Wednesday, September 3, 2008

Charles Bluhdorn Returns

"Name nearly any scandal, incompetence or hiccup suffered by the financial industry in the past decade or so, and the chances are Citigroup will have been at its forefront. ... Concerns over its judgment haven't been assuaged by Citigroup's recent trouble with auction-rate securities, leading to its agreement last week to buy back $7.3 billion of them. It isn't alone in that, nor is it anywhere near as endangered as some other U.S. banks, but is sice makes it a particular worry. ... This 'too big to fail' doctrine, however, potentially encourages a risk-taking culture unchecked by the fear that the institution will bear the full force of the market's wrath for any transgressions. Employees may additionally feel emboldened by Citigroup's size, believing it can absorb losses is a way smaller rivals cannot", WSJ, 12 August 2008.

"Swiss banking giant UBS AG has for years trumpeted the idea that melding an aggressive investment bank and wealthy-client private bank would create a revenue machine On Tuesday, UBS conceded it had all been a bad idea. ... Gone are some of the special privileges that allowed the investment bank to borrow from other parts of UBS at low cost. ... The moves are another blow to the cause of 'universal banking,' a concept that came in vogue during the 1990s positing that banks could cram a range of different products and services under one, cheaply-funded, banking umbrella. The idea has crumbled amid the credit-markets crunch, leaving the likes of Citigroup and UBS grasping for new directions. ... Going forward, the investment bank will have to borrow at market rates instead of being subsidized by UBS's wealth-mangement business. Outgoing finance chief Marco Suter said that could increase the unit's borrowing costs by as much as 0.09 percentage point. ... UBS blamed the investment bank's access to low-cost internal funding as a factor is leading it to invest in securities underpinned by mortgage loans to U.S. borrowers with shaky credit-investments that have soured and cost the bank ten of billions in write-downs", Carrick Mollenkamp and Katharina Bart (M&B) at the WSJ, 13 August 2008.

Bust up Citigroup. Now. Yes, Vikram Pandit, I mean you. Do it.

M&B check your arithmetic, 9 basis points! I don't believe it. Can anyone at UBS compute the "cost of capital"? If not call Joel Stern, MBA Chicago, 1964, at Stern-Stewart, he'll teach you. In the 1960s conglomerators like Charles Bluhdorn ran Gulf & Western in part on cross-subsidization of different businesses. It didn't work then, it doesn't work now. Having audited a few banks, one thing that impressed me about them was their poor cost accounting. The typical bank hasn't a clue what it does profitably.

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