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The final straw with Citi

July 23, 2009

 ”We have and will continue to exit several forms of proprietary risk-taking. Where we continue to take principal risk, we will only do so when we have proven teams and a clear source of advantage.” – Citigroup CEO Vikram Pandit on January 16, 2009. 
   
Don’t be fooled by Vikram Pandit’s playing the part of a prudent banker.

Instead of scaling back risky hedge fund-style trading, Citi is doing just the opposite. And that raises big questions about why the federal government continues to bail out this basket case of a bank, and why Pandit is allowed to remain at Citi’s helm.

Here’s the scoop on this latest bailout outrage: Citi is planning to commit at least an additional $1 billion in capital to a team of stock-focused proprietary traders, say people with knowledge of these strategies — a move seemingly at odds with Pandit’s earlier vow. 

These traders buy, sell and short a wide variety of stocks, including telecom, technology, healthcare and consumer financials. And the profits and losses on those trades all go straight to Citi’s bottom line. 

In all, I’m told that this team of nearly three dozen prop traders and analysts at Citigroup Principal Strategies will get to play with some $2 billion of house money. 

That’s roughly the same sum of Citi capital the group had under its belt before Lehman Brothers melted down last September. Citi sharply scaled back the operation soon afterward. 

By the end of 2008, the Citi Principal Strategies trading group’s committed capital had dwindled to under $800 million. But that was when Citi was fighting for its very survival. Now it appears Pandit has no qualms about ramping up the bank’s prop trading group after getting $350 billion in capital infusions and asset guarantees from U.S. taxpayers. 

To be sure, $1 billion in capital is chump change compared with the size of the bailout package that Citi has received. And it’s a mere footnote against the $1.8 trillion in assets on Citi’s balance sheet. 

And maybe it does make business sense for Citi to resume equity prop trading if its main competitors on Wall Street are doing the same. 

But it’s the principle here that matters. A bank that’s still a ward of the state has no business running its own internal hedge fund. Actually, Citi Principal Strategies is a collection of seven mini-hedges, each controlling between $250 million and $300 million in Citi — or should we say taxpayer? — money. 

To me, this is the final straw with Citi and in particular with Pandit. It’s hard to take anything Pandit says seriously after this quiet step-up of proprietary trading. In my book his credibility, which already was wobbly, is shot. 

Citi, for its part, isn’t commenting on the return of prop trading as a business strategy.

I’m sorry, but a “no comment” just doesn’t cut it. Goldman Sachs might be able to get away with that non-response, but only because it isn’t effectively owned by the federal government.

(Yes, Goldman is able to make billions from prop trading because it has the implicit backing of the government behind it, but that’s the subject for a different column). 

Citi, on the other hand, has an obligation to come clean with its biggest shareholder — the U.S. taxpayer. 

Back in April, The Wall Street Journal reported that Citi won the Treasury Department’s permission to pay special bonuses to “many key employees” in order to remain competitive with other Wall Street firms. 

It’s fair to assume the prop traders might be some of the “key employees” Citi had in mind when it begged Treasury Secretary Tim Geithner for the right to lavish such pay packages on some workers. 

Before the collapse of Lehman, traders with Citi Principal Strategies used to get to keep a percentage of the profits they made. Is that still the case with these traders — some of whom, a person familiar with the operation tells me, used to work for Pandit’s failed hedge fund Old Lane, which Citi acquired in 2007? We simply don’t know. 

In the second quarter, it appears that stock prop trading paid off for Citi. On July 17, Citi reported that “strong results in derivatives, proprietary trading and cash trading” contributed to some $1.1 billion in equity markets revenues. 

But trading is risky and there’s always the chance that Citi could lose money on its equity prop trades in future quarters. 

The bank bailout saved the world financial system from collapse, and that certainly was a good thing. But in keeping sick institutions like Citi afloat, the goal should be getting them well enough to resume lending to businesses and consumers. 

Until Citi can pay back the government, it has no business going back to the way things used to be. 

So if a taxpayer-subsidized executive like Pandit wants to get into the hedge fund business he should head for the exit right now and open up his own shop.
(Editing by Martin Langfield)

Comments

Duh, they are an investment house.
This type of trading can be very profitable.
That’s part of their job, GS does it as does JPM and every other investment house.

What? Do you live in a vacuum. Hello???

Posted by James | Report as abusive
 

This article is pointless. It’s first paragraph states that Citi will utilize its trading prowess with proven traders and strategies. Who cares where the money comes from? It’s not like Citi is different from any other bank that got bailed out, except for the fact that they are huge. If you want to point fingers, go blame the people who created this mess. Bill Clinton and Billy Graham who basically repealed the Glass-Steagel act back in 1999.

Posted by Jared Boyar | Report as abusive
 

Ousting a CEO is not a panacea in these tell-tale times. Policy is generally corporate and there is comprehensive corporate responsibility. Instant sadistic gratifications, like the one Matthew wants to dwelve in, will be forgotten the next day after the ouster. The problems will remain staring at the faces of the rest of the crowd. Root-cause analysis, fundamental problem solving, lean strategies, out-of-the-box approaches..some of the designs which come out of the kaledioscopic string of possibilities for kaizen.

One set of dogs barking at another does not even figure in this scheme of things. Offer value, Matt. Real value.

Posted by Mohandas | Report as abusive
 

There may be profits, but these are paper profits only. There is no substance in this type of trading and is akin to Las Vegas gambling, except there is no house that covers the bets. When will we wake up and outlaw any bank activity that does not have a backing to the full extent of the risk. This type of betting has been going on since the beginning of time, but it was limited to losing only the money of the risk taker.

I had some hope for Obama, but I think he is as clueless as the congress as how to stabilize the country. The Congress and Obama are all playing with funny money and they will end up making the same mistakes over again.

I think that we will see a Constitutional Convention take place shortly that will change the face of Government at all levels.

Posted by f belz | Report as abusive
 

First the current administration is in trouble because it “wants to run the banks and the car companies.” When it won’t prevent GM from importing from China or tell Citi it can’t compete with other investment banks on a level playing field, it is ironic to now see this kind of op-ed where a news article should be.

Posted by Ken Crofoot | Report as abusive
 

From http://edupreneursvkleptobankers.wordpre ss.com/

“Canonical research findings suggest that American entrepreneurs who establish popular online markets for customized education will catalyze the creation of many good jobs in America, and will end the reign of America’s kleptobankers. Some of the researchers: Clayton Christensen, Paul Romer and Paul Krugman.”

Posted by Frank Ruscica | Report as abusive
 

Matt,

You’re an idiot. It’s only with this very sort of initiative that Citi stands a chance to regain it’s footing. Taxpayers stand to profit handsomely.

Posted by Jason Rawstron | Report as abusive
 

Citi is doing a right job to steer the bank back to the right track. People in Finance like to see it. only outside suckers who are hammered out by the financial mess would complain..

Posted by Rose Eli | Report as abusive
 

Hi Matt,

You got to take some I-banking lessons for getting your grey matter clear. Have you looked at Citi current results, they are far better than MS or BoFA. I am zapped this article is on homepage of Reuters.

Posted by Paul J | Report as abusive
 

this article is waste of time.. change the title to ‘i have nothing todo’. Shame on you.. let citi work, finance business is risk, nothing but risk.. it is foolish to say what not to do, when other finanicial company can make money huge money.. Citi also made money..

Posted by Avasi | Report as abusive
 

Nice article! There is many ways to make money and a huge bank like Citi should be more cautious where it invests, it is the whole lesson of this crisis for Citi -their risk-managment is junk. The money was given from the goverment for boosting the credits for the real economy, not for speculations on the equity market.

Posted by Anthony | Report as abusive
 

Perhaps the worst business article of the year. Congratulations. Look at Q2 Earnings reports.
Firms have made money trading becasue of wider
spreads and volatility. The Government aka
Taxpayers need Citi to remain robust in order to
benefit.

Posted by Jack | Report as abusive
 

Whoever wrote this is an idiot.

“Until Citi can pay back the government, it has no business going back to the way things used to be.”

Ummm, hello??? If you want Citi to repay government funds then you need to let them make money the same way their competitors (JPMC and GS) are making it (and already repaid those loans fyi).

Posted by Tyler | Report as abusive
 

Well, I am not shure whether Prop-Trading is such a bad thing for the state, since citi will have to pay back fortunes to the state, money that has to be earned somehow. And currently it seems as if further write-downs on mortage-, consumer-,and small company loans were inevitable. Therefore citi will have to tap alternative sources of cash and Proprietory Trading is usually a very healthy source with high returns on investment. Furthermore it can also be used as a hedging-instrument against other risks, not by offsetting them, but through sheer diversification.
Beyond that, citi will have a hard time in the more conservative business areas, because who wants to work for or lend to a failed bank?

Posted by Björn | Report as abusive
 

In your article you blast Citi for rebuilding their prop book and then go on to admit the same prop book raked in over a billion dollars in profit for the institution.

Why should Citi not trade? It’s not prop trading that caused the financial crisis.

Maybe your sour grapes can be put to better use. Find a job in a winery in France.

Posted by Dom | Report as abusive
 

What a poorly written, horribly premised, unresearched, and frankly lazy article. Citi is doing what it needs to do in order to have a chance at rebounding. They would be deeply in the red right now without the joint venture profits and these investments are its only viable strategy to avoid a slow death.

Posted by Tim Link | Report as abusive
 

I fail to see where the risk is. Past experience has shown us that all the banks have to do when they lose money is to call the treasury secretary and tell him to cover the losses.

Posted by max | Report as abusive
 

The majority of replies to this article speak for themselves;the author does not understand much to finance.Any large house on Wall Street has $1bln+ of their own balance-sheet at risk on any given day these days.check out the VaR (value at risk) in the annual reports and you get a reliable idea of the magnitude.Citi’s VaR is not bigger than anyone else.Any losses occured by a rare event would be $100mln tops.this is not what cause the financial crisis;the subprime crisis was created by persons with no savings and no income buying a house in the hope of reselling it to another person at a higher price.That is called a ponzi scheme.

Posted by tough | Report as abusive
 

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