Citigroup at the Fence

"Citigroup Inc. may need to raise as much as $10 billion in new capital, according to people familiar with the matter, as the government continues negotiations with banks over the results of its so-called stress tests. The bank, like many others, is negotiating with the [Fed] and may need less if regulators accept the bank's arguments about its financial health, these people say. ... The discussions stem from the tests being run by the Fed and the Treasury to assess the health of the country's 19 largest banks. Those results will be released Thursday, later than initially planned. ... For certain banks who can't raise new funds from private investors, federal regulators are allowing banks to consider giving the government stakes in their common equity, people familiar with the matter say. ... The overall goal is to get out of the investments as quickly as is possible and minimize government intervention in banks' operations. The outcome of the stress tests could play a major role in shaping the next phase of the US government's intervention in the nation's ravaged financial system. After the results, banks will have 30 days to give the government a plan and six months to put it into effect. The banks are expected to reveal their plans next week. ... In fact, the government has said it would not allow any of the 19 banks undergoing the test to fail. ... The stress tests are a central part of the Obama administration's effort to restore confidence in the US banking system. They have met resistance from top bank executives who complain the government's estimates are wrong and too theoretical. ... Banks have been scrambling over the past week to refute the Fed's preliminary conclusions. Bankers say those negotiations are part of the reason the government has pushed back its annoucement of the results", my emphasis, David Enrich and Damian Paletta (E&P) at the WSJ, 2 May 2009.

"A Citigroup spokeswoman said the bank had no comment on the Journal story. ... Regulators are trying to make information public without roiling financial markets. If they provide too much detail, banks singled out as needing more capital could be punished by investors. Too little detail could undermine the process' credibility, damaging efforts to shore up banks", Jeannine Aversa and Daniel Wagner at the Houston Chronicle, 2 May 2009.

"If Citi isn't required to raise capital, I doubt there will be much confidence in the stress test results. I was expecting a much higher number than $10 billion", Calculated Risk, 1 May 2009, link: http://www.calculatedriskblog.com/2009/05/wsj-citi-needs-up-to-10-billion-in.html.

"The latest leak, arriving curiously after the markets closed, is that the Treasury wants Citigroup to raise $10 billion as a result of the famed stress tests, which the bank is fighting tooth and nail. ... On the one hand, the stress tests aren't turning out to be the complete farce that I had thought they might be (my benchmark was whether Citi got off clean while some regional banks, such as Fifth Third, were dinged to validate the process. ... Consider: ... There was no verification of underlying accounting and loan books, not even a teeny bit of sampling. ... I suspect the hope was that Treasury would draw the line is at a place that the banks would look more or less OK, with only minor remedial action required. ... A regulator with any guts would not take backchat from its charges on a determination of safety and soundness. ... So bizarrely, Citi holds a sword of Damocles over the Treasury, as much as AIG does. ... [YS here inserts the confidence 'money quote']. While this may be shorthand, it reveals a preference for optics over substance. The priority should be to assure depositors and investors that banks are sound, not to 'restore confidence', a more nebulous and subjective standard", my emphasis, Yves Smith (YS) at Naked Capitalism, 2 May 2009, link: http://www.nakedcapitalism.com/2009/05/bank-stress-test-dance-of-seven-veils.html.

I had not planned on posting on the "so-called stress tests", calling them a "Kabuki dance" from the outset, disagreeing with YS who called them the "Dance of the Seven Veils". I agree YS, these tests were "choreographed". Did Zimbabwe Ben channel George Balanchine for instructions? Their purpose was not "to assess the health of the country's 19 largest banks", but "to restore confidence in the US banking system". E&P, get on the stick. More skepticism, please. Paraphrasing Mark Antony in Julius Caesar, 3:2:81, "The Fed came to praise the TBTF banks, not to bury them". These tests remind me of Tom Sawyer whitewashing the fence. Or Brer Fox throwing Brer Rabbit into the briar patch found in Uncle Rhemus Tales. "Oh please, anything but subjecting a bank to the stress test", these tests are as threatening as Monty Python's "comfy chair" used by the "Spanish Inquisition" as a torture device.

Investors? Well Mary Schapiro, are the "stress test" results 8-K reportable? If not, why not?

Fighting "tooth and nail"? I doubt it. The "fight" is just more kabuki dance. YS sees the stress tests like I see the PCAOB inspecting CPA firms, i.e., ding a few small CPAs while passing the Big 87654. My criterion for stress test authenticity: would Citi be found to need at least $100 billion? The current number, later negotiated down, was 10% of what I wanted to see. I don't find the lack of "verification" troubling. In theory, KPMG audits Citi, charging it $98 million for various services last year. Supposedly Citi's books were verified. Right. "Minor remedial action", right on. "A preference for optics over substance", yes maam. I love that phrase.