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.
ripper
i hope your right about wells fargo but don’t they have a mortgage product from wacovia where for the next 7-12 years they can have negative amortization on “good loans” which
if you had to take the write down like a regular mortgage wells would be out of capital?
Isn’t the purpose of a corporation ultimately to benefit the shareholders? It looks more and more to me these institutions are simply turning into money making machines for top management. One can blame the boards, the regulators, and others but bottom line is the top management is smart enough to have figured out how to co opt the boards, and either work around the regulators or take advantage of whatever the current political environment which hinders the regulators. The government needs to really sit up and take notice of what is happening. They have found the magic button in which to hit these guys where it counts. That is in their personal pocket book. Looks to me like a regulatory process that can link social ( or at least shareholder ) responsibility to management pay would be a successful strategy. I don’t think the government can figure out quickly enough what these folks are doing to produce adequate safeguards. Govt does not work that quickly and is simply treating the symptoms ( process ). Go after the disease ( personal financial gain at the expense of all others ).
Jim, you’ve missed the point of this whole sorry affair! I don’t like the prospects of a financial collapse…who does? I’m glad Citi and others are paying “us” back! Who is the best at regulating banks or any other business for that matter? How about the shareholders? If we’ve learned anything this past year, it’s that regulators and those that oversee them are inept! Enter, the shareholder; that pesky group that can demand the “powers that be” place their worthless heads on a platter.
A “mountain or molehill” of troubled assets reduced to something “less threatening”? Ha! Pay us our money back! What about the next commercial real estate bubble? Shareholders, now’s your chance to demand responsible business ownership from molehills to bonuses! The government should stay out of running things they know nothing about…from cars to banks…our current group of congress folk can’t run themselves. I could care less about the exec pay packages and bonuses…so long as “I” (we) don’t have to foot the bill! That’s a shareholder issue. Insist that regulators regulate; If they choose to turn a blind eye, fire them. Replace them with those who are good at regulating and insist they do their jobs. Now would be a good time for a regulatory check-up, shareholders asking hard questions and the rest of us expecting a higher level of business acumen…we are after all, customers of these institutions.
What really burns my chops is that if you look at what these “banks” are socking away for bonuses you see that it about as much as the government is asking them to increase in capital! So they are basically saying we are so profitable that we can hand out money right and left, but we need to borrow to get the money to run our business “properly”!
I think and hope I’m right by saying that Wells Fargo is doing ok. Here in Charlotte they are keeping there 4 huge buildings. However they are not using the 5th building ( a 52 story just completed). Jim thank you for the incite on citigroup, I did laugh when I heard that news.
With Larry Summers and Tim Geithner at the helm, I would not expect otherwise. Am I being too political?
http://www.pbs.org/wgbh/pages/frontline/meltdown/view/
You could probably write the same article about BofA(bought Countrywide and Lehman) and Wells Fargo(bought Wachovia). Both banks built their empires on volcanoes(although not as big a volcano as Citi did).
JP Morgan has their own time bomb they’re sitting on…they’re short 40% of the entire Comex Silver market or 200 million ounces. I can’t wait for that to blow up in their face.
Pandit must go!
Thank you Jim! The other night, Jim Cramer was singing Citigroup’s praises. I was more than sceptical (moreso than I normally am with Cramer’s stock picks), mostly because I just don’t see any significant growth prospects for most of the financial sector, but especially among the largest TARP banks. You just showed why I was right to be sceptical. I hope the rest of “Cramerica” reads this post.