Citicorp -- The New Hero?

Having been without electricity for most of the week, I would pick up the New York Times and Cincinnati Enquirer each morning in the dark (around 5:30 am) and walk down to our empty house for sale down on Greenville, which did have electricity from Tuesday night onward.

The NYT of September 18, or was it 19?, was chock full of the most amazing articles on the business situation created by the events of last week. The entire banking world was either thrown into chaos or rescued, depending on your point of view. Now Wachovia is the White Knight??? Nad now Citicorp is "good" whereas it was "the worst!"

Read on:

new_york_times:http://www.nytimes.com/2008/09/21/business/21citi.html

By JULIE CRESWELL and ERIC DASH
Published: September 20, 2008
YOU’RE one of the largest commercial banks in the United States. Your international reach is beyond compare, with customers in scores of countries relying on you for credit cards, mortgages and auto loans. Corporations worldwide turn to your investment bankers for advice.
You’re Citigroup, and on paper, you look perfectly suited to withstand these tumultuous times.
As the stocks of once-high-flying brokerages firm gyrated wildly last week and some smaller banks struggled to survive, Citigroup even found itself named as a potential suitor.
“We were a pillar of strength in the markets,” said Citigroup’s C.E.O., Vikram S. Pandit, in an interview late Friday afternoon. Sitting calmly in his quiet office after one of the most chaotic weeks of trading in Wall Street history, Mr. Pandit said that his bank had some funds flow in from competitors’ coffers.
“That’s a great place to be,” he says, smiling.
Of course, even Citi’s stock was whipsawed last week as fears about a financial collapse appeared to overwhelm even the mightiest of Wall Street’s titans. And Citi’s fortunes also may be buttressed by a huge government bailout plan unveiled on Friday.
Regulators plan to create a taxpayer-financed depository for withering mortgage securities — and Citi holds billions of dollars of such stuff.
Until the government works out all the details, it’s unclear how much Citi stands to gain. The biggest unknown is the price that the government will pay for the assets. If it’s below the price that Citi has assigned them, the bank could face further losses.
Mr. Pandit said he did not know exactly how the fund would work or what impact it might have on Citi’s holdings. But he expressed confidence that the proposed bailout could go a long way toward restoring confidence among investors and eventually free up banks to make new loans. “That’s going to be good for housing prices as consumers are able to get mortgages again,” he said.
While the proposed bailout and the newly buoyant market raise Citi’s prospects, the large bank — which has been inundated with an unusual array of managerial and financial debacles in recent years — still isn’t out of the woods.
If consumers continue to be hammered by the economy, the bank may have to add to the billions it has set aside to cover potential losses in credit-card, home-equity and auto loans. And Citigroup’s large international base (two-thirds of its deposits are outside the United States) could expose it to further hits as economies in Europe and emerging markets slow.
Other problems that Citi’s executives must tackle are homegrown. A decade has passed since Citigroup was formed after the landmark $70 billion merger between Citicorp and the insurance company Travelers, shattering the Depression-era law that hemmed in the size and power of America’s banks. Yet Citigroup is still struggling to make all the parts perform.
While Mr. Pandit is scrambling to put out fires, he also must find a way to integrate the dozens of companies that his predecessors acquired over the years. Even during the good times, Citi underperformed its peers. And since the credit crisis struck last year, the bank’s market value has plunged more than $125 billion. It is on track to have four consecutive quarters of multibillion-dollar losses.
Since taking over the banking giant late last year, Mr. Pandit has made many moves to shore up the company’s finances. In recent months, Citi has raised $50 billion in capital, cut the dividend by almost half, slashed expenses and headcount, and put underperforming businesses up for sale. He is also trying to refine the bank’s strategy and has brought in new heads for several important divisions.
Until recently, however, Citigroup hasn’t been given much credit for its new steps.
“What’s not clear to people from the outside is that we’ve done a lot to clean up the business,” said Mr. Pandit. Indeed, a handful of analysts give Mr. Pandit kudos for addressing many of Citi’s longstanding problems and argue its diverse business lines position it well if markets stabilize.
“No one financial company has the geographic and product breadth that Citigroup has,” says Richard X. Bove, an analyst with Ladenburg Thalmann. “But the company has been massively mismanaged for 15 years.”
MUCH of Citigroup’s woes trace back to Sanford I. Weill, Citigroup’s former chairman who transformed the bank into a financial services behemoth during more than a decade of flashy acquisitions. Citigroup’s stock soared during his reign as he bought company after company, then slashed expenses to show quick profits.
Mr. Weill’s successors, first Charles O. Prince III, and now Mr. Pandit, have had to deal with the devastating consequences of Mr. Weill’s tenure. Analysts say that he instituted a cowboy culture that pitted managers against one another, did not share information with employees and forced them to battle for every last nickel of spending. He underinvested in technology, leaving Citigroup with outdated systems that analysts say could still take another five years to update.
More important, Mr. Weill and Mr. Prince did not keep the bank up to date with risk analysis systems and personnel, leaving it vulnerable to the dangers associated with complex products like collateralized debt obligations, or C.D.O.’s, which have loomed ever larger on Citigroup’s balance sheet in recent years.
Mr. Pandit is a former Morgan Stanley executive who left to start a hedge fund, Old Lane Partners, which Citigroup acquired in 2007 for $800 million. When Mr. Prince resigned late last year amid gigantic losses in the mortgage portfolio, Mr. Pandit was tapped to take his place.
Even though he had no retail banking experience, Mr. Pandit so far has earned fairly strong marks from some Wall Street analysts. He quickly started raising capital and announced plans to slash nearly 20,000 jobs. Thousands more layoffs are likely. And this spring, he said Citigroup would shed $400 billion in assets over the next three years. Still, Citi is exposed to significant risks.
While it has written down about $27.6 billion of its subprime and related mortgage securities, Citi still holds about $22 billion of the mortgage-linked securities on its balance sheet. Gary L. Crittenden, Citigroup’s chief financial officer, says that most of the securities predate 2006, when mortgage lending practices really went off the rails, and that Citigroup has marked many of those C.D.O.’s down to 61 cents on the dollar. If the government values them below that level, Citi will have to mark them down even further.
The bank also has $16.4 billion in another type of risky loans on its books. Defaults on so-called alt-A loans, which were made to slightly more creditworthy customers but with little to no proof of their income or assets, is accelerating.
Citigroup must also reckon with new problems created by the credit crisis, like losses on its Fannie Mae and Freddie Mac securities, and the collapse of supposedly safe auction-rate debt.
Still another unknown for Citigroup is its exposure to loans provided to buyout firms, which paid what now seem like high prices to privatize publicly traded companies. As the economy slows, the values of those acquired companies are also declining. So far this year, the bank has written down about $3.5 billion of those loans but still has a further $24 billion outstanding.
While Citigroup’s huge deposit base has given it more stability in these rocky markets, its retail customers may also give it some trouble in the coming quarters. Consumers, hit hard by falling housing prices and rising gas prices, are struggling to keep up with sky-high credit card bills and auto loans.
In the last year, Citigroup has more than doubled the money it has set aside to cover potential losses in its consumer loans, ranging from mortgages to credit cards and auto loans, to $16.5 billion. And its losses will increase if the unemployment rate keeps rising.
“If you look at the last three credit-card cycles, they typically last somewhere between 8 and 10 quarters long. We’re now in the fourth quarter,” says Mr. Crittenden, who worked at the credit-card giant American Express for seven years before joining Citi in 2007. “We’re likely to see additional deterioration.”
Still, an even bigger potential problem for Citigroup is the $1.2 trillion in assets that shareholders do not see because they are not on its balance sheet. (JPMorgan Chase also holds hundreds of billions of dollars’ worth of special securitization vehicles off its books.)
While Citigroup provides ample disclosure of these assets — 23 pages worth of discussion in its second-quarter filing — it doesn’t address one big question: How much of that $1.2 trillion might wind up back on the balance sheet? In the last year alone, Citigroup has shifted $55 billion of assets back onto its books.
Last week a Senate banking subcommittee held a hearing on how accounting rules for off-balance-sheet entities may have contributed to the explosive growth of risky subprime mortgages and mortgage securities.
Earlier this year, the Financial Accounting Standards Board proposed rules that could require banks to bring these potentially distressed assets back onto their books — a move that could seriously weaken the banks’ financial well-being. The board, however, has delayed implementation of the rule, which will give banks more time to lobby against the changes.
While Citigroup has struggled to get its sprawling operations under control, its closest competitor, JPMorgan Chase, has performed much better during the current credit meltdown. While some analysts say JPMorgan’s C.E.O., James L. Dimon, has proved himself to be an adroit leader, others say the biggest factor dividing the two banks’ performance is the business mix.
JPMorgan, unlike Citigroup, had relatively little exposure to mortgage securities. On the flip side, JPMorgan’s extensive retail branch network in the United States makes it much more vulnerable to consumer defaults on home equity and auto loans than Citi, analysts say.
STILL, in these uncertain markets, Citigroup’s business mix has offered it protection that some of its investment banking brethren would have lusted after last week. Mr. Pandit continues to staunchly resist calls to break up the banking giant. After all, in today’s market pandemonium, a stand-alone Citigroup investment bank might not have survived, he says.
“If there’s anything I’m right about 100 percent it’s the strategy we’re on and what we’re doing,” Mr. Pandit says.