Yesterday's Wall Street Journal featured a front page article bemoaning ailing Citigroup's CEO's troubles in shedding problematic businesses.
Vik Pandit made the usual excuses, painted the usual rosy future picture, and tried to avoid facing the fundamental truth.
That truth is, precisely at the time businesses are in their worst shape is when you can't typically sell them. And, small world that it is, most of the buyers are least able to pay more than current, depressed values for them.
GE ran into this issue last year with some of its newly-unwanted businesses. Now, Citigroup can't find buyers, at prices it wants, for some credit card and private equity businesses.
Of course, being significantly government-owned, Pandit wants time to wait for prices to rise. In the meantime, he'd like to be allowed to simply ignore the consequences of having built badly-performing businesses.
What would normally happen in this situation is one of two things. Either one or more competitors would offer to take over and break up Citigroup, or creditors would force their way onto the board to get the restructuring moving, perhaps by simply shutting some businesses.
Time is the luxury weak, troubled businesses don't have, or get. If there were no time limits, every business would eventually wait out valuation issues. But, well, time is money.
Pandit wants a reprieve from either selling or closing businesses, because either of those would permanently bring the low valuations home to shareholders' equity for good, and permanently lock in the losses.
You have to wonder why Citigroup is even allowed to continue its existence in a sector with excess capacity.
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4 comments:
When I was trading bonds, the first thing I learned was never marry your positions. By most counts, Pandit is a smart guy, but he's forgetting the most basic rules of running a book. It seems to me that bank shareholders would be better served if their directors pressed management to spin the troubling assets off into a "bad bank" structure and let the core banks get on with life. The country and the economy desperately need commercial banks to get back into the banking business.
Steve-
Thanks for your comment.
I respectfully disagree with the hoary old concept of the "good bank/bad bank".
From a financier's perspective, it sounds good and generates fees. However, in reality, the owners of the mess today still own the same mess, albeit represented by two pieces of equity, tomorrow.
Whether closed, sold or otherwise handled apart or within the existing entity, the same realities apply.
Further, trading fixed income is simply not the same as managing multiple businesses as a large commercial bank.
Finally, I actually don't think the economy "desperately need(s) commercial banks to get back into the banking business."
True, the current, business-hating administration and Congress keep braying this line. But the truth seems to be an absence of much actual, profitable demand for loans.
How many times must we (re)learn that lending at rates anchored by a 0% Fed rate is asking for trouble.
Personally, I'm quite content to let banks wait until more realistic interest rates obtain, and set their rates on top of those.
-CN
Good bank/Bad bank isn't about generating fees (though I'm sure Wall Street would never complain about that)-its about separating risk into buckets that can then be assumed by those who prefer a particular flavor. If some bank shareholders prefer the spicier flavor (and presumably higher prospective returns) of toxic waste, let them have it by holding onto the "bad bank" shares. I expect Pandit would be in that camp. Widows and orphans can keep the "good bank" shares complete with more realistic capital ratios and restrictions against publicly subsidized prop trading etc.
Regarding the need to get banks back in the banking business, we are in the throws of a classic liquidity trap. The only thing that has kept business going has been the intervention of the Fed in leapfrogging commercial banks. In my current role as a wealth advisor, I deal with entrepreneurs every day who struggle to finance working capital. They would beg to differ with your assessment that there is little demand for profitable loans. These guys pay their debts and a good floating interest rate.
Steve-
"Good bank/Bad bank ...its about separating risk into buckets that can then be assumed by those who prefer a particular flavor. If some bank shareholders prefer the spicier flavor (and presumably higher prospective returns) of toxic waste, let them have it by holding onto the "bad bank" shares. I expect Pandit would be in that camp. Widows and orphans can keep the "good bank" shares...."
Yeah, yeah yeah.....
How about this? If you don't like the Godawful mess Citi has become, sell the effluent and buy a decent financial institution. Assuming you can find one.
I have never liked rewarding management for screwing up and screwing shareholders by being allowed the free pass of the hallowed "good bank/bad bank" structure.
Again, regarding the Fed, I disagree with you. The Fed hasn't really accomplished anything of value after the immediate triage of late 2008, in my opinion.
Now, it's created unnecessary liquidity, promoted yet another low-interest bubble, and continues to throw its weight around in such a way as to intimidate and scare private capital.
To which you may add the administration's thuggery on confiscatory actions, abetted by Congress. Like, say, oh, student loan originators?
Medical practitioners?
I'm sure your clients are looking for funding. They are startups.
Existing businesses are hanging on in the face of tepid demand, and generally don't seem to be demanding many loans.
I don't believe you can extrapolate your venture capital datapoints to existing mid-sized and larger businesses.
-CN
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