Citi

  • 15 Oct 2012 at 2:10 PM
  • Banks

Citi Has An Excellent 88% Decrease In Profit

I don’t have much insight into Citi’s earnings but I do enjoy the reporting of them. When a car or Facebook company reports earnings you basically ask questions like “how many cars or Facebooks did it sell?” and “how much money did it make on each one?” and those questions are kind of answerable and their answers give you a sense of how you should feel in your heart about the company. When a bank – like, a bank bank – reports earnings you can ask “how many mortgages did it sell?” and “how much money did it make on each one?” and those answers will be useful to you too, though there will be murky liquidity and valuation overhangs that will reduce their usefulness.

If you asked those questions of Citi, you might or might not get answers that might or might not be useful, but you’d be hard pressed to translate them into the headlines on Citi’s earnings. Big banks are not primarily engines for selling products and collecting a margin on them; they are bundles of accounting decisions, and this is never more apparent than at earnings time. This is pretty far removed from economic activity in the world:

Citigroup Inc.’s third-quarter profit fell 88% as the bank took charges tied to the value of its debt and the sale of a stake in its brokerage joint venture …

Others chose to emphasize economic activity in the world, at the cost of, y’know, GAAP: Read more »

Buried in a footnote1 a while back I ruminated on the fact that, in the deal where Morgan Stanley bought a chunk of its Morgan Stanley Smith Barney brokerage JV from Citigroup, Morgan Stanley got a sort-of-free option to buy the rest of Smith Barney, and how that option is (1) valuable and (2) sort of cheap funding. That was basically all wrong, sorry! The lesson is, never read footnotes.

Charlie Gasparino is reporting that “Morgan Stanley chief James Gorman is making a full-court press with regulators to expedite the purchase of the remaining piece of the Smith Barney brokerage firm from Citigroup, moving up the buyout date as much as two years ahead of schedule,” so I guess Gorman puts the time value of that option at zero or less. As for cheap funding, Goldman had a research note this week saying that they met with Morgan Stanley and heard the same story, and also that:

At the margin, full MSSB ownership should have a meaningful impact on ROE as: 1) MS is still paying Citigroup a portion of earnings from the JV despite holding capital to support the entire business, 2) synergies with the Institutional Securities business will grow (i.e. client flow routing), and 3) the funding profile and client product offering mix will improve.

I think the second two things say something like “Citi won’t appreciate us shoving all of our MSSB customers into high-margin Morgan Stanley products, so we have to get rid of them before doing that,” though you could read them otherwise. The first thing calls the cheap-funding argument into some doubt, though maybe not that much doubt; Morgan Stanley’s capital is by some metrics cheaper than Citi’s, while its (credit market) funding is more expensive, so maybe this is still a good deal.

Anyway here’s what Gasparino has to say about the delay: Read more »

Being in certain rooms at certain times seems to be a good predictor of selling a book. Bin Laden’s bedroom on the night of his death is an obvious one, and various days in the Oval Office have or may soon have their chroniclers, though the world still awaits the unabridged memoirs of the guy who cleaned out Jeff Gundlach’s office at TCW. But the Treasury Department conference room where regulators imposed TARP on eight big banks seems to have been especially fecund; by my count Hank Paulson has already published his account, somebody in the room seems to have contributed to this account, and now Sheila Bair has written a book that includes hers, which was excerpted in Fortune today.

This is weird because – well, one, because a bunch of guys (and Sheila Bair) in suits discussing the terms of a preferred stock purchase in a conference room is not necessarily the first place you’d look for thrilling literature, but also, two, because the accounts are all pretty similar. Here’s Bair’s take on the bankers’ reaction to the TARP terms:

I watched Vikram Pandit scribbling numbers on the back of an envelope. “This is cheap capital,” he announced. I wondered what kind of calculations he needed to make to figure that out. Treasury was asking for only a 5% dividend. For Citi, of course, that was cheap; no private investor was likely to invest in Pandit’s bank. Kovacevich complained, rightfully, that his bank didn’t need $25 billion in capital. I was astonished when Hank shot back that his regulator might have something to say about whether Wells’ capital was adequate if he didn’t take the money. Dimon, always the grownup in the room, said that he didn’t need the money but understood it was important for system stability. Blankfein and Mack echoed his sentiments.

Coincidentally, Dimon is always the grownup in these accounts, too; what is new here is really Bair’s take as the head of the FDIC:1 Read more »

So remember when Citi did that thing that was all the rage in 2007 where they constructed a synthetic CDO referencing mortgage-backed securities in order to facilitate their own prop bet against those MBS, but then maybe inadequately disclosed to investors that they were in fact naked short those MBS? And then they got sued by the SEC for fraud, and settled that case for $285mm, or tried to anyway*? Well the SEC also sued one Brian Stoker, the Citi VP who structured that deal, because it’s important for the SEC to pursue powerful individuals responsible for financial crisis wrongdoing and who could be more powerful than the vice president of Citigroup? And unlike Citi, Brian Stoker chose to roll the dice, and today he won big but with an asterisk:

A jury on Tuesday cleared a former Citigroup executive of wrongdoing connected to the bank’s sale of risky mortgage-related investments at the peak of the housing boom, dealing a blow to the government’s effort to hold Wall Street executives accountable for their conduct during the financial crisis.

In addition to handing up its verdict, the federal jury also issued an unusual statement addressed to the Securities and Exchange Commission, the government agency that brought the civil case.

“This verdict should not deter the S.E.C. from investigating the financial industry and current regulations and modify existing regulations as necessary,” said the statement, which was read aloud in the courtroom by Judge Jed S. Rakoff, who presided over the trial.

Thanks jury! Bringing lawsuits about mortgage CDO marketing practices has been the major focus of the SEC’s response to the financial crisis,** and this was the first time that approach was tested in court, and the SEC’s lawyers spent building the case only to see a jury shoot them down in two days, and they have no courtroom victory or precedent to show for their work, but they won the one thing that is truly important in this vale of tears: an encouraging note from a group of anonymous strangers. Read more »

Morgan Stanley has announced that it will be buying 14% of its Morgan Stanley Smith Barney joint venture from Citi in a sort of glacially negotiated way. MS currently owns 51% of MSSB (plus $5.5bn of preferred interests), and Citi owns the other 49% (plus $2bn of preferred). You can read how they’re going to figure out the price here. Basically they each hire an advisor to value MSSB like a public company, and then get together and see how close they are. If they’re within 10% of each other, they average their prices; if not, they hire a third advisor to figure out who got closer to the right answer. Don’t get too excited about pitching to be one of those advisors, though, at least not in the first round:

Morgan Stanley and Citigroup each will engage one investment bank or financial advisory firm of national standing and with experience in the valuation of securities of financial services companies (an “Appraiser”) for purposes of estimating FMV. All fees and disbursements of the first two Appraisers shall be the responsibility of the party that engaged such Appraiser. Either or both of the first two Appraisers may be an affiliate of the party engaging such Appraiser, and Morgan Stanley has engaged Morgan Stanley Investment Banking as its Appraiser.

MSSB’s net income was about $300mm last year*, and recent Morgan Stanley Investment Banking valuation precedents suggest about a 100x P/E, so I’ll go ahead and predict we’ll see a $30bn-ish valuation from them, no? (Too easy? Actually, ha, it’s not that wildly off; press reports suggest a $15bn bid from MS and a $23bn offer from Citi.) Here’s how they’ll do their math: Read more »

I occasionally entertain myself thinking about this set of puzzles:
(1) It is good for financial regulators and probably, let’s say, the world, if creditors are slow to pull money out of banks that run into trouble. In particular you don’t want everyone to want to move first and get their money out well before there’s a problem, because them getting their money out creates, or let’s say at least exacerbates, the problem.
(2) Banks also want that, since going bankrupt for no reason seems sort of harsh.
(3) But creditors want their money back – and being first out the door is a good way to ensure that that happens.

And since, when things go pear-shaped, there’s always some risk either that the rules won’t let the creditors move as fast as they want, or that the rules will change, it’s good to get your money out before there’s a problem. The best way to do that is just to keep your money to begin with, or only to give it to people who won’t get into trouble, but failing that, you want to get your money back when there’s a hint of trouble but things are still mostly fine. For some reason credit ratings used to indicate that state, since they worked so well last time, so a downgrade from nice investment grade to less-nice-but-still-investment-grade is a good time to check in with your money and see if it might miss you and want to spend a bit more time with you.

On the other hand, if you are a bank and you agree to terminate or collateralize lots of contracts upon a downgrade, you tend to have to come up with lots of cash at exactly the wrong time. So it is probably smart practice to mostly not agree to that sort of thing. But life being what it is you can’t win them all, so you agree to have some trigger-on-downgrade collateralization in some of your contracts, and you just push for those triggers to be as few and as far away from your current ratings as possible.

Anyway, let’s check in with some counterparties’ money: Read more »

  • 16 Apr 2012 at 3:47 PM
  • Banks

Nice Earnings, Citi, Shame About Your Credit Improvement

I have nothing particularly useful to tell you about Citi’s earnings – they were good, yay, well done Vik, one day maybe you’ll be able to pay a dividend – so let me ask you some useless things. My favorite useless thing is DVA, which is the thing where if you are a bank you “lose” “money” when your credit improves and you “make” “money” when your credit gets worse, which is in some ways the opposite of right though also not, like, totally away from reality. Citi suffered thereby for its virtue:

Citigroup reported improved first-quarter earnings on Monday, with steady growth in the bank’s globe-spanning consumer businesses and a rebound in investment banking from a poor previous quarter.

Net income was $3.4bn in the first quarter compared with $3.2bn a year earlier as revenue grew just 1 per cent to $20.2bn. Those measures exclude the impact of so-called “debt valuation adjustments” – an accounting rule that makes companies take gains or losses from swings in the price of their own debt. On a reported basis, including DVA, Citi’s net earnings were down at $2.9bn.

So three useless thoughts/questions for you on that:

(1) WTF guys: Read more »