FDIC Keen to Designate Citi a Problem Bank, Change Management

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The Wall Street Journal has an eyepopping item tonight:

The Federal Deposit Insurance Corp. is pushing for a shake-up of Citigroup Inc.’s top management, imperiling Chief Executive Vikram Pandit…

The FDIC, under Chairman Sheila Bair, also recently pressed a fellow regulator to lower the government’s confidential ranking of Citi’s health — a change that would let regulators control the firm more tightly.

The FDIC’s willingness to take an increasingly tough position toward one of the nation’s largest and most troubled financial institutions is setting up a bitter clash between regulators — some of whom disagree with the FDIC’s position — and between the FDIC and Citigroup, whose officials have argued that Ms. Bair is overstepping her authority.

Yves here, Not being privy to details (and I see no corresponding story at the New York Times to allow for triangulation), inquiring minds wonder whether the Journal has been spun a tad, since the piece also makes clear that the bank believes Bair is overreaching.

Look at the logical relationship it sets up: Bair wants to oust some Citi top brass, ergo she wants to lower Citi’s score at the FDIC.

Frankly, it seems more plausible the reverse is what is happening: Bair thinks Citi deserves a lower ranking, and given how long Citi has been on the ropes, a management change is in order.

Now Bair has been argued to have been trigger happy on WaMu, taking over the bank and cramming down bondholders, with the result that JP Morgan looks to have gotten a very nice deal. However, readers have said a run was starting on WaMu. Given how nervous despositors were then, the FDIC may have been afraid of a run as WaMu morphing into something worse. I know people (savvy, not the survivalist types) who were pulling meaningful amounts of currency out of banks in the September-October period out of fear of a possible bank holiday. So I don’t think the case is as clear as the Monday morning quarterbacks make it out to be. A run on WaMu could have created a great deal of collateral damage.

The reason I have some sympathy for the FDIC is that the US has violated the best practices playbook for dealing with troubled banks. If they get significant contributions from the state, the board and top brass go. The authorities install new management and set broad guidelines, sometimes timetables for particular objectives to be met, but do not meddle on a day-to-day basis.

Given Citi’s globe spanning operation, and its nearly $1 trillion in maybe-not-so-off balance sheet exposures (Advanta’s credit card woes are instructive here) which were enough to mobilize Paulson to try to solve them via the MLEC (our take was the MLEC was mainly about salvaging Citi, with far and away the largest SIV exposures in aggregate), it isn’t hard to imagine that it is still in lousy shape. And if Bair is right, that it really does deserve lower marks from its regulators, her agitating is not out of line. Indeed, she might have waited (or been urged to wait) until equity and credit markets were on a good enough footing so that unfavorable news about Citi would not have disproportionate impact.

In fairness, the article actually comes out and says (admittedly a fair way into the story) that Citi is in worse shape than other big banks. But it spends even more time on the turf war charge, which makes it sound as if the FDIC is significantly, if not primarily motivated by the desire to make a land grab.

Back to the story:

“The FDIC is our tertiary regulator,” behind the Office of the Comptroller of the Currency and the Federal Reserve, said Ned Kelly, Citigroup’s chief financial officer…

Still, some officials across the government are frustrated at the company’s pace of change. FDIC officials in particular are concerned about the lack of senior executives with experience in commercial banking. Mr. Pandit himself comes from an investment-banking background, but most of the bank’s current problems stem from troubled consumer loans.

Federal officials have reached out to Jerry Grundhofer, the former U.S. Bancorp CEO who recently joined Citigroup’s board, to gauge his interest in the top job…

The FDIC’s aggressive stance comes just ahead of the Obama administration’s big revamp of financial oversight, which is expected in mid-June. Several regulators, including the FDIC, are hoping to win additional powers, and some may end up losing authority.

The FDIC’s influence has grown in the past year because of Ms. Bair’s willingness to challenge her peers, as well as her agency’s central role responding to the financial crisis. Ms. Bair warned about the housing crisis before many of her colleagues.

The FDIC traditionally hasn’t been nearly as assertive in management of a large firm. But Ms. Bair’s agency is heavily exposed to Citigroup. The FDIC is helping finance a roughly $300 billion loss-sharing agreement with the company.

It also insures many of Citigroup’s U.S. bank deposits. Citigroup has issued nearly $40 billion in FDIC-backed debt since December…

Since late 2007, Citigroup has had more than $50 billion in write-downs and loan defaults. It’s in substantially worse shape than many of its peers, many of whom have been able to raise billions of dollars in fresh capital recently.

The Fed, in its recent stress tests of the nation’s 19 largest banks, estimated that Citigroup could face up to $104.7 billion in loan losses through 2010 under the government’s worst-case economic scenario. The test found that Citigroup could face nearly $20 billion in losses in its huge credit-card portfolio, which is suffering from rising defaults.

However, the Fed’s conclusion that Citigroup needed to beef up its capital by only $5.5 billion to withstand a deteriorating economic environment surprised many investors and analysts, who feared the company faced a much steeper shortfall….

In private conversations with other regulators, FDIC officials have argued the government should be tougher on Citigroup. In what is becoming a classic Washington turf battle, the Comptroller of the Currency has countered that replacing the bank’s management could be too disruptive. The agency, which oversees Citigroup’s national bank division, believes Citigroup needs more time to implement its turnaround strategy.

In March, senior officials from the FDIC and Comptoller sparred over the confidential financial-health rating the government assigns to the company’s Citibank unit, people familiar with the matter said. The FDIC wanted the rating lowered, these people say. Banks rated a 4 or 5, on a scale of 1 to 5, are deemed “problem banks,” which means they’re at greater risk of failure.

Government officials decided to keep Citigroup off the “problem” list at the end of March, which became clear after the FDIC disclosed that the 305 banks on the anonymous list had a total of only $220 billion in assets, meaning Citi couldn’t be among them.

Still, Citigroup officials believe that the FDIC will push them onto the “problem” list if they don’t remove Mr. Pandit and his team. They fear being on the list could limit Citigroup’s access to federal programs and prompt trading partners and clients to yank business.

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  1. Steve

    I'm mystified about who floated the WSJ story, and why. A bank with a CAMELS rating of 4 or 5 is subject to "or else" supervisory direction — required cap raising, replacement of directors, etc. But the bank has to disclose this (in general terms, not in detail) to investors. And that disclosure can cause a run and problems with counterparties. Which the government wants to avoid with Citi. On the other hand, a 4/5 rating would formalize the kind of oversight that Citi is already getting and chaffing under. But the bats would be in the hands of the OCC (primary regulatory)and the Fed (holding company), not the FDIC.

    I'm one of those observers who has no confidence in Bair's ability to weigh the likely second-order effects of the actions she has proposed. So, maybe this is her idea.

    The question that matters is whether the government's handling of Citi remains an improvisation, with competing views on tactics but without any clear long-term goals.

    The handling to date sort of looks like the Monty Python dead parrot routine. The market says it's dead, the government says it's not.

  2. jerrydenim

    Very interesting development indeed Yves.

    Slightly off topic comment but I was told by a person supposedly in the know that the bulk of Citi's off balance sheet trillion dollar SIV liabilities consisted mainly of junior tranches from their own CDO offerings. (the very worst of the super toxic MBS) The story was they wanted a piece of their 20% interest payments and couldn't resist believing their own lies. Making this story even richer I was told that this nefarious deal with book keeping that would make Manuel Noriega blush had to be signed off on by Citi's regulator the chief of the NY Fed who was at the time, you guessed it: Tim Geithner.

    Can anyone confirm or deny this yarn? If this is true it would put Geithner at the shady epicenter of the decision making that dug Citi into the deepest hole of all the bankrupt Mega banks.

  3. Yves Smith


    Thanks for the input, and good point re source of leak. Maybe Citi figures this is going to get out anyhow, and it trying to put a "Bair out of control" spin on it. And you may be right re her lack of sensitivity to ramifications, but the flip side is the powers that be seem to be hypersensitive to them, to the detriment of doing what needs to be done.


    I had seen that Citi a long time ago that Citi had junior exposures in its SIVs, but no idea it might be that drecky. Wow.

  4. Greg Hall

    Bair has been saying publicly that
    "too big to fail" can't be allowed anymore. She wants to slice and dice Citi. It will be fun to watch her rev up her chain saw.

  5. Richard Smith

    There was $600Bn+ of some kind of MBS in Citi's SIVs. If it really is all CDO equity tranches that were meant to yield 20%, then that's $120Bn per annum of income that just isn't coming in, and the $600Bn of "assets" is long gone.

    Miraculous though off-balance-sheet accounting is, it's hard to see how it could hide black holes of that size for very long.

    Those must surely be somewhere near the top of the range estimates for the size of Citi's OBS problem (ooh, perhaps the other $500Bn of assets aren't worth anything either…).

    If this is anything like the scale of losses Citi will see, and Bair knows it, her trigger-happy behaviour since Sept '08 is immediately explained.

    I'm somewhat suspicious – which has spiralled out of control: a) Citi, or b) the construction of worst case scenarios for Citi's losses?

  6. Richard Kline

    Re: Steve's remark, C and a number of others have been dead parrots for coming on two years now, except they keep scarfing down capital which could be used for something else: zombie parrots. Which stink. We have seen tension amidst Guvmint Reg'laters regarding those who want to play footsie and kissy face with said zombie parrots on the public's nickle, ostensibly 'for fear of the market fallout,' and others who know that thus far the Guvmint has violated all best practices, prudence, and quite possible criminal constraints in order to sting along these zombie parrots which won't walk.

    At some point, perhaps not yet, those who are handmaidens for the financial industry will see the last of their credibility collapse. I'm hoping that that will come sooner rather than later, so that we can get some _real_ reg'laters in there to, well, regulate. Bair may be to a degree insensitive to the consequences of taking down C—but consider the alternative. Does the 'C situation' get _better_ if we wait? Or simply cost more? We had the great story about the world ending when GM transitions through BK to become Specific Motors. That doesn't appear to be impending either. Do those who want Ms. Bair to wait feel like paying indefinitely for C to root up the credit pool? Or are we going to actually try to _solve_ anything, here.

    This remains a solvency crisis. And we really won't even begin to turn a corner on putting the economy back together until we get the worst of these radiating zombies encased in cement and compartmentalized. Let's, fer crissakes, get ON with it.

  7. Steve

    Richard Kline:

    Agree with you on the solvency issue and the fact that time and secrecy haven't worked and that this approach has spared the regulators from making hard and politically dangerous calls.

    Greg Hall:

    Seidman also opposed "too big to fail" but wound up not paying out Bank of New England as he had planned (I was at FDIC at the time). FDIC has extraordinary latitude in performing its cost tests and there can on occasion be a political dimension with the folks on the Hill that is never part of the public record.


    Totally agree about the hypersensitivity thing. We get pure judgement calls without regard to law and regulation in the name of the greater good — including the greater personal good of future former Treasury secretaries and undersecretaries. It's not just the banks that are broken — it's our long-standing pay-to-play system of government.

  8. Richard Smith

    Another factor is the curious position of FDIC.

    The laws and institutions that were devised in the 30s to contain future crises did dovetail quite neatly. Certainly FDIC and Glass Steagall fit together well. Citi in its current shape poses a problem that FDIC was never designed to solve. Killing Glass-Steagall without thinking through how one might resolve universal banks was careless.

    Citi had bulldozed its way past Glass-Steagall long before that law was repealed (by the time of London's Big Bang, at any rate). Letting that happen was careless, too.

  9. Independent Accountant

    I have believed "C" is insolvent for at least two years. Whether or not Pandit is ousted doesn't make much difference. What matters is: will "C" be liquidated and each TBTF bank forced to mend its ways. Apparently Bair is not in the pocket of "C"'s management.
    I hadn't thought of the "Bair out of control" angle. Good catch. I wonder if this story originated with Zimbabwe Ben (ZB) & Co., "Just last month, the bank performed better than expected on the [Fed's] 'stress test' of top banks' strength", the article states. Is ZB trying to protect his "franchise" and stress tests? Did ZB preapprove this story?

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