By Simon Johnson
In the early and mid-2000s, Citigroup had compensation practices that can fairly be described as a disaster for shareholders (and for the broader economy). Top executives, such as then-CEO Chuck Prince, received big bonuses and generous stock options. Lower level managers and traders were paid along similar lines. These incentives encouraged Citi employees to take risks and boost profits. Unfortunately for shareholders, the profits proved largely illusory – when the dangers around housing and derivatives materialized fully, the consequences almost destroyed the firm.
The market value of Citigroup’s stock dropped from $277 billion in late 2006 to under $6 billion in early 2009. The shareholders could easily have been wiped out – they were saved from oblivion by a generous series of bailouts provided by the federal government (see Figure 7 in the final report of the Congressional Oversight Panel; direct TARP assistance was $50 billion but “total federal exposure” was close to $500 billion). In the next credit cycle, the experience for Citi shareholders could be even worse. So it is entirely reasonable for shareholders to look carefully at, among other things, the details of how executives and other key employees are paid – and to understand the current incentives for taking and managing risk.
But Citigroup is resisting efforts to disclose fully the structure of relevant compensation contracts. What is Citigroup hiding now? Continue reading “What Is Citigroup Hiding From Its Shareholders Now?”
By Simon Johnson
Citigroup is a very large bank that has amassed a huge amount of political power. Its current and former executives consistently push laws and regulations in the direction of allowing Citi and other megabanks to take on more risk, particularly in the form of complex highly leveraged bets. Taking these risks allows the executives and traders to get a lot of upside compensation in the form of bonuses when things go well – while the downside losses, when they materialize, become the taxpayer’s problem.
Citigroup is also, collectively, stupid on a grand scale. The supposedly smart people at the helm of Citi in the mid-2000s ran them hard around – and to the edge of bankruptcy. A series of unprecedented massive government bailouts was required in 2000-09 – and still the collateral damage to the economy has proved enormous. Give enough clever people the wrong incentives and they will destroy anything.
Now the supposedly brilliant people who run Citigroup have, in the space of a single working week, made a series of serious political blunders with long-lasting implications. Their greed has manifestly proved Elizabeth Warren exactly right about the excessive clout of Wall Street, their arrogance has greatly strengthened a growing left-center-right coalition concerned about the power of the megabanks, and their public exercise of raw power has helped this coalition understand what it needs focus on doing – break up Citigroup. Continue reading “Citigroup Will Be Broken Up”
By Simon Johnson
Just a few short days ago, it looked like Citigroup was on the ropes. The company’s proposal for redistributing capital back to shareholders was rejected by the Board of Governors of the Federal Reserve System. Given the global bank’s repeated fiascos – including most recently the theft of around $400 million from its Mexican unit – it is hardly surprising that the Fed has said “no” (and for the second time in three years).
The idea that Citigroup might now or soon have a viable “living will” now seems preposterous. If top management cannot run sensible financial projections (that’s the Fed’s view; see p.7 of the full report), what is the chance that they can lay out a plausible plan to explain how the company, operating in more than 100 countries worldwide, could be wound down through bankruptcy – without any financial assistance from the government? According to the Dodd-Frank financial reform law, failure to submit a viable living will should result in remedial action by the authorities.
Such action has now been taken: CEO Michael Corbat has been named to a top White House job, with responsibility for helping to develop “financial capability for young Americans.” Continue reading “Citigroup CEO Named To “Key Administration Post””
By James Kwak
Before 2006, people used to talk about the Greenspan put: the idea that, should the going get rough in the markets, Chairman Al would bail everybody out. But there’s something even better than having the Federal Reserve watching your back. It’s the résumé put.
The Wall Street Journal reported that Vikram Pandit, former CEO of Citigroup, is starting a new firm called TGG which will . . . well, it’s not entirely clear. In one email, they claim “a novel approach to address the challenges that large complex organizations face in compliance, fraud, corruption, and culture and reputation.” (That’s the standard marketing tactic of describing what benefits you will provide without mentioning what you actually do.) Now, Pandit certainly has experience in a large, complex organization with compliance, fraud, corruption, culture, and reputation problems. Citigroup checks pretty much every box. But is it experience you would want to pay for?
Continue reading “Résumé Put Hall of Fame”
By James Kwak
. . . are excess optimism and Citibank.”
That’s a saying that someone, probably Simon, repeated to me a few years ago. Crash of 1929, Latin American debt crisis, early 1990s real estate crash (OK, that wasn’t a financial crisis, just a crisis for Citibank), Asian financial crisis of 1997–1998, and, of course, the biggie of 2007–2009: anywhere you look, there’s Citi. Sometimes they’re just in the middle of the profit-seeking pack, but sometimes they play a leading role: for example, the Citicorp-Travelers merger was the final nail in the coffin of the Glass-Steagall Act and the immediate motivation for Gramm-Leach-Bliley.
Citigroup is also the poster child for one of the key problems with our megabanks: the fact that they are too big to manage and, on top of that, the usual mechanisms that are supposed to ensure half-decent management don’t work. Around 2009, if you were to describe the leading characters in the TBTF parade, they were JPMorgan, the last man standing (not so much anymore); Goldman, the sharks who bet on the collapse; Bank of America, the ego-driven empire-builder; and Citi, the incompetent (“I’m still dancing”) fools.
Continue reading ““All You Need for a Financial Crisis . . .”
By Simon Johnson
On Thursday of last week, four senators unveiled the 21st Century Glass-Steagall Act. The pushback from people representing the megabanks was immediate but also completely lame – the weakness of their arguments against the proposed legislation is a major reason to think that this reform idea will ultimately prevail.
The strangest argument against the Act is that it would not have prevented the financial crisis of 2007-08. This completely ignores the central role played by Citigroup.
It is always a mistake to suggest there is any panacea that would prevent crises – either in the past or in the future. And none of the senators – Maria Cantwell of Washington, Angus King of Maine, John McCain of Arizona, and Elizabeth Warren of Massachusetts – proposing the legislation have made such an argument. But banking crises can be more or less severe, depending on the nature of the firms that become most troubled, including their size relative to the financial system and relative to the economy, the extent to which they provide critical functions, and how far the damage would spread around the world if they were to fall. Continue reading “Remember Citigroup”
By James Kwak
This week’s Atlantic column is my somewhat belated response to Judge Jed Rakoff’s latest SEC takedown, this time rejecting a proposed settlement with Citigroup over a CDO-squared that the bank’s structuring desk created solely so that its trading desk could short it. I think Rakoff has identified the heart of the issue (the SEC’s settlements are unlikely to change bank behavior, so what’s the point?) but he’s really pointing to a problem that someone else is going to have to fix: we need either a stronger SEC or stronger laws. I’d like to see an aggressive, powerful SEC that can deter banks from breaking the law, but we don’t have one now.
By Simon Johnson
Earlier this week, Richard Fisher – President of the Dallas Federal Reserve Bank – captured the growing political mood with regard to very large banks: “I believe that too-big-to-fail banks are too-dangerous-to-permit.” Market-forces don’t work with the biggest banks at their current sizes; they have great political power and receive almost unlimited implicit subsidies in the form of protection against downside risks – particularly in situations like now, with the European financial situation looking precarious.
“Downsizing the behemoths over time into institutions that can be prudently managed and regulated across borders is the appropriate policy response. Then, creative destruction can work its wonders in the financial sector, just as it does elsewhere in our economy.”
Mr. Fisher is an experienced public official – and also someone with a great deal of experience in financial markets, including running his own funds-management firm. I increasingly meet leading figures in the financial sector who share Mr. Fisher’s views, at least in private.
What then is the case in favor of keeping mega-banks at their current scale? Vague claims are sometimes made, but there is very little hard evidence and often a lack of candor on that side of the argument. So it is refreshing to see Vikram Pandit, CEO of Citigroup, go on the record with The Banker magazine to at least explain how his bank will generate shareholder value. (The interview is behind a paywall, unfortunately). Continue reading “Why Not Break-Up Citigroup?”
By Simon Johnson
Vikram Pandit heads Citigroup, one of the world’s largest and most powerful banks. Writing in the Financial Times Thursday morning, with regard to the higher capital standards proposed by the Basel III process, he claims
“There is a point beyond which more is not necessarily better. Hiking capital and liquidity requirements further could have significant negative impact on the banking system, on consumers and on the economy.”
Mr. Pandit is completely wrong. To understand this, look at the letter published in the Financial Times earlier this week by finance experts from top universities – the kind of people who trained Mr. Pandit and his generation of bank executives. Continue reading “Vikram Pandit Has No Clothes”
By James Kwak
I’ve already criticized Citigroup CEO Vikram Pandit’s testimony before the TARP Congressional Oversight Panel on Thursday, but there’s one thing I left out. Citigroup, like other banks not named Goldman Sachs, is attempting to cloak itself in a mantle of goodness. Pandit’s testimony included several bullet points discussing all the wonderful things that Citigroup is doing for ordinary Americans. For example: “In 2009, we provided $439.8 billion of new credit in the U.S., including approximately $80.5 billion in new mortgages and $80.1 billion in new credit card lending.”
Continue reading “More Bank Marketing”
Testifying today before the TARP Congressional Oversight Panel, Citigroup CEO Vikram Pandit took pains to strike the right notes. Near the beginning of his prepared testimony, he said, “First, however, I want to thank our Government for providing Citi with TARP funds. For Citi, as for many other institutions, this investment built a bridge over the crisis to a sound footing on the other side, and it came from the American people.” Saying “thank you” may not satisfy many people, but it is a step in the right direction.
More importantly, Pandit said that Citigroup is on the side of the angels — in this case, the side of real financial reform:
“Citi supports prudent and effective reform of the financial regulatory system. America – and our trading partners – need smart, common-sense government regulation to reduce the risk of more bank failures, mortgage foreclosures, lost GDP and taxpayer bailouts. Citi embraces effective, efficient and fair regulation as an essential element in continued economic stability.”
When it comes to the substance, though, I’m not sure how much Pandit had to say that was new, although he took care to say it in the nicest way possible.
Continue reading “Is Vikram Pandit in Favor of Real Reform?”
By Simon Johnson
Today, perhaps following our earlier recommendation, Mr. Vikram Pandit – CEO of Citigroup – will appear before the congressional oversight panel for TARP. (Official website, with streamed hearing from 10am).
This is an important opportunity because, if you want to expose the hubris, mismanagement, and executive incompetence – let’s face it – Citi is the low hanging fruit.
Citibank (and its successors) has been at the center of every major episode of irresponsible exuberance since the 1970s and essentially failed – i.e., became insolvent by any reasonable definition and had to be saved – at least four times in the past 30 years (1982, 1989-91, 1998, and 2008-09).
In the last iteration, Citi was guided by Robert Rubin – self-styled guru of the markets and sage of Washington, a man who likes to exude “expect the unexpected” mystique – directly onto the iceberg at full speed.
Mr. Pandit was brought in by Mr. Rubin to refloat the wreckage, despite the fact that he had no prior experience managing a major global bank. Mr. Pandit’s hedge fund was acquired by Citi and then promptly shut. And Mr. Pandit’s big plan for restructuring the most consistently unsuccessful bank – from society’s point of view – in the history of global finance: Reduce the headcount from around 375,000 to 300,000.
Here are five questions the FCIC should ask. This line of enquiry may seem a bit personal, but it is time to talk directly about the people, procedures, and philosophy behind such awful enterprises. Continue reading “Questions For Mr. Pandit”
In late summer or early fall, Citibank was running a promotion: if you opened a new account or moved a certain amount of money to your bank account, you would get a $200 bonus within three months. Someone I know took advantage of this promotion, but as of Monday he still hadn’t gotten the $200 bonus, so he visited a branch.
“I was given the ridiculous explanation that I didn’t surrender the promotion letter and that the promotion code NP55 was not linked (?) in the application. I told them that: (1) the letter is not a coupon to be surrendered, (2) I should not have to tell the customer service rep how to process the promotion, (3) there was no requirement that the letter even be presented (just go to a financial center, it states), and (4) the code only needed to be mentioned if applying by phone. They called me back in the afternoon and asked me to come back this morning. They first offered me some ‘thank you’ points, but I stood my ground. After calling several places they finally reached a Texas office that would further research my problem. “
Continue reading “Design or Incompetence?”
On the first day of the Financial Crisis Inquiry Commission, Phil Angelides demonstrated a gift for powerful and memorable metaphor: accusing Goldman Sachs of essentially selling defective cars and then taking out insurance on the buyers. Lloyd Blankfein and the other CEOs looked mildly uncomfortable, and this image reinforces the case for a tax on big banks – details to be provided by the president later today.
But the question is: How to keep up the pressure and move the debate forward? If we stop with a few verbal slaps on the wrist and a relatively minor new levy, then we have achieved basically nothing. We need people more broadly to grasp the dangerous financial “risk system” we have created and to agree that it needs to be dismantled completely.
One way to do this would be for the Commission to call key people from Citigroup to testify. Continue reading “The Citi Never Weeps”
On Monday, Citigroup received permission from its regulators to buy back the remaining $20 billion in preferred shares held by Treasury because of its investments under TARP. (Treasury invested $25 billion in October 2008 and another $20 billion November 2008; however, $25 billion worth of preferred shares were converted into common shares earlier this year, giving the government about a 34% ownership stake in the bank.) The stock then fell by 6%. What’s going on?
This is another example of a bank doing something stupid in order to say that it is no longer receiving TARP money, and probably more importantly so it can escape executive compensation restrictions. As Citigroup CEO Vikram Pandit himself said last October, TARP capital is really cheap (quoted in David Wessel, In Fed We Trust). Instead of paying an 8% interest rate* on $20 billion in preferred shares, Citigroup chose to issue $17 billion of new common shares while its share price is below $4/share. Citigroup’s cost of equity is certainly more than 8%, so it just increased its overall cost of capital. The stock price fell because existing shareholders are guessing that the dilution they suffered (because new shares were issued) will more than compensate for the fact that Citi no longer has to pay dividends to Treasury.
Continue reading “What’s Up with Citigroup?”