An Update On Citigroup

It's been a while since I've written about Citigroup's troubles. Since that post late last month, the big news is the federal government's imminent conversion of its preferred equity stake in Citi into a 40% or so common equity position.

Last night, my business partner and I ran into an old friend, while playing squash, who works for Citigroup. Given the bank's problems, and his position in one of the planning groups, he'd been scarce for months.

Suppressing jokes about offering to buy coffee with a few shares of Citigroup stock, we asked him how things are on the inside. There wasn't that much he could say. Other than the allowable teasing about becoming a government employee, it was just a sad situation.

Drawing back from the personal anecdote, I recall a few articles in the Wall Street Journal cataloguing Vik Pandit's recent travails trying to get some direction from his new, largest shareholder. Geithner's evidently been reduced to cryptic, late night phone calls to Pandit, vaguely urging that 'something' be done soon.

Pandit is reported to be begging for a chance to fix the unwieldy financial conglomerate, despite its continued slide since the waning days of Chuck Prince's misguided leadership in 2007.

The more I ponder the status of the large US commercial banks, the more I'm taken back to the Journal interview with Anna Schwartz in October of last year, about which I wrote in this post. It's becoming increasingly clear that she is correct.

Better for the FDIC, Federal Reserve, and OTC to have enlarged the capacity to close insolvent banks, transfer deposits to other banks, writedown the bad loans and sell them back into the market.

Like it or not, the way in which our financial system functions, allowing banks to accumulate bad loans results in taxpayers eating those losses. This is why government oversight of lending practices is so critical. When a bank is closed, we can't expect another bank to buy bad assets at face value, when they are clearly impaired.

I believe it's past time for us to lose our attachment to specific organizations and put badly-managed, bankrupt firms to death.

Those outside the financial services sector may not realize it, but commercial banking became a commodity business long ago. Aside from their names, there's not much difference between large banks. Why keep a Citigroup, but close a WaMu or Wachovia?

I remain convinced that Schwartz is correct in observing that the key to repairing the health of the US commercial banking sector is to close insolvent banks. If there is more demand for banking than there is capacity, new capital will flow into the sector, either through existing, healthy banks, new banks, or banking units created by private equity firms.

Geithner's fuzzy private-public asset holding trust doesn't, on the face of it, get the job done. It simply continues to dance around the issue, unaddressed since late 2007, of modifying mark-to-market to allow for economic valuation, if it is higher than a non-existent market price, and taking losses.

Until this is done, capital won't flow into existing banks. And until the federal gorilla stops lumbering through the sector in a haphazard fashion, capital won't flow into the sector at all.