Opinion

Felix Salmon

Citi’s cities

Felix Salmon
Sep 24, 2009 14:10 UTC

David Enrich says that Citi is retrenching its consumer operations in the US:

Executives at the New York company plan to narrow the focus of Citigroup’s U.S. branch network to six major metropolitan areas, according to people familiar with the situation. Citigroup also will limit its overall consumer lending in the U.S. primarily to credit cards and “jumbo” mortgages, while catering largely to affluent customers.

This makes a great deal of sense: even now Citigroup has many fewer branches than the likes of PNC and BB&T, and with the collapse of the ill-fated Wachovia acquisition, its dreams of becoming a retail powerhouse in the US are clearly dead. Citi was never very good at old-fashioned branch banking, and it should indeed play to its strengths rather than trying to be all things to all people.

Citi’s main strength, globally, is banking the affluent, largely through its extremely strong Citigold brand. The cities it’s concentrating on — New York, Washington, Miami, Chicago, San Francisco, and LA — are the main global cities in America, the ones that Citi’s international client base is most likely to visit. Philadelphia and Dallas, though lovely places, aren’t global in that sense, and if Citi has less than 1% of the deposit base in such cities anyway, it’s easy to see how it could make the decision to sell those branches to a strong local franchise. (It probably won’t, though: Citi sources tell my colleague Matt Goldstein that although the bank will indeed concentrate on the big six cities, it’s not going to leave Philly, Dallas, Houston, or Boston.)

I’m sure it’s unrelated to the WSJ story, but last night I got an email from the branch manager of my Citibank branch, the one at 120 Broadway in lower Manhattan; the subject line was “Our commitment to New York starts here.” She included her phone number, so I gave her a ring, and she gave me some astonishing numbers. That one branch alone, which includes all the accounts which used to be held at the World Trade Center branch, has over 30,000 customers, and a deposit base of — get this – over $1.5 billion. (That’s 75 times the size of my local credit union.) Its customers are a very diverse and international group of people, and, with an average of about $50,000 on deposit apiece, are clearly pretty well off.

That kind of customer base is clearly what Citi wants, and what it’s good at; you can see why Citi would want to concentrate on jumbo mortgages.

It’s true that this news means Citigroup pulling back from banking the ordinary Americans who bailed the bank out last fall. But frankly those ordinary Americans were always better served by the big retail powerhouses anyway. Retail banking is not Citi’s strength, except for possibly in Mexico and Poland. It should stick to banking the global affluent, who stuck by it through all the troubles of the past year, and who remain incredibly profitable for the bank.

COMMENT

The Dallas area only has the global headquarters of small companies like ExxonMobil and AT&T, and the US headquarters of insignificant global firms such as Ericsson, Nokia, RIM, EADS American Eurocopter, Alcon, etc. A rather provincial place.

Posted by Rich Republican | Report as abusive

Counterparties

Felix Salmon
Sep 23, 2009 21:21 UTC

“Of course there were four rooms in Mr. Thain’s office suite” — of course! — TBI

25% budget reductions at Conde Nast, but no mention of salary cuts. Surely all those $400k/year editors could live with such a thing — NYO

Couric’s salary is more than the annual budgets of “Morning Edition” and “All Things Considered.” — CJR

Madoff by Karsh!!! Being auctioned! — Artnet

A 2008 survey reported that chocolate digestives were “‘key’ to clinching business deals” — BBC

This Selective Twitter thing is a very good idea, I think — FB

Emanuel Derman’s ode to the chocolate digestive — who knew quants had a knack for the poetic and sublime? — Wilmott

Why would an “in-depth interview” show take its name from a twitter feed? — CBS

Easy + Easy + Easy = Impossible — Scienceblogs

Me, on the radio, on the G20 — KPCC

Me, on the TV, on lots of other things — BNN

COMMENT

your glasses are off kilter

Posted by MarkC | Report as abusive

More on European bank charges

Felix Salmon
Sep 23, 2009 19:51 UTC

Thanks to SP, I’ve now found the study (149 pages, 1.5MB) examining bank fees across Europe. It makes for fascinating reading.

Here’s one key graph:

bankcharges.tiff

On the y-axis is the annual cost of a checking account for the average individual; on the x-axis is the degree to which banking products are transparent and simple. (Simplicity and transparency are very highly correlated.) Basically, once transparency and simplicity reach a certain not-particularly-high point, the cost of checking is capped at a reasonable level. But where there is opacity, the sky’s the limit when it comes to how much banks can charge.

Incidentally, “checking” is now very much a misnomer in pretty much all European countries. In Belgium and Spain, the average household writes less than 3 checks per year, and fewer than one in three households writes any checks at all. At the other end of the spectrum, in Portugal the average household writes one check a month: anything more than that is considered “high usage”. I don’t know what the equivalent figures are for the US, but I’m sure that the number of checks written overall is at least a full order of magnitude higher than it is in the EU.

I’m also intrigued by these charts:

charges.tiff

The main thing I see here is lots of red and purple: basic annual and account charges. What that says to me is that banks in Europe don’t hide their charges in the form of overdraft fees and other things people don’t expect to incur: that in general European bank charges are much more transparent than those in the US. That’s a good thing, and it stops the poor from cross-subsidizing the rich, as happens in America.

COMMENT

Alex, is there a correlation between high banking charges and sport by any chance ?

it looks like Spain is a leader not only in
football
cycling
tennis
etc

and banking charges opacity and charges themselves.
8-)

I live in Spain, but not Spaniard, and i am so upset

Posted by chris | Report as abusive

Blankfein’s disingenuousness

Felix Salmon
Sep 23, 2009 18:18 UTC

Spiegel has a good interview with Lloyd Blankfein. They started out by asking him about his astronomical pay, and whether such sums promote greed:

Blankfein: I think we all know that greed can drive behavior, but it tends to be short term and ultimately destructive. Our leadership team stands out because most of our people have built their whole career at the firm and stayed through many years and many changes in the market. When our people leave they tend to go on to other positions — whether in government or other forms of public service — that no one would do if their were motives were financial. Those characteristics don’t make me think of “greed.”

SPIEGEL: So only modest, good people work for Goldman Sachs? We hardly believe that.

Blankfein: I have stated my honest view of things.

Of course, for every Rubin, Corzine, or Paulson — someone who made it to the very top of Goldman Sachs, became dynastically wealthy, and then went on to amass power commensurate with their wealth — there’s a John Thain or Chris Flowers, who left Goldman to make even more money elsewhere. And besides, if the motives of Goldman employees weren’t financial, why would the firm pay them such exorbitant amounts of money?

Then Blankfein tries to deflect the too-big-to-fail question:

SPIEGEL: Wouldn’t it be much easier to simply limit the size of banks? After all, the danger of systemic contagion is less when the banks are smaller.

Blankfein: So what is “too big to fail”?

SPIEGEL: When a bank is so large that in the event of insolvency, it could take the entire financial and the entire economic system along with it into the abyss. The state would then rescue the financial institution with taxpayer money.

Blankfein: The size of the bank is not the most important factor. Whether a certain risk is bundled at a single bank or spread across several is completely irrelevant. That doesn’t diminish the size of the risk. In fact, this would only change the problem from “too big to fail” to “too many to fail.”

When you have “too many to fail” — as we saw during the S&L crisis of the 1980s — the repercussions are manageable, in the way that the repercussions from the collapse of a Fannie Mae or AIG, say, really aren’t. Of course it’s relevant if a systemically-devastating risk is bundled at a single bank: then one bank’s errors can cause chaos. Besides, banks which are too big to fail — like Goldman — benefit from the moral hazard play: you can lend to them at low rates, safe in the knowledge that they’ll be bailed out if they ever get into trouble. The result, of course, is higher profits for Goldman. And more risk for the taxpayer. That doesn’t happen with small-enough-to-fail banks.

(Via TED)

COMMENT

““we hardly believe that.” Wow, can journalists really say that?”

German ones can. Very direct. I guess they dispense with the “fair and balanced” fakery.

Posted by jj | Report as abusive

Map of the day, McDonald’s edition

Felix Salmon
Sep 23, 2009 17:59 UTC

mcd_us_high.jpg

This beautiful map comes from Stephen Von Worley, who has mapped the contiguous USA by how far any given point is from the nearest McDonald’s. Turns out the McFarthest Spot, somewhere in South Dakota, is 107 miles, as the crow flies, from a Golden Arch. There’s something for South Dakota to be proud of!

(Via Matthies)

COMMENT

Being from South Dakota…I can tell you there is no Mcdonalds in Glad Valley or Meadow SD. Both towns are less than 100 people…What was he using for his information

Posted by Ryan | Report as abusive

The beginning of the end of meaningful regulatory reform

Felix Salmon
Sep 23, 2009 16:37 UTC

The erosion of the Obama administration’s regulatory-reform plans has now begun in earnest:

At a hearing before the House Financial Services Committee, Treasury Secretary Timothy F. Geithner announced that the administration had dropped one provision in its plan for a consumer financial protection agency — a requirement for banks and other financial services companies to offer “plain vanilla” products, like 30-year fixed mortgages and low-interest, low-fee credit cards.

There’s no good reason for this capitulation, except for the financial lobby has so effectively captured Congress that no reform would be able to get through with such a common-sense provision in place. This has nothing to do with the government “approving and disapproving a wide array of financial products”, it just says that anybody who wants to call themselves a bank should provide simple, basic banking products which aren’t prone to hidden fees and lucrative opacity. I fear that by the time Congress is done, the Consumer Financial Protection Agency won’t be able to protect consumers at all — and that’s assuming it’ll even exist.

COMMENT

Oh but we are that smart, Don. You see, regulation only ever serves to enhance the position (or appear to oppose) those who would benefit the most from such a ‘crisis’, or create an uneven playing field thereby rigging the game. When the gatekeepers are the thieves, regulation really loses its meaning.

Bank fees around the world

Felix Salmon
Sep 23, 2009 15:12 UTC

The EU, after a long and complicated study which I can’t even find on their website, has come to a simple and powerful conclusion when it comes to the subject of bank fees:

High prices are directly linked to opaque price information. Therefore, consumers in countries with opaque price structures are likely to pay more for bank accounts.

This is a universal law; it’s not confined to the EU. The poster child for high and opaque bank charges is Italy: there, someone who uses their bank account a lot gets charged €831 (over $1,200) a year, compared to just €27 for the same level of service in Bulgaria.

That number includes overdraft fees, of course, which are the cause du jour in the US. Yesterday’s news is kinda funny: as of October 19, Bank of America will “not charge overdraft fees on more than four items per day”. What they don’t mention in the press release is that the cap was increased from five to ten earlier this year: they seem to have adopted the yo-yo model of bank charging, where you maximally gouge your customers until the Senate Finance Committee starts asking questions, and then immediately scurry backwards in a desperate attempt to avoid regulation.

Regulation is still very much necessary, no matter how much BofA, JP Morgan, and others try to avoid it. Anything they announce this week could be unilaterally repealed next week, or next month, or whenever the issue gets forgotten about. A few simple rules would make everything much more transparent and customer-friendly.

COMMENT

I have just closed out my account with RBC bank and I also closed out an account at Bank of America because of their predatory overdraft fee practices. Today I reached the limit of my tolerance of this overdraft fee theft when I was charged $164 in overdraft fees while my account only went minus by $11.84. They also processed the largest transaction first to insure that they whipped their slave the maximum possible amount. We are not slaves, we have the freedom to change to a bank that allows you set up your debit card to decline transactions that exceed the available balance (even if a card decline is slightly embarassing), thereby eliminating overdraft fees. I just learned that two US banks that allow this option are Wachovia, and Woodforest National Bank. If everyone closed out their accounts at banks that charge excessive and oppresive fees (such as Bank of America and RBC), and moved to more friendly banks that at least allow you an option, then this abusive banking practice would stop quickly. We can’t wait for the politicians (who don’t care about the plight of the low income, or the unemployed) to pass laws to protect us from this bank rape, we have to take action ourselves.

Posted by Chris | Report as abusive

Chinese housing datapoint of the day

Felix Salmon
Sep 23, 2009 14:49 UTC

Rosealea Yao reports:

Roughly 80 per cent of China’s urban residents own their homes – an astonishing number for a country that only began to privatise its housing stock in 1998.

Astonishing is right — and frankly, given the absence of any sourcing, I’m not sure I believe it. The high point of the influx from rural to urban China might be behind us, but it isn’t over yet, and all those poor Chinese workers looking to make their lives in the big city are unlikely to jump straight onto the bottom rung of the housing ladder. There might be some shenanigans going on with the definition of “residents” here — are all city inhabitants really included in the denominator?

That said, no visitor to China can fail to be astonished at the sheer quantity of housing stock which is going up in high rises across the country. If Yao is right, then substantially all of that stock is sold rather than rented, which helps to explain the astonishing amount of money in the Chinese construction industry. But it also means hundreds of billions of dollars of mortgages in the Chinese banking system, which I doubt were underwritten with particular assiduousness, and which have been written at extremely high price-to-income ratios. China could yet suffer a mortgage crisis of US proportions.

COMMENT

“Urban residents” means those with urban hukou (the all-important residence permit), about two-thirds of the population in large metropolises. The people owning houses haven’t moved into the city, they’re the privileged proletariat and intelligentsia from the pre-reform era, who bought their state-owned accommodation at uneconomic prices.

It’s also worth noting that ownership+rentals > 100%. Many of these people will rent the houses they own to others lower down the economic scale (like me) and rent their accommodation.

Mortgages are very rare in mainland China – people save up, encouraged by the fact that wages are often automatically put into a restricted account for housing purchases.

I’m less certain about this, but possibly another distinctive feature is that new housing stock is often pre-sold, as I believe is also the case in Hong Kong. The developer sells the units on in blocks, which are then split and sold on, then split and sold on, until they are owned by individual families. The risk is spread very widely.

Posted by SeekTruthFromFacts | Report as abusive

Olympic costs

Felix Salmon
Sep 23, 2009 12:25 UTC

When a number in the newspaper seems too outrageously large to conceivably be true, don’t believe it. For instance, from today’s WSJ:

The campaigns by the four bid cities, Rio, Chicago, Tokyo and Madrid, are heating up. Mr. da Silva has already approved some $240 billion in funding for the Games and offered the federal government’s financial guarantee to cover shortfalls in the organizing committee’s budget.

The Olympics are expensive, but they’re not that expensive — $240 billion would amount to more than 12% of the continent-sized country’s $2 trillion GDP.

The actual Olympic costs are $14.4 billion, and that includes $11.6 billion in construction and infrastructure costs — renovation of airports, roads, subway lines, that kind of thing. And the whole package has been incorporated into Brazil’s monster $240 billion federal investment program, 57% of which is public funds.

Most of the costs of the Rio Olympics, then, are a necessary part of the city’s (and country’s) regeneration in any event, they’re not Games-specific. The organizing committee’s operating budget is $2.8 billion, or about 1.2% of the number in the WSJ. That’s a much more realistic number to look at.

COMMENT

Hey! That’s 430 billion Reals! Now we’re talking real money.

Posted by jonathan | Report as abusive
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