To be honest, I’m not quite sure how to read this Wall Street Journal piece, since this is a spat between two parties, with a “he said, she said” quality to it. However, the title, “Citigroup Chafes Under U.S. Overseers:” suggests a bias in favor of Citigroup.”Overseers” is a weak word, suggesting Uncle Sam really doesn’t have legitimate authority to take the actions it is demanding.
But that assumes both viewpoints are equally legitimate, when the case can be made that they aren’t. Poor abused Citigroup is unhappy that the government is trying to leash and collar the behemoth company. They somehow seem unable to process the fact that if they had done the same lousy job with a smaller institution, it would already have been seized by the FDIC and put in to receivership.
This viewpoint is not an exaggeration of the facts on the ground. As former bank regulator William Black points out in “Why Is Geithner Continuing Paulson’s Policy of Violating the Law?“:
Whatever happened to the law (Title 12, Sec. 1831o) mandating that banking regulators take “prompt corrective action” to resolve any troubled bank? The law mandates that the administration place troubled banks, well before they become insolvent, in receivership, appoint competent managers, and restrain senior executive compensation (i.e., no bonuses and no raises may be paid to them). The law does not provide that the taxpayers are to bail out troubled banks.
The other bit of bias is in how the piece characterizes the relationship. It mentions the 7.8% equity state the government holds, but fails to acknowledge the additional guarantees of what amounts to $250 billion of loans (once you parse out first losses and loss sharing arrangements). The story also depicts a possible effort to break up the bank as politically motivated, as opposed to something that would make managerial sense. The span of control in the bank is simply too large, and the synergies between many of the businesses are weak to non-existent. Plus every study ever done of banks in the US had found that banks, once they exceed a certain asset size, show a slightly INCREASING cost curve, as in their costs/revenues rise. Big banks are not more efficient; the evidence is that they become a tad less efficient the bigger they get.
So why were banks so keen to consolidate? Might have to do with the fact that CEO pay is (was) correlated with asset size of bank.
From the Wall Street Journal:
Citigroup executives are attempting to strike a seemingly impossible balance: Run the business in a way that will please their new federal masters, but also help the bank rebound from $28 billion in losses over the past five quarters.
Yves here. That is another company-serving bit of spin. Does anyone think, with pretty much all advanced economies contracting and deleveraging likely to continue, that there are great profit opportunities out there?
The “help the bank rebound” bit makes it sounds as if the Citi crowd is really trying hard to do the right thing, when looking high returns in a market like this is what economist Tom Ferguson calls a “Hail Mary pass”: taking risk with taxpayer money.
Remember the original terms of the TARP funds: preferred stock with a 5% coupon for five years, then the dividend rate increases. One could argue that for a not-so-large loan, that might be a good incentive (I don’t subscribe to that view), but the fact is it gives the bank reason to gamble. And the more they’ve borrowed, the higher the desperation level (until the debt reaches a level where it is clear, like AIG, that there is no way out). Back to the piece:
Former federal officials have dubbed Citigroup the “Death Star,” comparing the bank’s threat to the financial system with the planet-destroying super weapon in the “Star Wars” movies. Privately, in the words of one official, they regard the banking giant as “unmanageable.”
Complicating the issue is the government’s back-and-forth between bouts of micromanaging the banking giant and periods of ignoring it. In trying to be neither an active nor a passive investor, the U.S. is directing the business without a firm strategy or particular expertise.
Yves here. That sounds completely plausible. But if you have ambiguity in the relationship, Citi could have used that to help define it, by being very pro active on certain axes (of course, ones that suited them) and hope that the display of seeming good faith (and keeping supervisory personnel busy) would buy them slack on other fronts. Back to the piece:
Central to the confusion: There’s no one individual or entity in charge of the federal oversight of Citigroup.
That’s because banks like Citigroup are regulated by a patchwork of agencies including the Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. The Treasury Department also has oversight because it’s the one that is injecting government capital into the banks. And members of Congress, who initially approved all that money, have their own stake in how things play out. All these interested parties have been handing Citigroup a jumble of sometimes conflicting orders, advice and critiques.
Officials with the Fed, for instance, informed Citigroup executives they have “observer rights” that entitle them to participate in the bank’s board meetings. Though the government hasn’t joined in so far, the fact that it might has led some Citigroup executives to complain privately that the U.S. now has “unlimited power” over the bank. One person close to the company compared the government’s role to the sword of Damocles, an ever-present evil hanging over their heads.
At a minimum, the powers that be should be getting minutes of board meetings. But the sword of Damocles is par for the Citibankers not getting it. They are wards of the state, yet want the rights of a private concern. Back to the article:
But even as the government has ensured Citigroup’s survival for now, bank executives say they have been left to read tea leaves about how to implement federal directives.
U.S. officials say Citigroup’s problems are wide-ranging, presenting issues for various governmental agencies — all of which are also engaged in handling problems involving other banks and the economy. Some officials say they have given Citigroup executives broad outlines of what they’d like the company to do. They say thus far it’s not been the government’s position to give Citigroup a specific playbook about how to put directives in place. The current talks for federal assistance, however, could result in more direct orders on how Citigroup should proceed.
Without having more detail, it is hard to know what to make of this. The Citi staffers are unhappy that the government is giving orders, and then unhappy that the orders are vague? The various government officials may indeed be being vague to try to avoid being overdirective.
But if Citibank isn’t sure what will fly, why not write a plan or program back as a forcing device? The fact that this wasn’t done makes me think the complaints are mere kvetching. There is more that Citi could do to make this messy arrangement less ambiguous, and they don’t appear to be taking those steps. This bit argues otherwise:
In recent weeks, Citigroup executives have reached out to various government officials for guidance — with little to show for their effort. Last week, Mr. Pandit met with Lawrence Summers, the government’s chief economic adviser, in the White House’s West Wing. Mr. Summers made clear that he wouldn’t discuss Citigroup specifically, and Mr. Pandit emerged from the meeting with no better idea of where the Obama administration stands in managing ties with the big bank.
Yves here. I would not have recommended a meeting of that sort without doing groundwork. And how involved is Summers with Citi on a day-to-day basis anyhow? It is impossible to tell, but it give the impression that Pandit walked in trying to get an answer from Summers, who is probably unfamiliar with the details anyhow even if he had been inclined to answer? An approach more along the lines of “we’d like to have a productive relationship, here is our impression of where things are working well, here are areas where we have a lot of uncertainty. Should I look to you to help work this out? If not, how do you suggest I proceed?” Now that may have been what happened, but the article does not give that impression.
And then we get this:
Amid the anxiety, Edward Kelly, a senior investment banker and one of Mr. Pandit’s closest confidants, used his personal misfortune to ease tension within Citigroup. After a trying visit to Washington to brief regulators, Mr. Kelly returned to his Baltimore home tired — and soon woke up to a screeching smoke alarm. Finding flames in his home office and working to halt the fire from spreading, Mr. Kelly burned his right hand and arm so badly that doctors kept him home for several days to prevent infection.
In a flurry of phone calls while he was home recuperating, Mr. Kelly joked to colleagues that he was putting out fires at both his home and his company.
What does this have to do with the thrust of the article? And we have this:
Communications from government officials, meanwhile, have been spotty. Friday afternoon, after the bank’s shares had closed the week at an 18-year low of $1.95, top executives reached out to the Office of the Comptroller of the Currency and the New York Fed. They wanted to discuss Citigroup’s proposal to substantially enlarge the government’s ownership stake. The conversations were constructive, but they couldn’t progress much until they heard from Treasury, the government arm that had invested in Citigroup’s preferred stock and therefore would need to bless converting that stake into common shares.
Through the weekend, Citigroup didn’t hear from Treasury officials. Then on Sunday evening, Mr. Pandit’s phone rang. It was Treasury Secretary Timothy Geithner, calling with a message: “I think we just need to do something.” Mr. Geithner was short on specifics, but said he was ready to entertain Citigroup’s idea of converting a big chunk of the government’s preferred stock into common shares.
Yves again. Citi wanted a weekend special. Team Obama has a lot on its plate (auto bailout, G20, need to flesh out details of housing plan). As we indicated at the time. we did NOT see Citi getting a deal over the weekend. Why? With all the government backstopping, a tanking share price isn’t the big deal it once was. In the absence of a depositor or counterparty run, this indeed COULD wait a few days, But Citigroup characterizes it as poor communications. Heck, they were the ones who called in a panic.
And we have this:
Citigroup’s guessing game also extended to congressional hearings held earlier this month. Legislators pounded Mr. Pandit and other bank executives for putting their institutions in jeopardy. As Mr. Pandit prepared for the hearings, some Citigroup executives urged him to make two concessions: apologizing for the corporate-jet fiasco and agreeing not to get paid until Citigroup returns to profitability. Others argued that such conciliatory gestures would validate unfair criticisms of the company. Mr. Pandit ultimately made both concessions at the hearing.
Yves again. Huh? A guessing game? Lee Iaccoa knew exactly what to do when he asked for a bailout for Chrysler (merely a Federal guarantee of its bonds). He took a $1 salary until the debt was repaid. The “guessing game” monicker makes it sounds like its the government’s fault that Pandit was getting conflicting advice from his team. No, he was merely getting bad advice from some that he needed to reject, as he did. Anyone who didn’t live in the Wall Street entitlement bubble would have known better.
There is a good deal more in the piece, but you get the point. That does NOT mean the Administration is handling Citigroup well either. It’s a new team dealing with an unprecedented situation. But my reading of this article says it should be taken with a fistful of salt.