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.

Bair’s FDIC frenzy

bair– James Pethokoukis is a Reuters columnist. The views expressed are his own –

It’s an unhealthy sign for the U.S. economy that the most fascinating, if not divisive, player on the financial stage is the head of the Federal Deposit Insurance Corporation. But such is the case with Sheila Bair.

Although there is mounting evidence that the worst of the banking crisis may have passed, Bair continues to command center stage. The latest, if the unnamed sources chatting to the Wall Street Journal are to be believed, is that Bair wants to shake up top management at Citigroup. Presumably this would include the ouster of Citi’s chief executive, Vikram Pandit.

Geithner’s naked subsidy redefines toxic

jimsaftcolumn31– James Saft is a Reuters columnist. The opinions expressed are his own

Treasury Secretary Geithner is all but admitting that U.S. banks are suffering not from market failure but self-inflicted collateral damage.

The U.S. Treasury on Monday detailed an up to $1 trillion plan to buy up assets from banks in partnership with private investors, using financing bankrolled by the government, financing that is only secured by the value of the doubtful assets the fund buys.

One portion will be dedicated to buying complex securities from banks employing capital contributed by private investors and the government topped up with funds borrowed from the Federal Reserve. A second portion will buy older securities that are, or were, rated AAA, using, you guessed it, more non-recourse funding.

Here comes another set of dodgy U.S. loans

jimsaftcolumn1– James Saft is a Reuters columnist. The opinions expressed are his own –

Banks in the U.S. face a new source of write-downs and failures in the coming year as loans made to developers to finance residential and commercial property development rapidly go bad.

And as these loans are old-fashioned and concentrated in smaller banks, their fate is particularly interesting as it indicates that issues with the banking system go far deeper than the so-called “toxic assets” belonging to the largest lenders that have thus far gotten most of the attention and government aid.

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