The near-death moment that Citi experienced in November is as close as one can get to a perfect lesson in confidence in banking, and how to lose it. Everyone knows that without confidence banks fail – fast.
So what caused confidence in Citi to evaporate so quickly? Within five days its stock fell 60%, below $5 – a level at which certain institutional funds became forced sellers of the stock. It was a precipitous descent that appeared to ignore reasonable assessments of whether the bank was a going concern and that would lead – inevitably – to a bail-out. And so it came to pass, with the terms of government assistance so generous as to support a general rally in financial stocks and Citi’s CDS snapping in by nearly half to 248bp.
Given the contrast with the onerous terms imposed on another institution deemed too big to fail, AIG, it was hardly surprising that Citi’s management were almost triumphant at their survival. Who can blame them?
One year ago, when Vikram Pandit was appointed chief executive, it was clear that his was a difficult – some would say near-impossible – task. On its way to becoming the biggest bank in the world, Citigroup has accumulated assets and businesses at breakneck speed. As a latecomer to the credit derivative revolution it piled into structured credit with little regard to good governance in risk management and with disastrous results.
Following Chuck Prince’s ejection, whoever became the next chief executive knew he would have to play well with an awful hand. But choosing a Morgan Stanley alumni was never going to be a popular choice among Citi bankers – especially those who go back to the Salomon days. But at that point, popularity was the least of Pandit’s problems. Much bigger was the fact that Citi has a $2 trillion balance sheet and very few ways in which to fund it – apart from the US Federal Reserve’s various facilities.
The first real disaster was allowing Wachovia to escape into the arms of Wells Fargo in October. Citi’s stock price rose 20% when it announced its deal with the Charlotte-headquartered bank. At a stroke this would have built confidence that Citi would have access to a major US moneycentre bank – like JPMorgan has in abundance. And it would have enhanced his reputation as a dealmaker. As would have selling Banamex, for instance. This might have raised $30 billion a year ago when emerging markets were still regarded as sound. Would there even be a bidder now?
Then last month came a series of unfortunate events that further sapped confidence. The news that Citi was getting shot of 30% of the payroll came amid a so-called town hall meeting that left much of the town’s inhabitants seething. An explanation on the basic principles of banking was probably not needed; a clear brief on the business strategy was.
Unfortunately, it was not forthcoming. Listeners came away thinking that Pandit was saying little different to his predecessor. The strategy is essentially one of maintaining the status quo: be a global financial supermarket but do things better.
The announcement that $17.4 billion of SIV assets would be brought on balance sheet raised the question: Why now? Surely there are still some traders at Citi who’ve heard the adage that the first cut is the cheapest? HSBC got the bad news regarding its huge SIV exposure out of the way at the start of this year. There were unfortunate headlines surrounding the chairman, Win Bischoff. His imminent ousting was vehemently denied but it all contributed to a feeling of a bank in disarray. There must have been a good reason why Robert Rubin, senior counsellor, chose not to pursue John Thain when selecting the bank’s new chief. Over to you, Mr Pandit.
