Commentaries

Citi’s other prop desk

Now that Citi is unloading it’s much-hyped Phibro energy trading group maybe the media can start focusing on the part government-owned bank’s other proprietary trading desk–its Principal Strategies Group.

While everyone has been obessing over Phibro and the excessive $100 million payday for top trader Andrew Hall, Citi continues to quietly add prop traders to this little-known group that uses bank capital to trade stocks and bonds.

Back in the summer, I wrote about how Citi was committing up to $1 billion in new capital to this group of three dozen traders and analysts–even though Citi CEO Vikram Pandit said earlier this year the bank was moving out of prop trading. But the rest of the media remained focused on Phibro, in part because it’s far easier to write stories about Wall Street salaries and big bonuses.

So with much of the financial press blinded by Hall’s outsized compensation package, Pandit’s strategy of reconstituting a prop trading desk that lost a bundle last year continues to get little attention. In fact, The Wall Street Journal, seemingly oblivous to the Principal Strategies Group, didn’t bother to challenge Citi’s contention that its decision to sell Phibro “is consistent with its efforts to slim down and focus more on serving clients, instead of placing financial bets with the company’s own money.”

Excuse me, the whole intent of the Principal Strategies Group is to place “financial bets with the company’s own money.” In fact, a good number of the prop fixed-income traders in the Principal Strategies Group came from Pandit’s own failed hedge fund Old Lane that Citi acquired mainly to get Pandit as its CEO in waiting.

The Principal Strategies Group is really a collection of seven or so hedge funds that follow different trading strategies. So great, Citi is unloading Phibro. But Pandit is trying to make seven other mini-Phibros.

Do you have any confidence Pandit will have more success with these mini-hedge funds than he did with Old Lane?

Churning is out at Citi

Citi is kicking the commission habit for its remaining brokerage customers.

The big bank says it is shifting away from charging commissions on customer trades and going towards a more customer friendly, fee-only business model. The change applies to investment advisors working out of Citibank branches.

Earlier this year, Citi entered into a joint venture with Morgan Stanley, which took over the day-to-day operation of its once mighty Smith Barney wealth management business. That venture largely already operates on a fee-only business.

The move away from commissions is a welcome one. And it should avoid situations in which brokers try to drum-up needless trading activity in customer accounts–simply to generated higher revenues.

By contrast, fee-only brokers generally charge a flat fee to customers based on the dollar value of the assets they have invested.

The move to a fee-only business model is consistent with the Obama administration’s call for brokers to be held to a fiduciary duty when investing for their customers. In other words, the Obama administration, as part of its regulatory reform package, wants brokers held to a higher standard for the investment decisions they make for customers.

These days there is a lot to complain about with Citi and I’ve been more than critical of the way Citi CEO Vikram Pandit is managing the bank’s affaird. But this decision to kick the commission habit is good news and Citi should be applauded for making the switch.

Sheila Bair and the black marker

The other day I wrote a column about a series of meetings FDIC Chairwoman Sheila Bair had this summer with Citi Chairman Dick Parsons. The column was based on entries in Bair’s datebook, a copy of which the FDIC turned over to me in response to a FOIA request.

But here’s the thing, the FDIC actually tried to keep some of those meetings between Bair and Parsons secret–along with a number of other meetings the FDIC chairwoman had this summer. The FDIC said it needed to redact some of the entries to protect the agency’s work with the banks it regulates. The agency did this by using a simple black marker to cover over the names of some people.

The trouble is the black marker was a dud–and the names of the people Bair met with on those days were clearly visible. That’s a good thing because it would have made it much harder for me to do my story.

Did someone at the FDIC screw up? It certainly seems that way. But the public is all the better for it.

I didn’t point out this market malfunction in the column. I figured people would notice it once they started digging through the 92-page datebook, which was posted along with the column.

The loyal readers of Zerohedge, which blogged on my column, were the first to spot the FDIC’s goof and they are having a field day with this mistake.

Citi back for more, but sans FDIC help

It looks like Citi is on a mission to prove it doesn’t need any stinking help from the federal government. Earlier this week it tapped the bond market for $5 billion, but the notes carried the FDIC guarantee. As the FT noted in its piece yesterday, the move seemed at odds with the bank’s supposed attempts to get out from under the government’s thumb.

So today, the bank is back with five-year note offering that comes without the FDIC backstop. But it’s going to have pay for that. IFR price guidance puts the risk premium at 3.25 percentage points over Treasurys. Just for a little perspective, JP Morgan has bond maturing January 2015 trading at 1.38 percentage point over Treasurys, according to MarketAxess.

A death panel for Citi

It’s way too soon for the federal government to contemplate reducing its considerable equity stake in Citigroup.

If anything, now’s the time for the feds to finally get tough with the troubled giant and establish a firm deadline for forcing Citi to shrink itself.

What better way to mark the anniversary of Lehman Brothers’ chaotic collapse and the birth of bailout nation than with a presidential directive giving Citi one year to reduce its $1.8 trillion balance sheet by half?

Harsh? Yes, but that’s the point. To restore the principle of moral hazard, the managers of giant banks need to know that there must be some consequences for their reckless actions.

Any “too big to fail” bank that gets bailed out shouldn’t be able to simply walk away to live another day as if nothing has happened.

Now don’t get me wrong. The bailout of the banking system was necessary to prevent a global financial meltdown. Propping up Citi with a $45 billion cash infusion and a federal guarantee on $300 billion in toxic assets prevented an out-of-control collapse of the mammoth bank that would have made Lehman’s bankruptcy look like a case in small-claims court.

But Wall Street historian Charles Geisst says Citi “hasn’t paid much of a price” for its many misdeeds — including SIVs, CDOs and subprime mortgages, not to mention reckless credit card and auto loans. And I suspect a lot of the populist anger over the bailout stems from the view that the banks have gotten away with murder.

Morgan Stanley keeps Goldman from top M&A slot

Despite top billing for M&A involving European companies as well as Asia-Pacific and Japanese corporates, Goldman is not top of the league tables for global M&A for the year to date.

Instead it is long-time rival Morgan Stanley leading the pack, capitalising on a sizeable advantage in deals involving U.S. companies. Goldman is in second place in the worldwide ranking and JP Morgan third.

While the usual suspects are top of the tables, the big banks aren’t having it all their own way. Evercore Partners stands in 5th position for advising on deals with a U.S. flavour, behind Morgan Stanley, Goldman, JP Morgan and Citi.

But with five months still to go and M&A mandates scarcer than before, there is bound to be plenty of scrapping for top slot before 2009 is done.