Back in the pre-Lehman days Citigroup owned a lot of things that, in hindsight, turned out to be awful. Everyone knows that now but various people didn’t know it then, including (1) the people who bought some of those awful things from Citi, (2) the people who bought stock in Citi while it hung on to the bulk of those awful things, (3) the people who bought bonds in Citi while it hung on to the bulk of those awful things, (4) the people who bought preferred stock in Citi … you get the idea. The world being as it is – full of lawyers1 – each of those groups of people is slowly making its separate peace with Citi. We’ve talked about some of them before, including a rather controversial $285mm SEC settlement on behalf of the awful-thing-buyers and a $590mm private settlement on behalf of the stock-buyers. Today brings the biggest settlement yet, $730mm on behalf of the bond- and preferred-stock and TRUPS-buyers, who lost billions when Citi defaulted on its bonds.
In the case settled Monday, plaintiffs alleged the New York company misled them about Citigroup’s possible exposure to losses on securities backed by home loans, understated its loss reserves and said some assets were of higher credit quality than they actually were. The pact covers 48 preferred-stock and bond deals between May 2006 and November 2008.
Those possible exposures became real exposures, and Citi incurred plenty of unpleasantness. But these bonds mostly didn’t. Read more »
One of the nice things about last year’s Fed bank stress tests was that they were released, and everyone was like “OMG Citi failed!!,” and then we all calmed down and realized that all that meant was that Citi’s capital return plans had failed, so it couldn’t launch a big share buyback, but it wasn’t going to be smashed into dust as a warning to its compatriots. That turned out to be cold comfort for Vikram Pandit but was soothing for the rest of us. This year, in part to avoid the Vikram thing, the rules have changed: today the straight-up stress test results were released, while the Fed will approve or reject capital return proposals next week, and there’ll be a lot of weird disclosure gamesmanship in the interim. Early signs point to Citi being out of the doghouse, and Goldman possibly being in it.
Also Ally Bank failed, sorry! Legit failed, not failed pro forma for capital return. So, smashed into dust.
Here is a chart you may or may not find amusing:
This chart is intended to answer the question: how many a 1-in-100 terrible days would these banks need to have in order to get the Fed’s estimated trading losses?1Read more »
Every once in a while I almost write “I don’t envy big bank CEOs,” and then I consider my own finances and the mood passes. But it does seem hard, no? The job is basically that you run around all day looking at horrible messes – even in good times, there are some horrible messes somewhere, and what is a CEO for if not to look at them and make decisive noises? – and then you get on earnings calls, or go on CNBC, or sign 10Ks under penalty of perjury, and say “everything is great.” I mean: you can say that some things aren’t great, if it’s really obvious that they’re not. If you lost money, GAAPwise, go ahead and say that; everyone already knows. But for the most part, you are in the business of inspiring enough confidence in people that they continue to fund you, and if you don’t persuade them that, on a forward-looking basis, things will be pretty good, then they won’t be.
Also, when you’re not in the business of convincing people to fund you, you’re in the business of convincing people to buy what you’re selling and sell what you’re buying, which further constrains you from saying “what we’re selling is dogshit.”1
Anyway I found a certain poignancy in Citi’s correspondence with the SEC over Morgan Stanley Smith Barney, which was released on Friday. Citi and Morgan Stanley had a joint venture in MSSB, and MS valued it at around $9bn, and Citi valued it at around $22bn, and at most one of them was right and, while the answer turned out to be “neither,” it was much closer to MS than C. Citi was quite wrong, and since this was eventually resolved by a willing seller (Citi) selling to a willing buyer (MS) at a valuation of $13.5bn, Citi had to admit its wrongness in the form of a $4.7 billion write-down, and the stock did this: Read more »
You can question some of the life choices that Tom Hayes, a/k/a Trader A, UBS’s Libor-manipulating-est Libor manipulator, has made, but this seems to me inarguable:
Citigroup executives wooed him in June 2009 at a swanky bar in Tokyo. As they showered him with praise, say people who were there, Mr. Hayes rarely spoke, instead letting his girlfriend, a lawyer, answer questions.
Shady traders: date lawyers! And let them do all the talking for you.
That detail is from this amazing Wall Street Journal article about Hayes. When we last discussed Hayes and his totally open and casual requests to people he’d just met to manipulate Libor for him, I asked “is this: (1) all of these people did not fully realize that they weren’t supposed to be doing what they were doing, (2) UBS’s culture was one of complete lawlessness and fuck-around-ery, or (3) both of those things are true and reinforce each other?,” and per the Journal the answer is fascinatingly (3).
I’ve occasionally said that Hayes made a career of Libor manipulating but that’s not entirely right. He started at RBS and, per the Journal‘s account,1 spent his time there mainly being smart and dressing “like a college student — with washed out jeans, a polo shirt and sometimes a threadbare sweater” rather than IMing people to ask them to fix Libor. (That, at RBS, seems to have come later.) Then he moved to UBS: Read more »
Back in October when Mike Corbat was dragged from bed in the middle of the night to take over the top job at Citigroup after Vikram Pandit’s ouster, he did a hastily assembled damage-control conference call while still wearing his footie pajamas. On this call CLSA analyst Mike Mayo surprised Corbat by asking him a softball interview question, namely: tell me how you want your tenure as CEO to be measured in five years. Corbat’s response – and here I’m quoting from memory – was “Wait, I’m the CEO? Crap. Let me get back to you on that.”
Mike Mayo – CLSA
And then for Mike, I asked this question when you first got the CEO job. If in five years from now you were to look back at your performance, what would you want to see to show that you were successful?
Mike Corbat – CEO
I think probably going back to your first line of questioning, we’ve got to get to a point where we stop destroying our shareholders’ capital. I would say that would certainly be at the top of the list, that we run a smart and efficient business that’s good at its allocation of its resources around its customer and client segments, that it’s continued to have the ability to lead in a company those clients around the world, that it served the social purpose. There’s several things in there.
My simple model of How To Be A Bank goes something like (1) amass assets that are numerous and volatile enough to make your management rich and happy and (2) give as much money back to shareholders as you can, consistent with (1). If that were your model and you were building your capital plan what feelings would you feel about this:
The Federal Reserve on Friday kicked off the next round of its annual “stress test” for big banks, releasing instructions on how the process will work.
Included is a new opportunity for banks to alter their proposals to pay dividends or buyback shares before the Fed decides to approve or reject their overall capital plans. … Under the new instructions, banks will have “one opportunity to make a downward adjustment to their planned capital distributions from their initial submissions” before the final decision to accept or reject a bank’s capital plan is made, the Fed said.
I propose a strategy that goes like:
take your best guess at how much capital you’ll be allowed to distribute, call it $X;
Citi today fired Mark Mahaney, its internet analyst, and was fined by Massachusetts securities regulators, for sending dumb emails to reporters. The Massachusetts consent order is here. Mahaney’s main misconduct1 is that on April 30 of this year a French reporter asked him about Google’s YouTube business:
Do you think that YouTube has been above your Total Net Revenue estimate 2011 ($876M)
Do you think that YouTube will be above your Total Net Revenue estimate 2012 ($1119m)
Do you think that they are largely profitable?
And Mahaney replied “Yes Yes Yes.” This was problematic because:
The information that [Mahaney] gave to the French Reporter had not been previously published. [He] had published a research report on Google, Inc. on March 21, 2012 and did not publish another research report until his interview with “All Things Digital” on June 21, 2012.
Two thought experiments. First, Mark Mahaney’s job was to drum up institutional business by producing actionable estimates and opinions about the stocks he covered. One way to do this is to publish research reports. Google, it is fair to say, is an important stock that he covered. He did not publish any research reports on Google for three months this year. What do you think he was doing during that time? Your choices are: Read more »
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