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Sunday, November 23, 2008

"Citi Never Sleeps"

"Citi never sleeps" Famous last words?

I had to write this because it is of great concern to the banking world. The bank I work for in New York was under discussions to be acquired by Citibank at some point. How Citigroup evolves or attacks the mess they are in is going to have great consequences. How the Feds respond to Citibank is of greater importance.

Citibank as you may know is on the brink of collapse after 4 years of having the philosophy that they are "too big to fail". Robert Rubin, a man of significant importance to the strategy Citigroup had taken for its demise, is also an advisor on the Obama team. Right now the Feds are negotiating terms of stabilizing the stock price after outcries from investors that CEO Pandit is not doing enough. Pandit contends that all the 'numbers' are right and there is nothing to fear, but those numbers had been right for the last 4 years as well. In short, no one believes him or shareholder Prince Talal who has publicly stated that Citigroup is 'drastically' undervalued. So undervalued that the Prince Talal increased his stake to 5% but not beyond.

Citigroup just decided to lay off 52,000 employees worldwide. Most of the cuts were from New York and London. And I am sure that my job would be at great risk if my employer was timely acquired. But amongst the Asian layoffs 300 are from Singapore and 1000 are from India. If such drastic cuts are being made regionally and the organization has planned to cut 20% of its costs, I have doubts about the existence of Citigroup Bangladesh.

Citibank Bangladesh might be cut out at a time when HSBC and Standard Chartered are aggressively expanding into this market termed by Goldman Sachs JP Morgan as one of the 'Frontier Five' (countries with high long term projected growth). It is a country which Citibank Bangladesh CEO, Mamun Rashid, termed as the "last frontier of banking". Ironically he may not be a part of this frontier for very long. Mamun Rashid's comments has made HSBC and Standard Chartered more aggressive. But while Citi burns have local banks rallied strongly in the stock market. Being in a frontier has helped everyone but Citi.

It has come to my attention that Citibank Bangladesh has hosted a "micro-credit" award ceremony amongst a media frenzy. Yunus wasn't there because Citibank didn't want to deal with a 'higher than thou' attitude. From sources at that event, Citibank NA staff were visibly depressed at a hyped media event. But what does a bank that is associated with all the Fortune 500 companies have in common with micro-credit? Nothing. This summarizes Citigroup for the last four years of existence. Nothing made cohesive sense. Bigger risks doesn't always mean bigger profits. How else does a $300 billion juggernaut become a $20 billion bargain bin company?


Red & Green said...

Perhaps its bed time for sweet Citi, the market will wish Citi 'Good Night' and put it to sleep. How about some bed time stories from yester years?

Anonymous said...

The "Frontier Five" were actually identified by JPMorgan, not Goldman Sachs. Goldman included Bangladesh in their "Next 11" (or N-11).

Citigroup (not Citibank as you state) never "had" a philosophy that they were "too big too fail". This is a misunderstanding and conflation of what is generally meant by the phrase "too big to fail".

"Too big to fail" alludes to a paternalistic view of the market by regulators that some companies are too big to be allowed to fail, not that some companies are so big as to be impervious to failure.

And in fact, US regulators recently decided just that and have bailed out Citigroup. The belief is that Citigroup is too big to be allowed to fail since market repercussions of such a failure would have severe knock-on effects to the entire economy. Whether they're justified or not is a matter of debate. (I personally believe it's a bad decision because it ignores economic realities of a capitalistic system. One person's failure is another person's opportunity. But that's besides the point.)

Pandit's claim that the underlying numbers at Citigroup are alright might be substantiated, it might not. The Federal Reserve Bank of Minneapolis recently released a research paper examining 4 myths about the current crisis. They reached the same broad consensus, the underlying numbers of the economy are quite sound and don't support the current policies being pursued in the bailout. The four myths about the crisis are: (1) Bank lending to nonfinancial corporations and individuals has declined sharply, (2) Interbank lending is non-existent, (3) Commercial paper issuance by nonfinancials has declined sharply and rates have risen to unprecedented levels, and (4) Banks play a large role in channeling funds from savers to borrowers. All four of these claims are false according to the hard data. Yet the researchers don't dispute the fact that a very real financial crisis is under way.

While they do not draw this conclusion, I would suspect the nature of this crisis is in large part a crisis in confidence more than a crisis of the underlying fundamentals (which are messed up, don't get me wrong, but not sufficient cause for all the market hysteria). The stock market is not the real economy, it is an arena of speculation on the real economy.

In fact, those who believe in "too big to fail" are perhaps the people with the least confidence in capitalism itself. There is such a thing as creative destruction after all.

Their paper is available in its entirety here:

Prince Talal's 5% stake is nothing to shake a stick at, he's the largest shareholder and 5% is quite a big chunk to hold. He increased his holding by about $350 million to get from around 4% to 5%. Whether it's foolish or wise who knows, but it was a substantial bet. The markets were impressed for about a day.

"Nothing" hardly summarizes the Citigroup story. The $140 billion Citicorp and Traveller's merger was at the time the largest in history. It ushered in the very concept of universal banking. They built the largest financial services network ever in over 100 countries. They employed hundreds of thousands of people, served hundreds of millions of customers. Managed almost a trillion in assets. Early investors like Prince Talal built the majority of their fortunes off of their investment in the company (he is currently the 13th richest billionaire in the world).

Their current demise is spectacular and indicative of gross negligence (and only one instance of how banks and financial institutions have been grossly and criminally negligent to not only their customers, investors and employees, but to their societies and the entire global economy at large). But that doesn't mean all their past accomplishments are "nothing".

As for Citibank Bangladesh, who knows what their future is. They're small potatoes and if they're in the black, they might escape the guillotine. Or Citigroup might declare bankruptcy and break up into its component parts again. It's anyone's guess.

But given the way banks have behaved, perhaps we'd all be better off with less of them around.