Friday, June 5, 2009

FDIC Keen to Designate Ciit a Problem Bank, Change Management

Posted by Yves Smith on Naked Capitalism:

The Wall Street Journal has an eyepopping item tonight:
The Federal Deposit Insurance Corp. is pushing for a shake-up of Citigroup Inc.'s top management, imperiling Chief Executive Vikram Pandit...

The FDIC, under Chairman Sheila Bair, also recently pressed a fellow regulator to lower the government's confidential ranking of Citi's health -- a change that would let regulators control the firm more tightly.

The FDIC's willingness to take an increasingly tough position toward one of the nation's largest and most troubled financial institutions is setting up a bitter clash between regulators -- some of whom disagree with the FDIC's position -- and between the FDIC and Citigroup, whose officials have argued that Ms. Bair is overstepping her authority.

Yves here, Not being privy to details (and I see no corresponding story at the New York Times to allow for triangulation), inquiring minds wonder whether the Journal has been spun a tad, since the piece also makes clear that the bank believes Bair is overreaching.

Look at the logical relationship it sets up: Bair wants to oust some Citi top brass, ergo she wants to lower Citi's score at the FDIC.

Frankly, it seems more plausible the reverse is what is happening: Bair thinks Citi deserves a lower ranking, and given how long Citi has been on the ropes, a management change is in order.

Now Bair has been argued to have been trigger happy on WaMu, taking over the bank and cramming down bondholders, with the result that JP Morgan looks to have gotten a very nice deal. However, readers have said a run was starting on WaMu. Given how nervous despositors were then, the FDIC may have been afraid of a run as WaMu morphing into something worse. I know people (savvy, not the survivalist types) who were pulling meaningful amounts of currency out of banks in the September-October period out of fear of a possible bank holiday. So I don't think the case is as clear as the Monday morning quarterbacks make it out to be. A run on WaMu could have created a great deal of collateral damage.

The reason I have some sympathy for the FDIC is that the US has violated the best practices playbook for dealing with troubled banks. If they get significant contributions from the state, the board and top brass go. The authorities install new management and set broad guidelines, sometimes timetables for particular objectives to be met, but do not meddle on a day-to-day basis.

Given Citi's globe spanning operation, and its nearly $1 trillion in maybe-not-so-off balance sheet exposures (Advanta's credit card woes are instructive here) which were enough to mobilize Paulson to try to solve them via the MLEC (our take was the MLEC was mainly about salvaging Citi, with far and away the largest SIV exposures in aggregate), it isn't hard to imagine that it is still in lousy shape. And if Bair is right, that it really does deserve lower marks from its regulators, her agitating is not out of line. Indeed, she might have waited (or been urged to wait) until equity and credit markets were on a good enough footing so that unfavorable news about Citi would not have disproportionate impact.

In fairness, the article actually comes out and says (admittedly a fair way into the story) that Citi is in worse shape than other big banks. But it spends even more time on the turf war charge, which makes it sound as if the FDIC is significantly, if not primarily motivated by the desire to make a land grab.

Back to the story:
"The FDIC is our tertiary regulator," behind the Office of the Comptroller of the Currency and the Federal Reserve, said Ned Kelly, Citigroup's chief financial officer...

Still, some officials across the government are frustrated at the company's pace of change. FDIC officials in particular are concerned about the lack of senior executives with experience in commercial banking. Mr. Pandit himself comes from an investment-banking background, but most of the bank's current problems stem from troubled consumer loans.

Federal officials have reached out to Jerry Grundhofer, the former U.S. Bancorp CEO who recently joined Citigroup's board, to gauge his interest in the top job...

The FDIC's aggressive stance comes just ahead of the Obama administration's big revamp of financial oversight, which is expected in mid-June. Several regulators, including the FDIC, are hoping to win additional powers, and some may end up losing authority.

The FDIC's influence has grown in the past year because of Ms. Bair's willingness to challenge her peers, as well as her agency's central role responding to the financial crisis. Ms. Bair warned about the housing crisis before many of her colleagues.

The FDIC traditionally hasn't been nearly as assertive in management of a large firm. But Ms. Bair's agency is heavily exposed to Citigroup. The FDIC is helping finance a roughly $300 billion loss-sharing agreement with the company.

It also insures many of Citigroup's U.S. bank deposits. Citigroup has issued nearly $40 billion in FDIC-backed debt since December...

Since late 2007, Citigroup has had more than $50 billion in write-downs and loan defaults. It's in substantially worse shape than many of its peers, many of whom have been able to raise billions of dollars in fresh capital recently.

The Fed, in its recent stress tests of the nation's 19 largest banks, estimated that Citigroup could face up to $104.7 billion in loan losses through 2010 under the government's worst-case economic scenario. The test found that Citigroup could face nearly $20 billion in losses in its huge credit-card portfolio, which is suffering from rising defaults.

However, the Fed's conclusion that Citigroup needed to beef up its capital by only $5.5 billion to withstand a deteriorating economic environment surprised many investors and analysts, who feared the company faced a much steeper shortfall....

In private conversations with other regulators, FDIC officials have argued the government should be tougher on Citigroup. In what is becoming a classic Washington turf battle, the Comptroller of the Currency has countered that replacing the bank's management could be too disruptive. The agency, which oversees Citigroup's national bank division, believes Citigroup needs more time to implement its turnaround strategy.

In March, senior officials from the FDIC and Comptoller sparred over the confidential financial-health rating the government assigns to the company's Citibank unit, people familiar with the matter said. The FDIC wanted the rating lowered, these people say. Banks rated a 4 or 5, on a scale of 1 to 5, are deemed "problem banks," which means they're at greater risk of failure.

Government officials decided to keep Citigroup off the "problem" list at the end of March, which became clear after the FDIC disclosed that the 305 banks on the anonymous list had a total of only $220 billion in assets, meaning Citi couldn't be among them.

Still, Citigroup officials believe that the FDIC will push them onto the "problem" list if they don't remove Mr. Pandit and his team. They fear being on the list could limit Citigroup's access to federal programs and prompt trading partners and clients to yank business.

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