Tuesday, January 27, 2009

Save Citi, Why?

"The great unwind of Citigroup's financial supermarket has begun. In the face of $10 billion in losses in the latest quarter, and with its stock at a 16-year low, Citi has struck a deal on Tuesday to effectively sell control of its Smith Barney brokerage unit to Morgan Stanley. ... Citibank, founded as City Bank of New York in 1812, has been beat up before. ... To justify the 1981 merger of Shearson brokerage with American Express, [Sandy Weill] claimed in a Time magazine interview that 'a typical consumer may have a stockbroker in Claifornia, a banker in New York, an insurance agent in Maryland and a real estate agent jetting back and forth from Chicago to Boston.' It's an old Wall Street ploy--pitch a dream and use the premium valuation to do deals. ... Were there any real synergies from Citibank's one-stop shop? I doubt it. It failed because internal compensation incentives mainly stressed units, not the whole, the downside of all behemoths. ... Each segment's profits became suspect as Fed Chairman Alan Greenspan lowered short-term rates to 1% in November 2002. While a boon for banks who borrow short and lend long, those pesky long-term rates stayed low, as the Chinese kept buying 10- and 30-year Treasurys. ... Normally, when a bank sees smaller returns on investment, it stops investing, or at least slows down and lowers its equty until better returns are avaliable. Others did. But this was Citigroup, which never sleeps, where money lives, and the bank DNA was watered down. Instead of reining in, those in charge went for it. ... You could borrow at 2% and get 4%-6%-8% yields. Who could turn this down? Leverage of 20 to 1 or even 30 to 1 was used to buy this tuff. Shareholders might have balked at so much leverage. Citi, unlike other big U.S. banks, kept this stuff off its balance sheet in so-called conduits or SIVs (structured investment vehicles). This is how Citigroup grew its earnings. ... There was an unwritten of 'implicit obligation' for Citigroup to take the SIVs back onto its balance sheet in the unlikely event that something went wrong. Well it did. the SIVs collapsed when short-term financing dried up, and are now on Citi's balance sheet", my emphasis, Andy Kessler (AK) at the WSJ, 16 January 2009.

"For his doctoral thesis at Columbia University in the 1980s, Vikram Pandit tackled a complex economic problem involving asset pricing. His academic advisers told him it would be impossible to unravel. They were right. He never solved the problem. ... Citigroup also is expected to detail the downsizing strategy aimed at dismantling pieces of the financial supermarket that Mr. Pandit repeatedly defended even as the credit crisis and recession overwhelmed his efforts to tackle problems haunting the company long before he arrived. Mr. Pandit hasn't said publicly what changed his mind. ... On Nov. 17, Mr. Pandit touted the company's prospects in an empoyeee meeting. That evening, he boarded a Citigroup jet for a one-day trip to Brazil. Some employees were surprised that he didn't cancel the trip. ... At a meeting in Sao Paulo, an employee asked Mr. Pandit whether the U.S. government might have to intervene to prevent Citigroup from unraveling. Mr. Pandit said no. ... The next day, Mr. Pandit held a conference call with about 3,000 executives. He lashed out at 'fear-mongering' by short-sellers and rivals. But he defended the company's health and structure. 'This is a fantastic business model,' Mr. Pandit said", my emphasis David Enrich at the WSJ, 16 January 2009.

"Sheila Bair, chairwoman of the [FDIC], recently tried to describe how this would work: 'The aggregator bank would buy the assets at fair value. But what does 'fair value' mean? In my example, Gothamgroup is insolvent because the $400 billion of toxic waste on its books is actually worth only $200 billion. The only way a government purchase of that toxic waste can make Gotham solvent again is if the government pays much more than private buyers are willing to offer. ... But should the government be in the business of declaring it knows better than the market what assets are worth? And is it really likely that paying 'fair value,' whatever that means, would be enought to make Gotham solvent again? What I suspect is that policy makers--possibly without realizing it--are gearing up to attempt a bait-and-switch: a policy that looks like the cleanup of the savings and loans, but in practice amounts to making huge gifts to bank shareholders at taxpayer expense, disguised as 'fair value' purchases of toxic assets.", my emphasis, Paul Krugman (PK) at the Houston Chronicle, 21 January 2009.

I agree with AK, "bad management" killed Citi. Including bad accounting. See my 6 February, 24 June, 17 July, 23 November 2008 posts. The Feds should kill this monster.

Pandit is either a criminal or a fool. Either way, he should be exited and told to return his $165 million "signing bonus". Citigroup's controller's office needs a thorough house cleaning. Pandit is right, Citigroup has a "fantastic business model" for him. It gave him $165 million for nothing. Is it possible, I an outsider, 2,000 miles from New York, knows more about what ails Citigroup than its CEO?

Uncle Sam would deceive the public? Say it ain't so, Joe. I go PK one better, why do we let the government declare it knows what interest rates are appropriate? Kill the Fed!

http://skepticaltexascpa.blogspot.com/2008/02/treasury-and-banks.html.

http://skepticaltexascpa.blogspot.com/2008/06/citis-800-million-man.html.

http://skepticaltexascpa.blogspot.com/2008/07/schwartzman-and-mcteer-on-accounting.html.

http://skepticaltexascpa.blogspot.com/2008/11/bank-accounting.html.

3 comments:

Anonymous said...

Ha ha...

Now they want to give banks "certificates of capital" in exchange for corrupt assets at inflated prices...

Bring on the wheelbarrows...

Printfaster... new print project coming up...

Oh and Citi... what a pile of crap... they are a leading indicator of systemic nonsense...

Junior said...

Someone should get a PR team on this immediately to improve Citi's public image.

How about "Citigroup: Revolutionizing Financial Incest Since 1812"

?

works for me. Might as well call 'em out for what they are. Thugs armed with the worst possible weapon - the U.S. government.

Anonymous said...

Junior... bravo...

A career at Burson-Marsteller awaits you...