I think Citigroup (C) just got off easy. If it were up to me, I wouldn’t have let the company repay its government loans so it can pretend to be just a regular bank again. Not yet. Not by a long shot.
You see there’s still the little problem of the $617 billion in troubled assets that Citigroup (C) stuffed into Citi Holdings. Yes, it would be nice to pretend that these aren’t Citigroup’s problem anymore but it simply isn’t true. And pretending that troubled assets disappear just because a bank says they’re off the balance sheet was critical to turning the bursting of a bubble into a global financial crisis in the first place.
On the surface, it looks like the Obama administration got real tough with Citigroup. But that’s only on the surface.
The government is forcing the bank to raise $17 billion in a stock offering and another $3.5 billion in a sale of tangible equity units, one of those wonderful it’s not equity/it’s not debt “things” that banks love so much right now, to repay $20 billion in government TARP (Troubled Asset Relief Program) loans. The bank wanted to repay at least part of those loans out of cash on hand rather than dilute its stock even further, but the government said No because it wanted Citigroup to raise enough capital to cover the repayment.
Citigroup wanted to get the government out of its business so badly that it agreed to those terms. (Think the bank could have been anxious to escape government restrictions on executive pay? Nah, that couldn’t be a reason.)
I don’t think the government was tough enough.
Oh, I know that after this offering Citigroup will have a 9% Tier 1 capital ratio. (That’s measure of how much capital a bank has in comparison to its assets such as loans and the like.) That number is higher than the 8.2% at JPMorgan Chase (JPM).
But JPMorgan Chase isn’t sitting on a $617 billion time bomb that could still go off. And Citigroup is.
As part of his plan to rescue and reorganize the bank, CEO Vikram Pandit split the bank into two groups. There’s Citicorp, the unit that contains all the businesses that Pandit wants the bank to hold onto. And there’s Citi Holdings the unit that holds all the unprofitable businesses that Pandit wants to exit and its most troubled loans and securities.
Citi Holdings has sold off about $100 billion in assets and businesses since it was set up. But the unit still had $617 billion in assets as of September 30. And about $182 billion of that is made up of Citigroup’s riskiest mortgages, auto loans, commercial real estate loans, and credit-card loans. (The rest is made up of businesses that include CitiMortgages and the Primerica life-insurance unit.)
The operating performance of the two units has been very different this year. Citicorp produced income of $13 billion from continuing operations in the first nine months of 2009. Citi Holdings showed a loss of $6.8 billion in that same period.
But it’s not the operating results that are the problem. Loan losses are still rising as consumers and business fall further behind on their loans as unemployment remains above 10% and growth is just beginning to pick up in the U.S. economy as a whole. Although total loan charge-offs for Citigroup fell in the third quarter, loans 90-days past due climbed to 4.7% from 4.2% in the second quarter.
If the economy is weaker than expected, if unemployment stays stubbornly high, total charge offs could start to rise again. That would eat into Citigroup’s capital. If enough loans went bad, the bank could be forced back into the capital markets to raise capital at exactly the moment when the markets don’t want to lend to banks.
And that’s what got us into this mess to begin with, isn’t it?
At the least Citigroup should have been told to wait until it had reduced the mountain of troubled assets at Citi Holdings to something a little less threatening. A molehill sounds about right.