Opinion

The Great Debate

Stress and the Citi

Markets are still absorbing the Federal Reserve’s surprising smack-down of Citigroup. Under its chief executive officer, Michael Corbat, Citi had greatly strengthened its capital base — indeed, it had one of the best capital ratios of all the big banks — and had proposed modest dividend increases and stock buybacks.  Instead, City was the only big American bank that failed its review.

The Fed announcement, perhaps harking back to the Alan Greenspan tradition, was gnomic, to say the least. The Citi bombshell was buried in a few lines in both the press release and the much longer official statement.

While acknowledging Citi’s stronger capital position, the Fed stated that the rejection was based on “qualitative” weaknesses, including the bank’s “[in]ability to develop scenarios … that adequately reflect and stress its full range of business activities and exposures.” The bank will eventually be handed a detailed bill of particulars, perhaps in a week or so.

Corbat, a former Harvard football all-American, is a Citi lifer, with hands-on experience at most of the company’s hot spots. He was elevated specifically in 2012 to rebuild its balance sheet and strengthen internal controls.  Both he and his board seem to have been badly wrong-footed by the Fed turndown — Corbat had planned to dial into the Fed phone call from South Korea, but had to rush home to deal with the crisis.

The stress test failure came on top of a cascade of adverse events.

In late February, Citi had announced that its Mexican subsidiary, known as Banamex — the jewel of its international network — was out $400 million because of a garden-variety fraud operation. One Banamex client, a local oil servicing company, had regularly borrowed against its contracts with Pemex, the Mexican state oil company.  Banamex discovered, by accident it appears, that Pemex had previously suspended this client, but the client had continued to borrow against forged contract documents. Investigations are underway, and reports are that at least one Banamex employee was complicit in the fraud, possibly in collusion with some U.S.-based employees.

UK takes right step on too-big banks

jamessaft1.jpg(James Saft is a Reuters columnist. The opinions expressed are his own)

So it can be done after all.

Britain is poised to take tough steps to break up the large banks it rescued, setting it in stark contrast to the United States, which seems set on a policy of shoring up the unfair advantages it grants its too-big-to-fail banks while regulating around the edges.

It is quite a change for Britain, which has a sorry history of self-serving self-regulation in financial services combined with limp and outgunned official control.

Chancellor of the Exchequer Alistair Darling on Sunday told the BBC that Lloyds, RBS and Northern Rock would be partly broken up and assets sold to new entrants into the banking market. Large existing competitors such as HSBC are expected to be blocked from making bids for the assets.

Two cheers for the walking wounded

ws2– Mark Hannam is a guest columnist, the views expressed are his own. He formerly worked at the Bank of England and Barclays. He is currently chairman of Fair Finance, a microfinance company –

Some banks have come out of the financial crisis in better shape than others. We should encourage them rather than lump them together with the failures.

Public anger at the recent failings of many of our leading banks, while justified, is not a sound basis for future policy. The temptation facing policy makers — that of failing to distinguish between better capitalized, better managed banks and under-capitalized, poorly managed banks — should be avoided.

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