Citigroup's Good News, Not so Great

Stephen Gandel The Curious Capitalist March 12, 2010

Host Katherine Lanpher talks with TIME business and economics reporters to sort through the headlines, forecasts, news and numbers that will help you weather these challenging times.

Download | Subscribe

View All Categories » View All Tags »

There seems to be a growing consensus on Wall Street that Citigroup's problems are behind it. The stock has been up recently, though at $4 the company's shares have far from rebounded. Three years ago, Citigroup's stock fetched $50. Nonetheless, Citigroup tried to fan those good feelings yesterday with some seemingly bullish comments from its CEO Vikram Pandit. Pandit told the Financial Times and a conference of investors that the portion of Citi's businesses that for now he considers the good stuff will produce a hefty profit in a year or so. The FT did some calculations and came up with a projected profit for Citi of $20 billion in three years. On the surface, this looks like really good news. Citi, afterall, lost $1.6 billion last year. And the FT played it big with a front page story and said this would be a big turnaournd. Actually, not really. Dive in and you will see that Pandit's comments are not nearly as positive for Citi as they seem or as the FT reported. The Wall Street Journal today does some analysis and comes away with a similar conclusion.

Bullish remarks from Vikram Pandit a year ago helped spark the great bank stock rally of 2009. On Thursday, the Citigroup chief executive once again gave a positive outlook for his bank. But investors should think twice before using Mr. Pandit's thesis as a reason to pile into Citi shares.

Here's why:

Should accounting tricks be added to the long list of things that caused the financial crisis? I'm not sure. Turns out Lehman was even more leveraged than we thought. A report out on Thursday by a court appointed examiner into what went wrong at Lehman Brothers finds that the firm towards the of its existence regularly employed accounting tricks to gussy up its financial statements at quarter end. The report is 2,200 pages and you can find a good portion of it here. The firm hid as much as $50 billion in loans a quarter in order to look like it was less leveraged than it was. The transactions were called "Repo 105" by the bank, and were used to move loans off its balance sheet for a few days at time. Conveniently, the days the loans went missing happened to always be the days that the firm had to report its books to the public.

This seems like fraud to me. The examiner calls it "actionable" and he says the moves open Lehman and its executives up to suits from shareholders who could claim, it appears rightly so, that they were mislead. Still I am not convinced accounting played as big a role in this crisis as past ones. Here's why:

I have a story up today on the website of our sister publication Fortune.com. It is part of Fortune's excellent redesign issue. The story is focused on a study by Sendhil Mullainathan of Harvard that finds a disturbing truth about financial planners:

Experts have long counseled against using financial planners who charge commissions, given their incentive to simply sell products that pad their paychecks.

Now a new working paper concludes there is another risk -- one that afflicts advisers of all stripes. The problem: Financial planners are yes-men and -women, asserts a report co-authored by Sendhil Mullainathan, a Harvard professor and top behavioral economist.

Most planners, his report finds, reinforce our bad investment behaviors instead of fixing them. And the problem, he says, may be harder to solve than the fee issue.

The story and the study are focused on financial planners, but I think it reveals a larger truth about capitalism and our system's ability to create reliable advisers, financial or otherwise. I wonder if we need a new model for paying advisers. Here's why:

There have been a lot of people blabbing on for the past few months about the new found thriftiness of the American consumer. The savings rate is up, and credit card balances are down. Well it appears, that that later piece of news does not fit as neatly into the thriftier American thesis as it appears. A new study by CardHub found that while credit card debt did fall $93 billion in 2009, a cool $83 billion of that drop, or 89%, came from banks charging off loans, not, as people thought, from customers paying down balances. In fact, when you adjust for the charge offs, consumers actually loaded up their credit cards with an additional $21 billion in debt in the last three months of 2009 alone.

Felix Salmon over at Reuters sees some pretty discouraging stuff here and does a good job of explaining why credit card debt has been and probably will remain so sticky.

But we're also going to need a change in the national mood, and a rediscovery of the virtues of thrift which seemed resurgent for such a short time. Frankly, that's not going to happen. And the new credit card rules won't help: by making it cheaper to have and service credit card debt, they also make it more attractive to do that.

But, at least in the short term, I'm not as convinced this is all bad news. Here's why:

The stock market is rising, though on very light volume. The economy is growing, though most observers are uncomfortable that fiscal stimulus accounts for some "”or much"”of the gusto. Then there are complex issues aplenty to flummox forecasters, such as the hope that the U.S. export growth can make this recovery sustainable, tempered by concern that huge parts of the globe (our export markets) are sinking under a sea of debt. Overhanging all of this are worries about job growth, or the lack of it, ostensibly the result of anxiety among company managers about the recovery's sustainability.

No, I'm not talking about The Vapors' old pop hit (as my editors breathe a sigh of relief). Instead I'm wondering if the United States is beginning to become a bit like Japan. And in this instance, I don't mean that as a compliment.

I'm writing this post from the town of Sendai, north of Tokyo. It snowed today, which was a lovely treat, something we never see back home in semi-tropical Hong Kong. Japan is an unusual respite from the rest of Asia in many other ways as well. While much of the region is still hurtling along the path of development, a blinding whirl of frenetic construction and perpetual change, Japan is a vision of stability, a nation that has everything others in Asia want, and has already had it for decades. Money. Technology. Global brands. A seat at the table with the powerful countries of the industrialized world. Japan decided to catch-up with the West a century before anyone else in Asia got the idea. Those of us old enough to remember The Vapors will also recall that Japan used to scare the pants off Americans and just about everyone else. Back in the 1980s, Japan was the first of Asia's rising powers, a nation that seemed destined to overtake the U.S. as the dynamic force of the global economy. Management gurus and academics looked to Japan in search of guidance that could rejuvenate an America that, many thought, had lost its will and its way.

Last March we all thought the world economy"”not to mention our cherished lifestyle "”was headed for the trash basket. The stock market had plunged, retirement plans were ruined, and few people cared that equities looked dirt cheap. But here we are one year later and the stock market is up 68%, rampant fear has morphed into uneasy optimism, and healthcare reform has replaced financial reform as the top newsmaker. A few other things have changed, as chief economist/strategist David Rosenberg at Gluskin Sheff notes in his report today. Here are some of Rosenberg's astute observations, comparing last March to the present:

I was taken aback this morning when I read in the New York Times that there is a new federal program that will look to put many thousands of mortgages-gone-bad back to the banks through a short-sale process. It's not actually new, the Treasury assures me, but rather was put forward as part of the Home Affordable Modification Program announced back in November. That's a relief because I was beginning to think that new housing programs were firing off as if from a multiple rocket launcher.

For a while now, chatter has been growing that the economy is headed for a double-dip recession. That's the type where you think you have recovered, but in fact you are only on the first bump of the roller coaster. But this morning's jobs numbers seem to suggest the possibility of a double dip is receeding. The Labor Department said the economy lost 36,000 jobs. Yes, still a loss. But it is far better than expected. Economists were predicting anywhere from a loss of 53,000 to 100,000 jobs for the month. And remember a year ago, the US job market shrunk a horrific 726,000 in February 2009 alone. Add in the snow effect and the economy looks like it has fully thawed. Here's why:

The Wall Street Journal ran a big story on Wednesday about how homeowners are missing out on big savings because people can't qualify for mortgage refinancings. This sounds like a tragic twist in what has been a humdinger of a bear housing market. But the more you understand mortgages, the more this bad news looks to be a blessing in disguise. To wit, the way fixed-rate mortgages are structured the lion's share of your first decade's payments are for interest payments, not to build home equity. Each time you refinance you reset the clock to zero, starting the interest-heavy period all over again. With the average homeowner mortgage lasting well less than 10 years before it is refinanced or paid off, it's no wonder Americans are so lacking in home equity. I don't mean to be insensitive to financially troubled homeowners who desperately need a break in their monthly payments, I'm just pointing out that there's a big hidden cost to refinancing.

Citigroup's Good News, Not so Great

Related Articles