulators would encourage them in such acts. These unlawful activities by the banks have affected the total economy to a large extent. Any wrong step in support of the banks would conceal these facts from emerging in the interest of the public.

On the contrary, SEC was not convinced with the judge’s decision and demanded more judicial power to take decisions while increasing the agency's authority to levy a fine on the companies and individuals.

Background

In October, Citi agreed to settle the charges, which SEC filed in the U.S. District Court in New York, accusing Citi of misleading investors by misrepresenting facts in its mortgage-backed securities of over $1 billion. The SEC's complaint accuses the investment bank for creating a CDO, which was made up of mortgage-backed securities.

Citi was charged by the SEC in the U.S. for misstating facts and betting against a complex mortgage investment in 2007. According to the SEC, the statements did not disclose that Citi had played a significant role in selecting the assets and had taken a $500 million short position.

Moreover, the transaction closed in February 2007 and by November 2007, a rating agency downgraded every tranche and the CDO defaulted. Citi made $160 million in the deal comprising fees of approximately $34 million for structuring and marketing the transaction and additionally realized net profits of $126 million from its short position, though investors lost millions.

Competitors

Previously, in September 2009, Rakoff also had dismissed $33 million settlement between the SEC and Bank of America Corp. (BAC - Analyst Report). The deal was related to civil charges imposed on BofA. The bank was accused of misleading shareholders when it acquired Merrill Lynch at the peak of the financial crisis in 2008. BofA failed to disclose the payment of $5.8 billion in bonuses to employees even though it recorded $27.6 billion yearly loss.

Among Citi’s competitors, Goldman Sachs & Co. (GS - Analyst Report) agreed to pay $550 million to settle similar charges in 2010, followed by JPMorgan Chase & Co. (JPM - Analyst Report), who faced similar charges in June 2011 and paid $153.6 million. All these cases had intricate investments called collateralized debt obligations, backed largely by mortgages securities.

Citigroup currently retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating.

RenaissanceRe Drops to Underperform

We have downgraded our recommendation on RenaissanceRe Holdings Ltd. (RNR - Analyst Report) to Underperform from Neutral based on the company’s poor operating results in the third quarter, coupled with the declining interest rate scenario, which have also led to a reduced earnings outlook for the fourth quarter of 2011.

RenaissanceRe reported third quarter operating income per share of 62 cents, lagging the Zacks Consensus Estimate of 84 cents and prior-year income of $1.59. Operating income showed a sharp decline to $32.7 million from $90.9 million reported in the year-ago quarter.

Natural catastrophes have been impacting the profits of RenaissanceRe since 2008. During the first half of 2011, the company was severely hit by floods in Australia, earthquake in New Zealand, earthquake and tsunami in Japan and tornadoes in the U.S. These catastrophes made the period the costliest semi-annual period for RenaissanceRe, even though there was marginal improvement in the situation in third-quarter 2011.

Moreover, while RenaissanceRe’s cash flows from operating activities are significantly in excess of its operating commitments, a hefty portion of it goes in covering losses from unpredictable natural calamities. Cash flows are impacted negatively as the actual losses from such events varies from their preliminary estimates.

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