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Citigroup's Collapse
CITIGROUP'S COLLAPSE....The New York Times explains the proximate cause of Citigroup's imminent demise:
The current turmoil can be traced back to the last weekend of September, when it sought to reassert itself by swallowing Wachovia, the stricken bank based in Charlotte, N.C., whose vast deposit base would have turned Citi into one of America's dominant lenders.
As the global financial crisis drove Wachovia toward collapse, the government frantically engineered their marriage. At a bargain price of $1 a share, Vikram S. Pandit, Citigroup's chief executive, was happy to oblige: The deal would have greatly enhanced Citi's retail banking presence and added more stable consumer deposits to a balance sheet staggered by billions in write-downs on bad mortgage loans and related securities.
But like so many other things for Citigroup over the last several years, it fell apart. Less than a week later, Wells Fargo, the powerful San Francisco-based bank, swooped in with a higher offer. Citi was left in the lurch, without a business that was vital to its future.
And why was Wells Fargo able to swoop in? You remember the Treasury notice a few weeks ago that modified Section 382 of the tax code, don't you? Pretty much every tax attorney in the country thinks the change was illegal, but Treasury went ahead with it anyway:
The notice was released on a momentous day in the banking industry. It not only came 24 hours after the House of Representatives initially defeated the bailout bill, but also one day after Wachovia agreed to be acquired by Citigroup in a government-brokered deal.
The Treasury notice suddenly made it much more attractive to acquire distressed banks, and Wells Fargo, which had been an earlier suitor for Wachovia, made a new and ultimately successful play to take it over.
The Jones Day law firm said the tax change, which some analysts soon dubbed "the Wells Fargo Ruling," could be worth about $25 billion for Wells Fargo.
I'd like to hear more about this before jumping to any conclusions. Citigroup's problems run deeper than merely the failed merger with Wachovia, after all. Still, if these two stories are right, it was the sudden and illegal change in Section 382 that allowed Wells Fargo to conclude their deal with Wachovia, and it was the loss of Wachovia that sparked the downward spiral of Citigroup, one of America's three big money center banks. Was this yet another own goal from the Treasury Department?
If you don't know how to play calvinball step away from the laser target.
The rule applies to ALL acquirers, so Citi could take advantage of this rule as well. The reality is Citi did not have a merger agreement in place after 4 days. That was malpractice under the circumstances. They could have come in with a higher offer based on the altered economics--they did not and could not. Which underscores a critical point: Citi was in financial distress long before the Wachovia transaction fell apart. This transaction just pulled back the current for others to see.
Publicus: Assume all that is true. It's still the case that without the Section 382 change, Wells Fargo would never have reentered the bidding. And Citi would have eventually acquired Wachovia. Right?
Now, it might be that Citi would be having all the same problems it's having now anyway. But I'd like to hear both sides of that case.
So what's happening with the bailout? Who, if anyone, is being bailed out and how?
The NY Times article explains very little and, as Publicus points out, is also misleading. What was the rot deep in Citi? Was poor integration of Weill's acquisitions really what brought it down? How important was the effect of the hedge fund shorting? (For a bank, this creates a positive feedback and accelerates the death spiral). Was the ban on shorting financials lifted too soon?
I'm not at liberty to discuss the facts of this transaction in a public forum (at this point), but your facts of the situation are not entirely correct. Section 382 certainly made the transaction more palatable, but Citi's offer was not exactly warmly received at Wachovia and Citi had every opportunity to match or beat WFC's deal.
As for Citi's financial health, they've been in trouble for a very long time. A very long time.
The deal would have greatly enhanced Citi's retail banking presence and added more stable consumer deposits to a balance sheet staggered by billions in write-downs on bad mortgage loans and related securities.
I don't understand this point. For a bank, deposits are liabilities, not assets.
Perhaps the writer thinks that "deposits" consist of a bunch of cash sitting around in vaults. But if this were the case, Wachovia wouldn't be in trouble in the first place...the problem is that they took all those deposits and lent them out on risky mortgages (or, equivalently, bought mortgages or mortgage backed securities originated by others.) Now if someone takes over Wachovia, they get the assets (the mortgages and whatever stream of payments the mortgages generate), but they also get the liabilities (if a depositor wants his money they have to come up with enough cash to give it to him).
Am I missing something?
*headdesk*
Having a merger agreement in place would not have helped - it would have had to allow a higher bid, so WF could have swooped in anyway, although it might have had to pay a modest break fee.
Ed, a larger deposit base would allow them to make more loans, which is how banks make money. It's the future income stream that's valuable.
If Citi needed an acquisition to survive, it was rather messed.
During the 2 years I worked in Citi the traders (all 53 of them) made about $5000 profit total/day. And that was the treasury/FOREX floor which should've made money almost automatically on the yen carry trade as well as commissions off of trades coming from "premium" customers.
I'll pretend to ignore the group of extremely unsavoury characters that swaggered about the building for about 6 months living in the penthouse suit with tattoos on their arms and necks, dressed in soccer shirts and sporting very working class accents who seemed to have no business there...
The only qualifications Chuck Prince had before being CEO was to be Sandy Weil's personal lawyer. He managed to walk out with a $60Million bonus despite losing the company $10Billion. Citi never failed to give me the creeps...
Whatever. Paulson has got to go. Immediately. Bush shd. nominate Geithner for Treasury on Tuesday and get him to work on Wednesday. A reverse of Gates staying at DoD....
On the other hand, maybe it is true (as Prince Alaweed seems to agree) that Citi is adequately capitalized.
What we are seeing is a combination of short-sellers trying to force a collapse by successfully inducing a mindless panic, combined with rules that force pension and mutual funds to dispose of stocks whose value falls below $5.
If there is to be a Fed statement of confidence in Citi, please do not let Paulsen make it.
Something doesn't make sense here. If Citi was in hopeless straits, and Wachovia was in such bad shape a $1 a share offer would apply. Then a merger of the two is simply tieing two rocks together, hoping the combo would float. Unless the synergy between them were so great as to create a large air bubble, they would both still sink. And upping the bid price would only have drained yet more money from Citi. Am I missing something?
So, since Citibank owns my mortgage, what happens to the mortgage if they fail?
My understanding:
The section 382 change allows the acquiring bank to use the losses of Wachovia to offset gains over the last two years and the coming 20 years. Wells Fargo and Citi were fighting over a big check in the mail. Citi was too weak and was out bid.
Instead of directly recapitalizing Wachovia or Citi we're giving a 20 to 30 billion dollar check to a bank that was doing fine.
The administration has been unwilling to target bailout funds at particular problems and has been trying to use rule changes and industry wide forced loans to buoy failing banks, apparently grasping for "free market" mechanisms to solve the crisis. My guess is they've been going over every banking regulation in the book looking for the magic free market pill that will increase investor confidence in banks holding crap for assets.
A sinking boat will keep sinking in a rising tide.
bigTom, Citi could be a witch.
So, since Citibank owns my mortgage, what happens to the mortgage if they fail?
That's still being worked out, but at the moment, it looks like most mortgage holders such as yourself will have to house one or two Citigroup employees and their families.
My suggestion: try for the tellers, the managers will eat you out of house and home and then reward themselves by fucking your dog as a bonus for their good performance.
Ed:
Deposits are a source of funding for lending, and relative to the cost of funds from other alternative sources (and indeed availability), rather cheap and fairly stable. Citi is facing a liquidity crunch, an expanded base of retail operations to pull in deposits (and more deposits) might have been useful.
[b]Margaret[/b]: Your mortgage is probably owned by investors with Citi as the servicer, but either way, someone buys the servicing rights, and you send your checks to the new or perhaps the same address.
Ed at 3:23 am
I don't understand this point. For a bank, deposits are liabilities, not assets.
You are forgetting that in the double-entry bookkeeping system each deposit provides both an asset and a liability.
Assets = Liabilities + Equity.
The left side of the equation lists all the assets of the business, while the right side shows who supplied the assets. The company has different obligations to lenders who create liabilities than they do to capital suppliers who supply equity, but it's the assets that allow a business to operate. The assets are also the way the business can meet the obligations to the lenders/depositors, so if Liabilities get to be more than assets, the company or bank is bankrupt. Equity is the safety factor for lenders/depositors who loan money to the bank.
The assets a bank gets from deposits allow the bank to lend money which is how they profit. The fact that a deposit is an asset that is created by a liability just tells what the source of the asset is, which only matters because it creates a contractual obligation that has to be paid back later.
Thus endth this lesson in the art of Luca Pacioli.
The thing is, if the bank can get retail deposits, those are government insured. Government insured deposits are stable because the depositors don't get frightened and yank them back, forcing the bank to sell assets at fire sale prices to pay the lender/depositor back. Lenders/depositers normally only yank the loans/deposits back when they are afraid the bank will not pay them back if they wait. They have lost trust in the bank.
Back during the S&L crisis a lot of S&Ls got private non-insured deposits by paying high interest rates, so that they could use the resulting money to make more mortgage loans. This allowed them to expand rapidly by selling more mortgages. But since those purchased loans weren't insured, if the S&L got into trouble (and if it became known publicly that they were in trouble) those lenders demanded their money back immediately. Since the money was loaned out by the S&L in long term mortgages, the S&L had no way to pay it back quickly. Bundling mortgages and selling them as bonds was supposed to solve that problem. It created a short term market for mortgages that did not require the banker to demand immediate payment in full of the mortgage by the mortgage holder when the banker's creditors demanded their money back.
The reason the surviving Wall Street investment banks have either become or merged with depository banks is so that they can get access to government insured deposits instead of having to depend on the highly volatile loans that they have used in the past. The other part of this is that they go under the umbrella of the bank regulators who can step in and tell the lenders/depositors "We'll pay off the insured liabilities if we have to, but let's see if we can find someone else more reliable to buy them first. So hold your horses. You'll get your money back in all due course."
Insured deposits, which come with bank regulation, is one solution to the banker's perennial problem of borrowing short term and lending long term. A wave of fear among the lenders the bank depends on for money can lead to bank-destroying runs on the bank. Insured deposits replace trust in the government for the trust between banks that investment bankers were previously depending on. That trust between banks has now disappeared from the financial markets because of the crap many banks pulled in unsupervised and unregulated mortgage lending and then selling the crap worldwide all rolled into improperly rated bundled mortgage backed obligations during the housing bubble.
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By now it is no doubt obvious to anyone who has read this far that I am an INTP. But how does Kevin's Typealyzer.com KNOW that? What's the algorithm? INTP minds want to know!
It is hard for anyone but a few select Citi insiders to tell us how exactly Citi is faring. Citi has tens of trillions of notional derivatives on its books and they are not obligated to provide details of those positions.
Even with that knowledge, it is hard to put numbers on Citi's situation because of the lack of liquidity for those instruments. Hence all we have right now is FUD.
Some are blaming mark-to-market for the failure of TARP. If that is the consensus, we may see that suspended fairly soon. I don't know how that makes any real difference, but it may pacify the m-to-m critics for a while.
At this point nobody seems to know what is going on. They are simply pretending to do something and running out the clock.
The interesting fact to me was that the FDIC decided to take over WaMu prior to the Section 382 ruling.
On a Thursday, a week before the Sec. 382 change, the FDIC stepped in and sold WaMu to JPMC with little or no involvement of WaMu management.
http://www.wamucoup.com
The failed merger with Wachovia is a hint that CITI needed Wachovia's deposits to keep its Ponzi schemes solvent. The collapse of oil prices may have more to do with CITI, though. Phibro and CITI's other energy futures trading companies may have Enroned CITI's stockholders and, potentially, taxpayers.
what happens to the mortgage if they fail?
either way, someone buys the servicing rights
When a bank or other mortgage owner fails, the mortgage debter should have the right of first refusal to buy their own debt. Retiring these debts to the debtor, seems more fair than letting them be sold to to a vulture for pennies on the dollar.
The 382 change could not have helped a bank that was not making any money. It could only help banks that make, or will make, money.
If Citi is not going to pay taxes for years then getting additional tax losses does it absolutely ZERO good.
If Wells Fargo is either paying taxes, or will pay taxes in the near future then the Wachovia losses will allow Wells not to pay any taxes for a long time. Those tax savings are worth really money to Wells but are worth ZERO to Citi.
Think about it on an individual level.
I make $20,000 a year and Bill Gates makes $20,000,000 a year.
I buy Wachovia and it has huge tax losses. The new law allows me to shelter my income with Wachovia's losses.
So, I will save a few dollars on my tax return since I don't pay much today.
Bill Gates pays 25% on his income or $5,000,000 a year. So, if I buy Wachovia I would get benefits of a few thousand dollars a year. Bill Gates would get $5,000,000 a year for the next 20 years.
Obviously, Wachovia would be worth more to someone (corporation) who pays a lot of taxes than to Citi which won't pay taxes for a long, long time.
PS My guess is that Citi has such huge losses that it won't pay a time in federal income taxes until the tax loss carryforwards expire in 2028.
You are forgetting that in the double-entry bookkeeping system each deposit provides both an asset and a liability.
Assets = Liabilities + Equity.
Yes, I know this. When a deposit is made, the "asset" is cash, and the "liability" is the ballance credited to the customer's account.
But Wachovia didn't sit on the cash, they lent almost all of it out. So now the "asset" is a mortgage loan, and the customer account remains a liability. But if the asset goes bad, all that is left is the liability. So what good does it do for Citi to acquire Wachovia's "deposits," if these are merely customer accounts that are liabilities?
a larger deposit base would allow them to make more loans, which is how banks make money.
Doesn't that assume that Wachovia wasn't maxed out on their reserve ratio?
people forget that bob steel, wachovia's CEO, was paulson's right hand man at treasury and at Goldman. The 382 change by paulson personally benefited steel and made wells Fargo bid possible. It also meant that the wells deal costs the us taxpayer more. Just more crony capitalism from the bush crowd.
I have to disagree with Kevin's point: that the Wells Fargo-Wachovia combination was any kind of "own goal" from a regulator's pov. There are at least two--maybe three--reasons for this.
First, of all the big banks, Wells Fargo (along with Chase) are the strongest. Citi is one of the weaker ones. Tying Wachovia to Citi would be like tying two stones together, in an attempt to make them more buoyant.
Second, Citi is #2 and Wachovia was #4 in size. Wells Fargo was #5. #2 & #5 is much more antitrust trouble than #4 & #5. Concentration is going to be one of the bad effects of the bailout. I wouldn't stop folding bad banks into good banks--it is a hell of a lot better than liquidating the bad banks. But if you're going to make bigger banks, it is wise to do the least antitrust harm.
Third, Wells Fargo and Wachovia had less business overlap than Wachovia and Citi. I know that this destroys whatever credibility I may have as a financial type, but this smaller overlap means that a merger of the Wells Fargo and Wachovia will likely save more jobs.
Charming how Drum's commentators remain such loonies in this area.
Regardless, re Deposits:
(i) expanded footprint in new regions allows for deposit base growth, and given the staggering difficulty in achieving other financing sources that is attractive now, low cost addition of branches and means to achieve deposit growth;
(ii) Citi's analysis may have convinced them that deposits were growing or sufficiently stable relative to credits, that with lending discipline, they would be successfully growing their resource base.
neil wilson @ 2:03 does a good job of explaining how the "repeal" of Section 382 benefitted Wells Fargo over Citi. Since Citi has posted losses for 4 consecutive quarters, the rule change couldn't help them. However, Wells has posted enough profits over recent history that they basically were able to raise their offer for Wachovia without it costing them a dime due to the resulting tax savings. The shitty part of all this is, the taxpayers are the ones who actually paid for that takeover. That is in addition to the bailout money already given to Citigroup &, surprise, also Wells Fargo.
I wish now that Citi had pressed their lawsuits they originated at the time of the Paulson doublecross.
Paulson is one more Bush appointee who needs to be wearing a prison-striped jumpsuit. Trouble is, the Justice Department has been packed with Liberty University law graduates, most of whom are in civil service positions. Good luck getting real investigations out of that agency.
A more substative and detailed NY Times article about Citi's demise.
. . . and it was the loss of Wachovia that sparked the downward spiral of Citigroup, . . .
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Sorry, Kevin. This is moose puckey. More accurately, when the Wachovia deal fell through, it only hastened the demise of Citigroup. They had been in a steep downward spiral for over a year, writing down over $65B in assets over that time. While the Wachovia deal promised to help them in the future, it would not have helped at all now.
And I have no clue what to do next. It's way above my pay grade.
Does anyone know someone working at the mid to upper levels at a financial institution who isn't a tool? Decades of top notch education has apparently gone completely to waste.
I'm very sorry, but what I get from this thread is that there are a lot of intelligent people out there who know a lot about high finance - a skill which will be as valuable as howto make a better buggy whip after Citi fails.
If only they had devote themselves on howto build a better mousetrap.
As it is, this thread reads like a section from Gulliver's Travels.
Fair point Ralph, though one thing I find fascinating in all of this is that we don't actually hear much about those people who "know a lot about high finance".
A lot has been written about the imprudent home buyers, the negligent mortgage writers, the greedy and incompetent traders and managers and CEOS and the blind risk managers -- but I haven't seen any profiles of the finance whiz kids that actually created those CDOs and SIVs and CDSs and the rest of the financial WMDs.
These were the math geniuses with science and math PhDs from places like MIT and Stanford and they were revered as demigods by everyone on Wall Street and it was taken for granted that their creations were unassailable because they were based on such advanced math that nobody else understood it. The formulas on many whiteboards at these companies looked indistinguishable from those on blackboards of theoretical physicists at the best schools.
I'm sure the journalists will get to these Einsteins as well sooner or later.
Thanks, all, for your answers to my mortgage question. I think I should just get a free house.
So what good does it do for Citi to acquire Wachovia's "deposits," if these are merely customer accounts that are liabilities?
Ed,
Citi would have gotten the financial assets that were created by using the money deposited as well as just the liabilities of the deposits themselves. And if they had gotten them in an FDIC arrangement, the FDIC would have covered the losses in defaulted assets, up to the total of the liabilities less the good assets. The failed bank's equity would have been wiped out before the FDIC took it over.
When you check FDIC: failed banks, each time the FDIC takes over a failed bank and hands off the deposits to the merging bank they also absorb the losses in the assets that could not be covered by the failed bank's equity. In the case of IndyMac, the FDIC simply runs the bank and absorbs the losses that the bank's equity and future operations do not cover. The FDIC: failed banks listing will always include an estimate of how much the merger or takeover is expected to cost the FDIC, and it is always significant. The failed bank's equity was wiped out before the FDIC stepped in.
The FDIC takeover works because when the FDIC steps in they guarantee that the total deposits are covered (up to the limit - previously $100,000 per account, now $250,000 per account.) That, and the access to the Fed's loan window to provide immediate cash, stops the panic of the depositors who otherwise would have made a run on the bank. Where the depositors have lost trust in the bank to pay them back, the FDIC is substituting trust in the government.
Since the acquiring bank doesn't have to sell the financial assets in an emergency fire-sale to immediately pay the depositors, they can sell the assets off at the long-term price which is invariably higher than the fire-sale price.
Essentially Citi was trying to buy both the assets as well as the deposits that created them from Wachovia, with FDIC making up the losses in the defaulted assets. The money used to buy Wachovia, of course, went to Wachovia equity and was actually used to cover the defaulted assets before the FDIC ever paid out a dime, so clearly the Wells Fargo bid was better for the FDIC.
This is no doubt pretty routine for the FDIC operations, so reporters probably don't consider it news. They just state that the acquiring bank is taking over the deposits, and ignore the asset side manipulations.
Doesn't that assume that Wachovia wasn't maxed out on their reserve ratio?
JS
If the reserve ratio is 10%, then every asset that is brought in allows 90% of the asset more in loans. The depositary bank only has to hold 10% of the deposit base in cash or near cash to cover withdrawals under a 10% reserve ratio. That's why a (regulated) depositary bank that wants to make more loans has to have uncommitted deposits or to acquire more deposits.
My question was though -- were Wachovia's deposits "uncommitted"? Hadn't Wachovia already made all the loans allowed by its deposits and its reserve ratio? If so, how could an acquisition of Wachovia help the acquiring bank make more loans?
After looking into this a bit more, I think the answer is that yes, Wachovia had indeed loaned to the allowed limit, but its non-performing loans were written off by FDIC so in effect its loan portfolio was below the reserve ratio -- and so allowed more loans to be made by the buyer.
the wonders of fiat money and fractional reserve banking they never have and they never will work very long
i always thought that
i always thought that citibank was such a strong company. I am not sure how this happened.
Don't shed a tear for Citibank
Citibank may have dropped the ball on this deal, but they are doing OK with bailout money. They were also able to get the government to take a common equity stake in company - ensuring that they will not go belly up. It may take a couple of years - but they will be a major player again.
Don't shed a tear for Citibank
Citibank may have dropped the ball on this deal, but they are doing OK with bailout money. They were also able to get the government to take a common equity stake in company - ensuring that they will not go belly up. It may take a couple of years - but they will be a major player again.