Commentaries
Now raising intellectual capital
The final straw with Citi
”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.
Tax Wall Street trades
Reports of the death of the investment bank have been greatly exaggerated, as Mark Twain might have put it.
Now all the chatter is about how little things have changed on Wall Street, with trading revenues and fees from underwriting stock deals padding the bottom lines of both banks. Back in September, The New York Times ran a lengthy article headlined “Wall Street, R.I.P.: The End of an Era.”
But this week the paper of record is writing about the return of the gilded pay package at Goldman.
Of course, things are different on Wall Street. Two big investment banking competitors are gone, leaving more opportunities for the remaining players. Banks like Goldman and Morgan Stanley owe a large debt of gratitude — and maybe their very existence — to the federal government.
In particular, Goldman, Morgan Stanley and JPMorgan collectively sold more than $80 billion in government-guaranteed debt. The government-backed bond sales enabled the banks to raise desperately needed capital at a time when investor confidence was at an all-time low.
It’s amazing what a big bank can do when it’s all but got the full faith and credit of the U.S. government behind it.
The big trading gains at Goldman and JPMorgan also should put to rest the notion that banks can’t generate hefty trading revenues, if forced to operate with lower levels of leverage. The gross leverage ratio — a measure of a bank’s debt to assets — dropped to 14.2 at Goldman, nearly half of what it was at the start of the financial crisis.
profile: ‘He does not buy, sell or own individual stocks.’ No wonder he battles with these concepts.
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The Wall
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.