July 29 (Bloomberg) -- Citigroup Inc. will probably write down the value of collateralized debt obligations by $8 billion in the third quarter, Deutsche Bank AG analyst Mike Mayo said, after Merrill Lynch & Co. announced it will sell CDO holdings for 22 cents on the dollar.

Citigroup values the securities, mortgage-related bonds at the heart of the credit crisis, at 53 cents, Mayo wrote in a report to clients today. Citigroup has $22.5 billion of CDOs and it may have another $7 billion in writedowns to come, Mayo said. That could force it to raise more money, as Merrill did today, he said.

``The decision about raising new capital may be closer than we previously thought,'' Mayo said in the report. He expects the bank to write down an additional $1 billion because of its $2 billion in exposure to so-called monoline insurance companies.

The additional writedowns at Citigroup mean the bank probably will report a third-quarter loss of 59 cents a share and a full-year loss of 80 cents, said Mayo, who has a ``hold'' rating on the stock. He previously estimated the New York-based bank, the biggest in the U.S. by assets, would report a loss of 66 cents in 2008.

Citigroup rose $1.02, or 5.9 percent, to $18.45 at 4:16 p.m. in New York Stock Exchange composite trading. It has dropped 37 percent this year.

`Higher Credit Quality'

Christina Pretto, a Citigroup spokeswoman, declined to comment.

About $24 billion of Citigroup's $39.5 billion of mortgage- related CDO positions on June 30 stemmed from agreements to take over asset-backed commercial paper, according to a presentation this month posted on Citigroup's Web site. The securities, carried at 61 cents on the dollar, are ``of higher credit quality'' because they were created mostly between 2003 and 2005, Chief Financial Officer Gary Crittenden said on a July 18 conference call.

The other positions, which were mostly issued later after home prices stopped surging and as lending standards weakened, were marked to an average of 23 cents on the dollar, according to the presentation. Merrill said yesterday that it would retain CDOs mostly from ``2005 and earlier'' valued at $8.8 billion, while selling the other ones.

Merrill is taking a $4.4 billion loss on the sale of $11 billion of CDOs.

`Good News'

``The good news is that the actual sales can give confidence that Merrill is finally selling assets rather than merely marking them to market,'' Mayo said.

Mayo estimates that Merrill, the third-largest U.S. securities firm, will report a full-year loss of $10.95 a share, compared with his earlier prediction of a $5.80 loss. Oppenheimer & Co. analyst Meredith Whitney estimates the company will report a loss of $10.50 in 2008.

UBS AG analyst Glenn Schorr estimates Merrill will report a full-year loss of $11.36 a share because of ``significant dilution'' from the plan to raise capital by selling about $8.5 billion of stock. Schorr has a ``neutral'' rating on Merrill.

``While we don't think Merrill's announcement necessarily implies a 40 percent writedown ($7.2 billion) for Citi, directionally we think investors should expect further incremental writedowns in coming quarters,'' Schorr wrote in a report to clients today.

Lehman Brothers Holdings Inc., the fourth-biggest U.S. securities firm, may have to sell ``significant assets'' to guard against further losses from its $65 billion of mortgage and real estate holdings, Schorr said.

To contact the reporter on this story: Adam Haigh in London at ahaigh1@bloomberg.net.

Last Updated: July 29, 2008 17:44 EDT