Citigroup's Mortgage Fraud Case

Thursday's Wall Street Journal reported that Citigroup will pay $285MM to settle fraud charges involving the bank's selling mortgage-backed securities to investors while simultaneously shorting some of those same instruments.

This is the same sort of behavior for which Goldman Sachs was excoriated before a Congressional committee, and settled related charges for $550MM.

In Citigroup's case, it seems rather odd to me that the US taxpayer rescued this firm. In effect, rather than let such a management fail, our government saw fit to rescue the management team responsible for such fraud. Something seems very wrong with that.

Wouldn't it have seemed more sensible, given the overcapacity of the financial sector, and the many mistakes made by management in some very large firms, to put those which failed into an orderly Chapter 11 process?

Instead, we have our government using our tax dollars to prop up and revive a management which actively engaged in large-scale fraud of investors in its mortgage-backed securities.

Vik Pandit's Outlook- Who Really Cares?

This morning has already brought some delicious financial sector comedy my way, courtesy of CNBC and Bloomberg television.

First, a financial sector headhunter appeared on Bloomberg to pronounce UBS in possession of a "deep bench" of talent to replace recently-departed CEO Oswald Grubel.

My late boss and mentor, Chase Manhattan Bank SVP of Corporate Strategy and Development, Gerry Weiss, would have burst out laughing at the headhunter's remark. Gerry was fond of noting that, even back then, in the 1980s, money center banks had a mix of businesses much broader than most non-financial diversified conglomerates. These ranged from trading, asset management, corporate lending, custody, and trust to consumer lending, deposits, and various other fee-based businesses.

It's rare that a bank CEO was ever actually adept at managing the entire mess. Since most large bank CEOs rise through one chain of businesses or functions- institutional, consumer, or IT (think John Reid and Art Ryan), it's almost impossible to find a senior executive who is genuinely widely-experienced in most areas of a modern commercial bank.

UBS will probably be lucky if their next CEO is only as mediocre as Grubel was.

Then we come to Vik Pandit.

He was on CNBC this morning via a recorded clip, and cited on Bloomberg, as assuring one and all that the Euro-crisis will be calmly resolved. And, in an apparently coincidentally-timed Wall Street Journal piece citing the Citi CEO, Vik also wants everyone to know that his bank will be an island of stability amidst the global financial turbulence.

I always get a kick out of how the business media glorify and hang on every word of a CEO of a large industrial or financial concern who, prior to being that, was a virtual nobody.

In Pandit's case, he was a fairly anonymous Morgan Stanley middle-office executive. Frustrated by his apparent career path there, he left to co-found a hedge fund. Then had the incredible good fortune of being offered a job to head Citi's alternative investments group by non-executive, but highly-paid chairman Bob Rubin. Who, as a sweetener, had Citigoup buy Vik's Old Lane hedge fund, although it had less than five years of operating history. An absolutely unheard of deal. No large financial firms pay cash for unproven hedge fund strategies lacking long live track records.

Sure enough, Vik's fund cratered a few years later. After he had been elevated from asset management to CEO at the bank.

With that as a career background, and Citi's organizational prowess landing it in the federal ICU in 2008, why would anyone care what this overcompensated clown thinks about any economy or financial crisis?

Gerry Weiss used to tell those of us who worked for him that Chase's senior executives were so inept that most of them likely said to themselves as they looked in the mirror to shave each morning,

'God, don't let this be the day they find out that I really have no idea what I'm doing, and don't deserve the large amount of money they are paying me.'

Pity Poor Citi?

The weekend edition Wall Street Journal's Heard on the Street column was actually laughable.

David Reilly argued that Citigroup's market/tangible book value is too low. Specifically, it's below that of BofA. Thus the title of Reilly's piece, Let Citi Out of Doghouse.

Let's see.....a bank run by a guy who's never done commercial banking, nor run anything large, which operated itself into insolvency under the guy's predecessor, a lawyer, should now be treated as a brand new bank?

I don't think so.

Mediocre as it is, BofA at least didn't technically need to be rescued by the Fed, while Citi would have been in Chapter 11 without the government's stay of execution.

As an example of corporate cronyism, poor board performance and overall ineptitude, it would be difficult to find a better one than Citigroup during and after the Weill-Rubin years.

Meanwhile, novice CEO Vik Pandit has done nothing appreciably significant but ride out the resulting storm and manage to cling to his job. The government and financial markets did the rest.

And this is reason to suddenly improve its valuation?

Hardly. Look at the nearby price chart of the four large US commercial banks and the S&P500 Index for the past five years. Performances since the financial crisis are, to me, expectedly similar. A few minor differences, with BofA recently diving. But, for the most part, all four are pretty much flat since the beginning of 2009, as is the S&P.

Like all four of the largest US commercial banks, Citi is simply a government-backed financial utility that wouldn't even actually need a CEO to run it anymore. Any investments in the equity of Wells, Citi, Chase or BofA is, at best, a timing play. Nothing more.

Their total return performances are all, to varying degrees, depending upon their specific business mixes, more vulnerable and dependent upon market conditions, rather than the micro-management of the banks themselves.

Large US Bank Performance In The Wake of Concerns Over Increased Capital Requirements

Tom Brown's announcement in early June that he had bought BofA shares for his sector fund. That post was on June 3rd, so Brown bought no later than that- perhaps in late May, perhaps earlier that week.

On June 9th, I wrote this post discussing the subsequent call by various regulators for large "too big to fail" banks to hold from 3% to perhaps 7% additional capital.

As of yesterday, the major US banks included in the nearby price chart, have all declined since late May. The S&P500 Index is about flat.

We don't know precisely when Tom Brown bought his fund's BofA shares, but all of the banks shown- Citigroup, Chase, BofA and Wells Fargo- have declined absolutely and relative to the S&P for the past three months.

No wonder Brown was cheering on Jamie Dimon's objections to the sensible call for these banks to be capitalized as, well, banks, rather than unsecured loan providers.

Could it be that between the divestitures and closures of now disallowed businesses, and the specter of higher capital requirements, these banks are in for a long term correction down to price levels more consistent with giant, slow-growing, government-insured deposit-taking financial utilities?

Citigroup's Board's Appalling Reward of Pandit

Color me stunned as I opened yesterday's Wall Street Journal to learn that Citigroup's board actually awarded its inept CEO, Vikram Pandit, a potentially lush compensation package worth as much as $23MM, so he won't leave!

I actually heard Dick Parsons, Citi's board chairman, say this with a straight face in a noontime interview on CNBC.

Before I go further, take a look at the nearby price chart of several large US financial firms, Citi and the S&P500 Index for the past five years.

Citi is by far the absolute worst performer. There is absolutely no surviving firm which did as poorly, although Morgan Stanley (Pandit's old firm) and BofA were in the running.

Chase, Goldman and Wells Fargo tracked the S&P, ending the period more or less flat.

Missing, of course, are Bear Stearns, Wachovia, WaMu and Merrill Lynch, all of which either failed or were bought as they became insolvent.

Citigroup should have been in this group, with or without Pandit. Since he was CEO when the financial panic hit in the fall of 2008, his naivete, inexperience and general cluelessness were all good reasons to simply put Citi into court-protected reorganization. Deep-pocketed competitors would have gladly scooped up various pieces of the firm, so it's not like it would have literally disappeared, or that all its employees would have been suddenly jobless.

In fact, by letting more experienced, surviving, better-heeled firms buy the remnants of a failed Citigroup, Schumpeterian dynamics would have been playing out along its natural lines.

Instead, we now have sanctimonious Citi chairman Parsons claiming that Pandit did a great job and the board is concerned with his retention. This despite the fact that Pandit and his team haven't yet been able to give the board a clear, firm picture of Citi's normal expected business performance and income statement in the years ahead.

Mike Mayo, a longtime bank analyst, echoed my thoughts when quoted in the Journal article casting doubt on,

"rewarding a CEO whose company's stock has significantly underperformed other large banks during his tenure, and who got an enormous payday with the acquisition of his hedge fund."

It's unclear, besides lots of platitudes, that Pandit has any idea what he's doing. The same goes for Parsons and his board. How can they, in good conscience, squander their shareholders' money like this? Either Parsons is a fool, delusional, or was just plain lying when he spun his fairy tale version of Citi's recent performance on CNBC yesterday afternoon. It's not like there are any firms left stupid enough to try to hire Pandit if he actually left Citicorp.

The Journal piece details that one of the elements of Pandit's compensation is participation in a profit-sharing plan which is cleverly based only on the "core banking unit, without counting the losses at Citi Holdings, the entity holding the assets earmarked for sale. The profit-sharing payments kick in once the core Citicorp banking unit tops $12 billion in pretax profit over the years 2011 and 2012- less than half the level recorded for 2010." That was $20B.

So Parsons' contention that Pandit 'has to perform' is disingenuous. He and his board cronies set the bar so low that a monkey could be in Pandit's job and Citi would still beat the profit-sharing targets. And the bananas would be much cheaper than what Pandit's going to receive for a bank that is essentially on autopilot.

Parsons also hastily put the past behind, probably because he doesn't want anyone to remember that Pandit was paid several hundred million dollars for a hedge fund that subsequently performed so badly that it had to be closed. Even with various stock options and lockups, it's pretty clear that Pandit made tens of millions free and clear from the deal.

From seeing Parsons' performance on CNBC and reading of Pandit's new compensation package, I can't imagine anyone other than market-timing institutional professional investors going near Citi's equity anytime soon.

Going Easy On Citi's Vik Pandit

Last weekend, according to the Wall Street Journal, was the third anniversary of Vikram Pandit's elevation to CEO of the ailing US bank Citigroup.

The nearby price chart of large US banks Citi, Chase, BofA, Wells Fargo and Goldman Sachs illustrates how miserably Pandit's institution has performed under his leadership- if you can use that word.

While all of the banks have been more or less flat for a year, Pandit's Citi plunged far lower during 2008. If you don't blame him, saying he inherited that downdraft, then you certainly can't say he did any better than any other bank since then.

In fact, it would be fair to say he essentially did nothing, and Citi benefited from a sector-wide easing of pressure on share prices.

Remember, if you will, and as I noted in posts at the time, like this one nearly two years ago, that Pandit was very slow on the trigger to change anything at Citi,

"For Vik Pandit, it's too little, too late. As the price chart for Citigroup in yesterday's post illustrated, the bank has lost nearly 80% of its equity price in the past twelve months. Surely, as others have also noted, Pandit would have gotten much more value for his shareholders had he done this early last year, rather than now.

This is precisely the sort of long term damage that results from in-denial, head-in-the-sand approaches to the actual condition of a business. By insisting on keeping Citigroup's unwieldy, difficult-to-effectively-manage business assortment intact, Pandit simply destroyed more shareholder value faster than he would have otherwise.
For this, alone, it should be time for him to go. And what more convenient time for the board, than in tandem with the guy who mistakenly hired Pandit, Bob Rubin."


The Journal, and others, are all saying Pandit has "made it," "survived," etc. Truth is, Pandit was the wrong man for the job, hand-picked by the guy who helped ruin Citigroup, Bob Rubin.

It's far from clear, from the lack of any stories concerning what Pandit ever did during the past three years, that 99 other people couldn't have "achieved," and I use that word very, very loosely, the same results at Citi to date.

It never fails to amaze me that CEOs like Pandit get time and allowances for failure or lackluster performance to which their lieutenants would never be entitled.

Next, we'll be hearing that Jeff Immelt, GE's hapless CEO, will be judged a success because, after nearly a decade of failure to perform for shareholders, he might eke out a one-time outperformance of the S&P.

From my perspective, Pandit is simply another fortunate guy who was given a job in which he hasn't done much, therefore receiving accolades for not having noticeably done more damage. However, of all the banks in that chart, only Goldman Sachs decisively outperformed the S&P for the period. None of the other banks have CEOs who were capable of delivering market-beating performance for their shareholders. But I don't believe I've read that any of those CEOs returned their large compensation packages due to those failures.

Dick Parsons' Misleading Remarks In This Morning's CNBC Interview

I caught some of Citigroup chairman Dick Parsons' interview with Becky Quick this morning on CNBC. The interview seemed like an exercise in futility, as Quick lobbed softballs at Parsons, and he replied with some misleading and almost delusional responses.

Parsons' off the cuff numbers on Citi's TARP bailout made light of the real risk undertaken by taxpayers. Of course, now, it looks like a great profit- something like $12B on $48B. But this obscures the capital flows and sources of the profit. That is, existing shareholders were just about wiped out, while subsequent "profit" to the government came from the markets. It's very difficult to assess a proper risk-adjusted return for the deal, since the government has unique characteristics as an investor, including the ability to rig market and economic conditions to favor its investments.

Further, Parsons delusionally claimed that the government never interfered with the firm's operation. What was the special compensation czar's job? Did I miss something over the past few years when Ken Feinberg  was fighting with commercial banks over compensation levels? Does anyone really believe there wasn't behind-the-scenes arm twisting of banks which had taken TARP funds?

Then, in a completely surreal moment, Parsons began to lecture Quick on how banking works. How banks intermediate savers and borrowers. I guess this stuff is news to Dick, and he assumes nobody else watching CNBC knew these important details, either. But he then went on to claim, on that basis, that banks were 'special,' at the 'heart of the economy,' and could not be allowed to fail!

Wow. How convenient, Dick. Your predecessor, Bob Rubin, helped leverage and direct Citi into the mortgage-backed mess, it should have gone bankrupt, its parts sold to other banks, and you claim that your, and, by extension, all large, globally-connected banks must be saved.

Anna Kagan Schwartz correctly noted over two years ago that the problems with the US financial sector in late 2008 were solvency-based, not liquidity-based. Closing losers like Citi would have improved counterparty trust throughout the sector. Propping it up with printed government liquidity simply prolonged and rewarded incompetent bank managements and their boards.

So now, we have faulty, inept managements continuing to function along with better banks, when we had an opportunity to weed out the bad managers and allocate, by market mechanisms, their salvageable businesses to better-managed competitors.

But, of course, Parsons is in a delusional, self-serving mode now. As chairman of Citigroup, he has to distort and misrepresent that bank's and the meltdown's realities, in order to justify the firm's current existence.

Flashes In The Pan: Inconsistent Total Returns

Lest you be overly-impressed by the recent year's returns of some equities, take a longer term perspective.

For example, here is a price chart of the remaining four large 'real' US commercial banks (excludes Goldman and Morgan Stanley), and the S&P500 Index, for the past 12 months.

Looks impressive, doesn't it? BankAmerica up nearly 100%, Wells up over 50%, and Chase even with the index. Even Citi is positive.

Trouble is, my proprietary equity performance research found that one- or two-year outperformances of the S&P are actually pretty common.

Given that the index hit bottom last March, then rocketed upward over the next 8 months, the past 12 months are going to look good for a number of firms.

Looking back five years, those same four banks, and the S&P, look quite different, don't they?

The index has been flat. Only one bank, Chase, has been positive. The other three banks were not, two having appalling losses in shareholder wealth.

Chase, of course, looks better simply because, as usual, it was late to the CDO and mortgage party, and, though anemic in absolute terms, managed to avoid the crippling losses of its more agile competitors.

I chose a handful of large commercial banks, but you can probably construct similar charts in other sectors right now.

Being fooled by 1-year performances can lead to unpleasant surprises for the longer term. Much of the current hoopla over the recent gains in the equities of many firms amounts to little more than backward-looking timing plays. Buying into a firm's equity now, on the strength of just the last year, is the epitome of rather naive momentum investing.

Whether all of these firms can actually maintain fundamental performances and total return outperformance for the next few years is an entirely different matter. Last year's March low in equities provides a handy comparison for so many equities this quarter.

Investor beware.

Rubin & Prince At FCIC Hearings Thursday

On Wednesday, former Citigroup executives Chuck Prince and Bob Rubin, along with Tom Maheras, broke some major news by divulging that they had simply followed the lead of their consultants, primarily Oliver, Wyman, in taking their company deeply into CDO origination and trading.

Unfortunately, I missed that session, due to prior commitments that kept me away from a television. But I managed to listen/watch much of Thursday morning's FCIC session.

I'd say the Wall Street Journal article describing those proceedings got it mostly right. Chuck Prince came across as an apologetic buffoon, while Bob Rubin continued to evade and deny any responsibility, whatsoever, for the consequences of his recommendations as non-executive chairman of Citigroup.

Prince, a lawyer and ultimate 'survivor' of a long-running contest at Citibank and, then, Citigroup, to succeed to the CEO's office, basically said he just had Citigroup ape the other large commercial and investment banks. So much for any unique value-added from the multi-million dollar per year CEO of what was once the nation's largest commercial bank.

Reinforcing Prince's image as a highly-paid dunce was his revelation that he held on to all of the Citigroup stock which he had received as compensation over 30 years.

If you need to understand why Prince couldn't identify risk if it hit him in the ass, this fact, alone, tells you all you need to know. The guy was so clueless as to not even diversify his personal finances.

Rubin, as usual, was an entirely different kettle of fish. Aloof and cool, he steadfastly denied any significant role in Citigroup's demise. No apologies, no admissions of involvement. Nothing.

Mind you, he has, on prior occasions, admitted to having advised the board on the relative safety and lack of risk in plunging into exotic fixed income origination and trading. His prior day's revelation about the role that Oliver, Wyman played in his decision to advise the board to enter those businesses would certainly be seen by most observers as an admission of involvement.

Rubin, however, insists this is wrong. He is simply in total denial, and nothing that anyone says will cause him to acknowledge reality.

The Journal's article cites both Prince and Rubin as supporting more and heavier regulation in the financial services sector.

However, after hearing their testimony, why would anyone believe more regulation would have stopped these two executives from wrecking their institution?

They didn't do anything illegal. Prince even contended that he requested federal regulators to rein in other banks in the same risky businesses. It's pretty clear that the two call for more regulation because that seems to shift responsibility elsewhere, and allow them the excuse that they were merely complying with existing rules and regulations.

If they blew up their bank, well, it wasn't really their fault. It was inadequately devised and implemented regulations.

Of course, human beings will, again, be asked to implement any new regulatory regime. Why would you think the outcome will be different next time?

Oliver Wyman's Role In Citigroup Mess Comes To Light

The Federal Crisis Inquiry Commission has been busy this week. Former Citigroup chairman Bob Rubin and CEO Chuck Prince have been 'guests' of the panel, and, boy, have they provided some entertainment.


And, according to this piece in the Financial Times, some interesting revelations,


"It emerged on Wednesday in testimony before the Financial Crisis Inquiry Commission in Washington that, partly on the back of a 2005 Oliver Wyman analysis of potential growth in the fixed-income market, Citi decided to ramp up its business in collateralised debt obligations, or CDOs, backed by high-risk or “subprime” mortgage loans.

This ultimately led to a US government bail-out after Citi racked up more than $50bn in losses in the wake of the implosion of the subprime market.

In the heady pre-crisis years, firms such as Oliver Wyman and McKinsey were frequently called in to assess how banks could bolster profits in underperforming divisions, as bank executives looked to stave off shareholder complaints about lagging returns.

Oliver Wyman, for example, marketed a yearly analysis of how banks were faring relative to each other in hard-to-measure areas such as fixed income and commodities, offering previously unavailable competitive intelligence.


Relying in part on the Oliver Wyman study, Robert Rubin, then chairman of Citi’s executive committee, and Thomas Maheras, head of capital markets, conducted a review of the fixed-income business. They then sought Mr Prince’s approval for an ambitious investment plan to ensure Citi would keep its edge as the debt markets evolved.

Citi would end up spending more than $300m in 2006 to hire traders, bankers and cutting-edge software systems. CDOs and other structured credit products were a part of that buildout.

“Based in part on a careful study from outside consultants hired by our senior-most management, the company decided to expand certain areas of our fixed income business that we believed at the time offered opportunities for long-term growth,” Mr Maheras told the Financial Inquiry Crisis Commission on Wednesday."


I recall, back when I was the first Director of Research at the then-independent Oliver, Wyman, that we produced and marketed a financial services sector "revenue map" each year. It sounds as if, over the years, the firm added data from its consulting engagements, in which it would get proprietary views of various firms' actual business data, to provide comparative information.


According to Prince's and Rubin's testimony, we see, once again, how a senior management team paid millions of dollars per year can't seem to have its own sense of direction. Instead, they hired Oliver, Wyman to do their thinking for them, with unfortunate consequences.

Rather like the unfortunate experience of Meg Whitman of eBay received from McKinsey some years ago with regard to Google as a competitive threat.

Or the consequences of an earlier Oliver Wyman team on Advanta, which left to join that once-thriving, premier credit card firm. Thanks to those young, inexperienced risk-management sharpies, Advanta blew up about a year later from excessive risks in its card portfolio.

It's understandable, and a good idea, for senior or business managers to use consultants who have some particular informational expertise or knowledge about a product/market. It's rather surprising to me, however, that in the clubby, competitive world of fixed income trading and origination, a firm like Citigroup, composed, in part, of the old bond king, Salomon Brothers, wouldn't already know quite a bit about the market in competitive terms.

Further, there's a point at which management has to do its own thinking, beyond the data.

As I wrote in this post, way back in September of 2008, about the "fallacy of composition" in risk management,

"This is a topic on which I have seen almost no ink, whether physical or electronic, spilled. The tendency of major financial service trading houses to employ similarly-vintaged and -featured risk management systems virtually guarantees the fallacy of composition with respect to sudden windshears in markets.


When one model sees a need to dump a security, due to excessive risk, they all do. And what the models don't account for is other desks, using similar risk metrics, piling on with similar actions, all of which rapidly accentuate the pricing moves that first triggered the sales of risky instruments.


What people outside the financial services industry fail to understand is that, like most industries, vendors supply products and services- data, software, information, risk management methodologies- to as many industry competitors as possible. Further, there is a constant flow of people back and forth between vendors, consultants and financial services firms. For example, a former investment management business partner and one-time colleague at Oliver, Wyman & Co., recently left a senior position at Mercer Management Consulting, which acquired Oliver Wyman a few years ago, to join some of his former OWC colleagues at a risk management consulting firm in California. This will speed the dissemination of his observations on industry risk management practices, and weaknesses, to another major sector consultant."

Apparently, this occurred in the area of simple revenue generation and business expansion, too, for Citigroup. It evidently never occurred to Prince, Rubin and Maheras that if Oliver, Wyman were peddling the idea of jumping into exotic fixed income origination and trading to Citi, they were probably also walking the concept up and down the investment and commercial banking community.

After all, everyone in financial services knew, or should have known, that this has always been the manner in which OWC does its business. One by one, they sold essentially the same risk management technology to every major commercial bank in the 1990s.

Now, though, Oliver, Wyman's role has been brought into the national spotlight in the context of a federal panel investigating the roots of the recent financial crisis. This can't be good for the firm's image or subsequent business.

Perhaps, though, it will serve as a cautionary tale for future financial business executives. Rather than simply seize on a consultant's juicy picture of a market, and plunge in, they'll do some game theory and strategy work to consider the ramifications of multiple competitors entering the same product/markets with similar strategies, technologies, personnel, etc.

Oh, by the way? The other major discipline that OWC prides itself on possessing is....strategy consulting!

Guess they didn't get around to selling that strategy engagement to Citigroup, did they? Maybe Rubin and Maheras ran out of the room after the fixed income market presentation so fast, heading for the board room to recommend jumping into CDO trading and origination, that there wasn't time.....

Sandy Weill's Citigroup Officially Dismembered Today

It took years...many years.....but Sandy Weill's original, unwise and unwieldy merger of Travelers and Citibank was dissolved today with the IPO of Primerica.



After probably inducing then-Treasury Secretary Bob Rubin to look the other way while he smashed Glass-Steagal, Weill hired Rubin as the non-executive Chairman of the merged firm. It didn't take long for Weill to manage to toss former Citibank CEO, his alleged co-head of the merged firm, out a window, leaving Weill to play with his new, hydra-headed toy.



That was 1998-2000.



Ten years on, Weill's monstrosity has been significantly dismembered with the separation of its insurance and banking components.

The nearby price chart for Citigroup and the S&P500 Index shows how badly the universal bank performed since Weill's grand mistake.

In the same timeframe, the index was down only slightly.

Too big to fail? How about just too big to be managed by anyone, and, instead, just limp along losing shareholders' wealth?

Am I the only person who doesn't completely understand why Sandy Weill wasn't sued by shareholders?

Vik Pandit's Tight Corner: Restructuring Citigroup

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.

Vik Pandit's Sorry Performance On Capitol Hill

Citigroup CEO Vikram Pandit's performance before the TARP oversight panel yesterday in Washington must have Walter Wriston spinning in his grave.

So craven was Pandit that he renounced the bulk of Wriston's vision of money as an equivalent of information. Instead, Vik basically apologized for Citigroup ever attempting to be more than your good ole' neighborhood bank with a heart, only on a global basis.

He prostrated himself, verbally, in front of the panel, thanking them profusely for taxpayer funds which saved his bank.

When attacked for Citi's overseas presences and investments, Pandit claimed that Citigroup wasn't global, but American. Indeed, America's global bank.

How heartwarming. Patriotic, even.

Then Vik went on to assert that, after much rumination, he personally decided that Citi should be a bank. So he's been selling everything that isn't a bank. When asked how he felt about the "Volcker Rule," Pandit disingenuously claimed he was adhering to it by selling off little pieces of Citigroup. Of course, what Volcker really means is for banks like Citi, which enjoy FDIC deposit insurance protection, to stop risking solvency, and, thus, taxpayer funds on proprietary trading.

Either Pandit is so naive as to not understand this, or so clever as to believe his claims would fool the panel and viewers of his live act.

I wrote this spoof of an interview with Pandit 2 1/4 years ago, upon his being named CEO in December, 2007. The nearby price chart for Citigroup and the S&P500 Index for the past two years illustrates how much Citigroup has lost in value for its shareholders under Pandit.

The second chart provides a longer term perspective from five years back for the same series. About the best that could be said is that Pandit chose to accept the promotion from relative safety, running Citigroup's asset management unit, at an inauspicious time. Whether simply greedy, egotistical, or foolish, he walked into a maelstrom from which he, his bank and its private, non-governmental shareholders have yet to emerge.

There will be those, like someone who commented on one of my posts about Citigroup last year, who are short term opportunists, and have profited from the relative rebound of the company's equity since early 2009. But the risks associated with such a strategy were not low, and it appears that markets have taken back about a third of that temporary increase.

Even this morning, perennial Citigroup bullish analyst Dick Bove was, as usual, giving a glowing vision of the bank's future and firmly endorsing Citigroup as an investment.

I just can't get the image out of my mind of Pandit groveling before the government panel, clearly afraid of being accused of yet more misdeeds, made to suffer more penalties, perhaps even dismembered under the implementation of the Volcker Rule.

Is it realistic to bet on such a timid, defensive posture for Citigroup and its CEO for the coming years?

Geithner: A Legend In His Own Mind

This morning on CNBC there was mention made of tax cheat and Treasury Secretary Tim Geithner's interview in Vanity Fair.

Two details of the interview came to light.

First, Geithner contemplated an alleged offer to run Citigroup. When I heard that, I burst out laughing, nearly spilling my coffee.

Here's a guy who has been taken to the cleaners by private sector parties, as described here and here.

So what would make anyone, especially Geithner, think he's up to the task of running the horribly-organized mess that is Citigroup?

How incredibly arrogant of Geithner. All anyone has been able to show so far is that Geithner might be a second-rate financial system's plumber, of sorts. Certainly nowhere near up to running a large US bank, much less a deeply-troubled one.

The other incredible admission from the Vanity Fair article is that Geithner now blames his tax cheating on.....TurboTax.

Right. Like you or I could do this and get to be Treasury Secretary. Never mind even just getting amnesty.

If you can stop laughing at this pathetic display of poor judgement on Geithner's part, consider what a whining excuse-maker he is. Nothing is ever Timmy's fault.

Outmaneuvered by Goldman? Had to do it- not his fault. Cheated on his taxes? Not his fault- blame the software.

This guy has to go.

The Folly of TARP & Government-Mandated Capital Raising

I had to laugh when I read yesterday's Wall Street Journal article concerning the federal government punishing Citigroup and Wells Fargo with heavy capital requirements before they can repay the TARP money they were forced to take.

If anything points to the veracity of Anna Schwartz' comments about the financial sector crisis of last year, this episode would be it.

Why are we letting some middle-level bureaucrats dictate what sort of capital levels these two banks require, when the obvious, better solution is to let the capital markets signal that. Under-capitalized banks will see their equity prices fall. If they are in a jam, where dilution to raise capital further depresses equity values, then, eventually, some other bank management will take over those assets at the depressed price.

That's how the market votes on managerial (in)competence.

Government mandates for capital are just stupid. Just as the Fed can set a funds rate, but can't actually control market appetites for Treasuries, or force banks to lend, arbitrary capital requirements set by mediocre regulators won't actually have much meaning to investors.

This latest dustup over banks trying to repay government funds shows clearly what a travesty Hank Paulson's and Ben Bernanke's TARP plan always was.

Now, as of this morning, Treasury Secretary Geithner sent a letter to Congress notifying it that he will extend the TARP slush funds and dubious authority until next October.

To add comedy to this act of governmental overreach, Geithner claimed both that the financial sector is still in need of help, but, magically, the government assistance will now actually aid "main street."

Good luck with that, Tim. It hasn't worked yet.

Citigroup's Recent Performance

I recently witnessed a discussion of Citigroup's recent total return, and whether it was now a legitimate investment vehicle. I can't recall the exact timeframe, but the price change cited was something like +300% or more.

Being curious, I produced the nearby Yahoo-sourced price charts for the ailing, government-owned bank and the S&P500 Index prices for the past 6 months and 2 years.

For the former, Citi's return looks to have been about +150% since early April. From the 2-year chart, it's clear that the low was prior to that, in March, which would boost that return a bit.

But looking back only through early this year requires an investor to have been engaging in speculation and market-timing.

The 2-year chart, more to my preference in terms of duration, shows the S&P to be a far superior investment, with Citigroup losing between 70% and 80% of its value. Additionally, with a background of the prior two years, the last few months don't look quite so stunning.

To me, Citigroup's recent performance is all too typical of the many companies capable of beating the S&P by a wide margin for any single year. The causes of such returns can be many, but I learned years ago, from my proprietary performance research, that one year of outsized total return performance does not an investment make.

That's why I look over a longer term. It's just not statistically significant to look at one-year, or less-than-one-year returns and pronounce a company to be a desirable investment.

Between the government's continued ownership of much of Citigroup, and the overall weakness in both business and consumer lending, plus the largely-intact, dismal management team at Citigroup, I'd stay far away from the company as a candidate for consistently outperforming the S&P for the next few years.

A Lack of Boundaries: Private Sector & Government

I recently sat with my business partner discussing the sad state of corporate management and governance that has led major US corporations to go begging to the federal government for help.

Now, we have new regulations affecting the compensation of employees at any company which accepted or requested TARP funds, completely contrary to the promises, at the time, of then-Treasury Secretary Hank Paulson that Washington would be the most passive of investors.

Further, any expenditures at companies which have accepted or requested government "help" are now scrutinized for the potential of being too "lavish" by a Congress that, itself, has overspent taxpayers' money.

How did we get to this point? Is it the fault of corporate America, or the federal government?

I believe it is the fault of both parties. Neither seems capable of respecting boundaries.

In my opinion, as well as others, such as William McGurn of the Wall Street Journal and even liberal Nobel Economics Laureate Joseph Stiglitz, the bankruptcy option has been avoided far too much in the past twelve months.

Bear Stearns, Lehman, BofA, AIG and Citigroup, upon appealing to the federal government for assistance, should all have been referred to bankruptcy court or the FDIC for closure. GM and Chrysler, too, should be in Chapter 11.

Somehow, corporate executives have come to expect their government to play favorites, pick winners, and temporarily prop up failing companies, rather than admit their own mistakes and close up shop.

By failing to observe the boundaries of responsible corporate behavior, boards of directors and CEOs unwisely opened a Pandora's Box of problems by requesting government financial aid. This left them open to having their operations and decisions overseen and scrutinized by political officials who have used the excuse of looking after taxpayer money in order to move our economy down the road of fascism.

At the same time, government officials, beginning with the Bush administration, and continuing into the current one, have unwisely consented to helping private corporations, rather than declining, and sending them to their fate in the financial markets or bankruptcy courts.

By failing to observe the clear line between private and public spheres of activity, our government officials have compromised our economic system and given into the temptation to begin manipulating companies for political purposes and pet political agendas.

Both government and corporations would have better served our society if they had just said "no."

No requests for handouts and government help. No consent by government to involve itself in any private company rescues.

It's difficult, at this point, to see how and where these mistakes will end. But it's very easy to see how and where they began. Our private and public institutions have failed the US by refusing to adhere to time-tested separations that allow the private sector to take risks and bear the consequences with limited public interference.

Yesterday's Equity Market Rally

Yesterday's equity market surge has been attributed to several factors.

First was Citigroup CEO Vik Pandit's rather tenuous claim that the ailing/failing banking giant managed not to lose money so far this year.

Wow. If that's fuel for a rally, things are pretty bad.

Pandit's statement was totally unsubstantiated. No audited financials. Not even a full quarter's performance. Is this really all it takes to move the market up 6.4%?

Maybe not. Ben Bernanke made obtuse comments about mark-to-market in a pre-market-open address. Nobody with a brain suggests that it should be eliminated or suspended. I've argued for almost two years now that it should be modified to reflect the greater of economic or market value, especially for assets planned to be held for more than a year.

But Bernanke evidently gave reason for some hope, as he opined that it made little sense to take writedowns for paper losses on performing instruments.

For what it's worth, our volatility measure rose significantly with yesterday's market rally. It's near 3%, which is much higher than it's been for probably two months.

In any case, I suspect this was simply a short-term reaction by traders to some unexpected news.

Various pundits, including CNBC's resident senior economic moron, Steve Liesman, claim that Pandit's utterance means that maybe the federal government's various banking palliatives are working.

Fat chance. Citigroup shouldn't even be alive. It should have been seized, its management and board removed, its assets auctioned off, months ago.

For anyone to read into Citigroup's unvalidated performance claims a sign of success of federal financial services sector rescue is to mark that person as naive.

Even if Citigroup does post a profitable quarter, it means little for the economy or the entire banking sector. The bank is now getting funding almost for free. This isn't a sustainable basis for profit.

As I write this, just prior to the market open, the S&P futures are up 9 points, to 725. But I remain unconvinced that the bases for a sustained equity market recovery are in place.

Our put positions for November, December and January were all negative until two weeks ago. Then they moved steadily upwards, leaving all but one comfortably positive. The late-2008 equity market rise was totally erased by late February.

I don't think what is occurring now is much different.

Have US Commercial Banks "Failed?"

Wells Fargo @ $8.12. Chase @ $16.60. BofA @ $3.17. Citigroup trading @ $1.02.

Yes, you can't even buy McDonalds snackwrap with a share of Citi stock.

Have our largest commercial banks really "failed?" Failed, in the Depression-era sense?

Clearly, they have not. Commercial banks are no longer the same as they were in FDR's era.

In fact, many people mistakenly identify our commercial banks as our total financial system, but nothing could be further from the truth.

First, all of these institutions have, for all practical purposes, had totally-insured deposits for decades. For several months, even their money-market funds have been federally insured, too.

The nation's financial plumbing system- clearing, settlement, electronic cash movement, etc., are separable, if necessary. Loans are made by several sorts of financial service firms, and more could enter at any time.

"Wealth management," a/k/a brokerage and money management, is a sector unto itself, even with the collapse of Merrill Lynch.

Truly, there is little, if any real economic damage from simply letting badly-run commercial banks fail.

From the nearby chart, it's easy to see that, among the surviving large US commercial banks, Vik Pandit, Ken Lewis and the management of BofA and Citigroup should be fired.

Citigroup is, for all intents and purposes, currently a government bank. How can any administration leave Pandit & Co. in charge, when, by comparison, Chase and Wells did so much better, if not so great in absolute terms?

BofA is a wreck, too, now. Lewis has to go.

But there's no actual risk to the economy's health in closing Citigroup and BofA. If anything, as Anna Schwartz noted, that would leave fewer, healthier banks, and opportunities for capital to move into the sector, should it require more lending capacity.

But with two of the largest US commercial banks trading nearly as penny stocks, reflecting investor doubts about the true, intrinsic values of their assets, it's ridiculous to keep them open.

Let's get the thing done, close or nationalize Citi and BofA, bring in new management, and get on with modifying mark-to-market rules to allow for economic valuation.

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.