Opinion

The Great Debate

from Breakingviews:

Why Citigroup would be better in bits

By Rob Cox

The author is a Breakingviews columnist. The opinions expressed are his own. 

Nine years ago, Breakingviews proposed an “extreme idea” to Citigroup’s then-leader Charles Prince. The $240 billion New York bank’s market capitalization was lower than the worth of its parts valued separately. By splitting into three separate units, the idea was, Prince could hand shareholders an extra $50 billion or so, the equivalent of one entire U.S. Bancorp at the time.

As it turned out, Citi had bigger concerns ahead. The housing crash exposed spectacular losses, wiping out capital and necessitating a government bailout. Prince was sent dancing onto the golf course. With the crisis now fairly distant in the rear-view mirror, however, it’s time for current Chief Executive Michael Corbat to revisit the case for a breakup.

Now cleaned up and well capitalized, Citi’s market cap today is about $160 billion – though any loyal shareholders are still nearly 90 percent worse off than in 2005. Despite the revamp, the bank is still prone to the stumbles that have proved characteristic since Sandy Weill, Prince’s predecessor, stitched the behemoth together.

This year, for example, Citi revealed an embarrassing fraud at its big Mexican subsidiary, Banamex. While not material to Citi’s capital, the $400 million swindle rekindled concerns that sprawl makes it too complex to manage. That’s one reason the Federal Reserve subsequently thwarted Citi’s plans to increase its dividend.

Slicing Citi into more manageable pieces would be one way to soothe regulators at home and abroad, not to mention U.S. taxpayers fearful of being on the hook for another bailout in the future. For any voluntary breakup to gain support, though, it would need to reward shareholders well beyond breaking the dividend logjam. Some arithmetic on Citi’s component parts suggests that’s possible.

from Breakingviews:

Memo to Wall Street: more Ace Greenberg please

By Antony Currie

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Wall Street needs more leaders like Alan “Ace” Greenberg. The onetime Bear Stearns boss, famed for his pithy missives to staff, died on Friday. He was 86. Though he was no longer in charge, the firm’s 2008 collapse is a notable blemish on an otherwise illustrious career. The industry could use more of Greenberg’s scrappy PSD: poor, smart and driven.

The shorthand was how he described the people he wanted to work for Bear, perhaps in his own image. Even after he became chief executive in 1978, and until 1993, his office was the trading floor not the executive suite. And unlike most bosses, he answered his own calls. Greenberg also believed in sharing at least some of the wealth, insisting that his senior managing directors donate at least 4 percent of their income to charity.

from Hugo Dixon:

EU needs more non-bank finance

The European Union needs more non-bank finance. Banks are on the back foot. On their own, they won’t be able to fund the jobs and growth the EU is desperate for. Non-bank finance needs to take up the slack.

The European Central Bank and Bank of England have made a good start by identifying the importance of reviving securitisation - the process of packaging loans into bond-like securities which can then be traded on the market. The two central banks have just published a joint paper describing blockages in the system which have all but killed EU securitisation since the financial crisis.

But securitisation is only one piece of the non-bank finance landscape. Similar leadership is needed to invigorate venture capital, equity investment, bond issues for small companies, shadow banking and so forth.

from Breakingviews:

Rob Cox: The worry now is a brewing M&A bubble

By Rob Cox
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Stop worrying about the tech bubble – there may be an even bigger one inflating beyond the confines of Silicon Valley. The corporate urge to merge has gone into global hyper-drive this year. Deal activity has surged as investors egg companies on and bid up the shares of acquirers well beyond mathematical explication, or prudence. As new metrics from interested parties are trotted out to justify the irrational, it’s time to exercise caution.

So far this year companies have announced some $1.3 trillion worth of transactions around the world, according to Thomson Reuters data. That’s nearly double the level of activity a year ago. European corporations have fueled even greater increases. Much of this is pent-up demand and a delayed response to the past year’s remarkable runup in stock market values.

In the Netherlands, bankers turn to God — by law

 

Lloyd Blankfein, the chief executive officer of Goldman Sachs, once famously said he believed banks were doing “God’s work.” Now, the Netherlands is going one step further: starting later this year, all 90,000 Dutch bankers will have to swear an oath that they’ll do their “utmost to maintain and promote confidence in the financial-services industry. So help me God.”

It’s part of a major attempt by regulators and banks to clean up after the financial crash of 2008, and put behind them scandals that continue to blacken the financial service industry’s reputation. Just last October, the big Dutch cooperative bank Rabobank paid a $1 billion fine to settle charges in the Libor rate-fixing scandal.

Board members of the banks have already been required to swear the oath since last year, but now it’s being expanded to cover everyone who works in the sector. It consists of eight statements, including promises not to abuse knowledge and “to know my responsibility towards society.” There’s also a new banking code, a special declaration of moral and ethical conduct that all board members are required to sign, a “treat your customer fairly” initiative, and a “suitability” test for executive and non-executive directors of supervisory boards.

Transforming Post Offices into banks

The U.S. postal service inspector general put out a report last week suggesting an intriguing way to shore up the ailing institution’s finances: Let the mailman double as a bank teller.

The plan? The post office would offer services designed to appeal to America’s unbanked and under-banked — the more than 50 million adults who either have no checking or savings account, or use high-cost, predatory services like payday loans to supplement traditional banking needs.

This sounds like a win-win. Americans — particularly low-income Americans — clearly need greater access to low-cost financial services. At the same time, many financial institutions have been complaining for years that providing banking services to low-income Americans is costing them money. So much so that they can barely bring themselves to open bank branches in anything less than well-heeled neighborhoods.

What’s your bank worth?

Half a decade has passed since the financial crisis, and yet the behemoth banks that caused economic chaos remain much as they were before – influential, opaque and potentially dangerous. It doesn’t have to be this way. Radical transparency could not only boost the industry, it could safeguard the economy. Forget “mark to market” and quarterly filings. Require every bank to report the value of its assets and liabilities on a daily basis. Don’t believe it can’t be done. Realize that it must be.

Elizabeth Warren, a Democrat from Massachusetts and newly established on the Senate Banking Committee, has already started asking tough questions of the bank regulators. She used to oversee them in her role as chair of the Congressional Oversight Panel that was created to oversee the Troubled Asset Relief Program. Among her most pointed questions is this: Why are so many publicly traded banks valued by the market at less than what they report to investors every quarter as their tangible book value?

Tangible book value is a bank’s assets minus its liabilities. It should be what you could sell the bank for, were you as fortunate as It’s a Wonderful Life’s Mr. Potter and owner of the whole shebang.

How to do PR for banks

Big banks — at least in Europe — are putting on a new, highly branded, and more contrite face.  Barclays is embarking on something it calls “Project Transform”’; Deutsche Bank has announced its “2015+” strategy and is pushing for what its CEO has called “deliberate” “uncomfortable change”. UBS has its own 2015 strategy, and the head of its investment banking unit publicly proclaimed that the industry has become “too arrogant, too self-convinced”.

Should we buy any of this? William Cohan, for one, isn’t a fan of Barclays CEO Anthony Jenkins’s “new morality”. Cohan’s right to point out that all of this hat-in-hand talk comes after a long period of transgression at Barclays:

Among other indiscretions, the good folks at Barclays manipulated the London interbank offered rate, shredded unflattering reports about the U.S. wealth-management division and, according to British authorities, may have fraudulently loaned money to Qatar to invest back in the bank to help Barclays avoid a government bailout in 2008.

Banks thrive, while homeowners still suffer

A year ago the federal government and 49 states completed a $25 billion agreement with the nation’s largest mortgage servicers to settle claims of “robo-signing” and unlawful foreclosure practices. President Barack Obama announced the creation of the federal-state mortgage securities working group in his 2012 State of the Union address. The nation seemed on the verge of transforming the way banks treat struggling homeowners ‑ particularly those with “underwater” mortgages, in which a homeowner owes more than the house is worth.

These promises, however, have yet to be fulfilled. The latest interim report on the national mortgage settlement is due out this week, and banks will likely again declare that it offers proof that they are fulfilling their obligations. But the communities hit hardest by the foreclosure crisis have yet to see any meaningful relief.

Time is running out to ensure that these communities receive their fair share under the settlement. But it is not too late to provide meaningful assistance. The settlement monitors need to demand greater transparency from banks, and they need to see that banks comply with the fair-lending requirements set out in the agreement. They also need to aggressively police the servicing reforms to ensure that all homeowners get a fair opportunity to save their homes.

Occupy the mortgage lenders

By Simon Johnson
The opinions expressed are his own.

Participants in the Occupy Wall Street movement are right to argue that the big banks have never properly been investigated for the mortgage origination, aggregation, and securitization behavior that was central to the financial crisis – and to the loss of more than eight million jobs. But, thanks to the efforts of New York’s attorney general, Eric Schneiderman, and others, serious discussion has started in the United States about an out-of court mortgage settlement between state attorney generals and prominent financial-sector firms.

Talks among state officials, the Obama administration, and the banks are currently focused on reported abuses in servicing mortgages, foreclosing on homes, and evicting their residents. But leading banks are also accused of illegal behavior – inducing people to borrow, for example, by deceiving them about the interest rate that would actually be paid, while misrepresenting the resulting mortgage-backed securities to investors.

If these charges are true, the bank executives involved may fear that civil lawsuits would uncover evidence that could be used in criminal prosecutions. In that case, their interest would naturally lie in seeking – as they now are – to keep that evidence from ever seeing the inside of a courtroom.

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