Citigroup Inc. on Friday announced its latest attempt to become profitable again: Splitting the bank into two pieces.

Citigroup, after suffering a loss of $8.29 billion, its fifth straight quarterly deficit, is reorganizing into Citicorp and Citi Holdings. The first will focus on traditional banking around the world, while the second will hold the company's riskier assets and tougher-to-manage ventures.

CEO Vikram Pandit's move should reduce operating costs and allow Citigroup to sell or spin off the Citi Holdings assets to raise cash. It also reveals the company's growing focus on back-to-basics lending and deposit-gathering, and dismantles the “financial supermarket” created a decade ago.

But investors, stung by years of instability at the company, were wary about cheering the move. Whether it marks the start of a recovery or a massive fire-sale depends on some unpredictable factors, like the economy, the market, and the government.

”We are looking at a liquidation here,” said Christopher Whalen, managing director of Institutional Risk Analytics. Citigroup doesn't appear to need extra government funding right now, he said, but a best-case scenario for the company is a “managed, orderly sale process.”

Citigroup still has some major weaknesses.

One is simply the dismal economy. The company expects loan losses to worsen, particularly in areas like credit cards.

”There are some things you can influence, but there are environmental factors,” said Chief Financial Officer Gary Crittenden. He said the rising unemployment rate might not peak until mid-2010.

The bank's results Friday showed that credit deterioration was severe in the fourth quarter, from North America to Europe to Latin America to Asia. Even if Citigroup separates its “bad” assets from its “good” assets, the bank still faces strong headwinds.

Also, Citigroup doesn't have a strong foothold in the U.S. market. It recently lost the opportunity to buy Wachovia Corp.'s U.S. deposit base to Wells Fargo & Co. Meanwhile, JPMorgan Chase & Co.'s deposit base soared after it bought Washington Mutual Inc.

”A major challenge,” said banking consultant Bert Ely, “is how are they going to build a meaningful domestic banking business?”

The new Citicorp will include the retail bank; the corporate and investment bank; the private bank, which serves wealthy individuals; and global transaction services.

Citi Holdings, which will account for $850 billion of Citigroup's $1.95 trillion in assets, will include Citi's asset management and consumer finance segments, including CitiMortgage and CitiFinancial. It will also be in charge of Citi's 49 percent stake in the joint brokerage with Morgan Stanley, a deal that was announced earlier this week, and the pool of about $300 billion in mortgages and other risky assets that the U.S. government agreed to backstop late last year.

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