Monday, July 7, 2008

Citi's $800 Million Man Speaks

"If there is any consolation in the latest credit crisis it is the vigorous global debate now unfolding on regulatory reform ... In my view, three principles in particular--transparency, a level playing field and systemic oversight--are the essential elements we need to consider as we look how best to frame these reform discussions. The goal of the debate should be to advance global coordination among central banks, regulators and financial institutions in ways that increase our understanding and ability to manage systemic risk. ... Yet transparency is difficult to achieve. It requires continual vigilance to standardize products when appropriate, introducing them to exchanges, creating counterparty clearinghouses and settlement systems and, finally, amassing accurate data on prices and transactions volumes. Transparency must also include public disclosures to investors about pertinent risk and financial information that give the market a chance to make informed judgments. ... Rating agencies, independent monitoring entities, and risk bureaus are all important if accredited correctly. Global coherence and consistency on accounting standards can also help, including clear guidelines regarding off-balance sheet instruments. ... Accounting based on a mark-to-model has been severly tested by unobservable inputs intended to estimate the market. ... This raises an important question: Are there alternative accounting approaches we should apply, particularly in dysfunctional markets? ... The third suggested principle is a need for oversight for systemically significant institutions. We cannot and should not legislate away an institution's ability to lose shareholders' money. But none should have the right to impose externalities on the rest of the financial system. Does an institution warehouse risk? Does it borrow short and lend long? Does it leverage its investments? Once a company gets large enough to impact the financial system, shouldn't it operate under the same systemic risk umbrella in terms of capital, liquidity and transparency? ... [W]e welcome a more robust regulatory architecture that embraces standards broad and clear enough to apply to all participants", my emphasis, Vikram Pandit (VP) at the WSJ, 27 June 2008.

Wow, Citigroup's $800 million man asks us to protect "C". From who? Hey VP, did "C" get good value for your $800 million rolodex? Show some love, take your $165 million and buy "C" with it; at $17.34, that's 9.5 million shares. Keep the fees in house, let Smith Barney handle it. "Advance global coordination"? Does that mean: All central banks should inflate at the same rate to bail out "C" and it competitors? What accounting methods do you like, other than: report whatever you want? What makes a market "dysfunctional"? That "C" bought into it and it crashed? Will you apologize to Craig Gile, my 25 June 2008 post and give him say $10 million of your own money? I don't think QSPE accounting is difficult to apply, see my 6 February 2008 post. If "C" can't figure out what to do, call IA. For a (large) fee, I'll tell you. Why does "C" need systemic oversight anyway? What are you paid for? VP warns against borrowing short and lending long. Brilliant. My idea for TBTF companies: bust 'em up, so no deposit-taking institution holds assets over 1% of total US financial institution assets. As to imposing externalities on the rest of the financial system, make each deposit taking institution executive liable for three times his last three years compensation should the institution fail. Personally liable. Uninsurably liable. Don't want the liability, don't take the job. Bert Ely, my 10 June 2008 post, has some good ideas. Besides, there is no list of TBTF banks, see my 12 December 2007 post. The Fed said so. Does this mean VP wants "C" included in the (nonexistent) list when it is ready?

VP shows confidence in "C". His 24 January 2008 SEC Form 4 shows he was awarded 1,094,948 shares under "C's" 1999 Stock Incentive Plan, for $0. VP also got 3,000,000 shares under option. "C" was worth $24.40 when VP's options were granted, having fallen $7.06 or 29% since then. Howaboudit, VP, take some of that $100 million recently freed up and buy some "C" in the open market, say at least a million shares. Show "C" some love.

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