COLUMNISTS Financial crises and panics are, perversely, entertaining. Officials and bank directors get to jet hither and yon for last-minute rescues, journalists get big headlines and the attention they believe they deserve, people’s voices rise in pitch. For once the business world is like the biggest ride in an expensive theme park.
Recessions and workouts are different. Crises get resolved, one way or another. But the grinding demoralisation of slow and disappointing growth seems to go on forever. Disappointments accumulate, and aspirations are repeatedly ratcheted down. That’s the fate of the US financial industry over the next few years.
In these phases of the business cycle, there are always a few institutions and individuals who become the focus of popular resentment that turns into open anger. I am beginning to think that Citigroup as an institution, and the present top management as individuals, could be in that position this time.
Disgruntled employees – former and current – are a journalist’s best friends. And these days I have a whole bunch of new best friends at Citi. (I always need more friends, and my e-mail address is below.) Information is leaking out to other groups in the Street, such as analysts and investors, as well as to the various tribes of Feds. You even hear from dissidents among the bank’s lawyers.
Citi is a huge place; much too huge really. The anger, if not necessarily all the systemic problems, though, are concentrating on two vulnerable points: Citigroup Alternative Investments, the hedge fund home, and the US credit card business. CAI was, very briefly, the line responsibility of Vikram Pandit, Citi’s chief executive, after his and his partners’ Old Lane hedge fund was bought a year ago for $800m (£406m, €511m).
Citi’s directors, led by Robert Rubin, pushed for the acquisition of Old Lane in large part as a way to buy instant management expertise, a “plug-in”, in the words of then-chief executive Chuck Prince. But Old Lane was a two-year-old multi-strategy fund, Mr Pandit and the other key managers were not specialists in credit or fixed-income investing, which was the expertise the bank needed going into the crisis.
Citigroup did need the application of both the axe and the scalpel to adjust to the new world, and I think the bank’s staff have known that. They would probably have accepted the need for a tough reorganiser in the Jack Welch-GE mould. But Mr Pandit and the Old Lane gang were seen not as ruthless or technically competent, but as self-serving office politicians who did not know enough about credit or commercial banking.
That is, according to Citi dissidents, a particularly serious problem at that bank, because the “credit culture” has been eroded by the originate-to-distribute strategy of Mr Pandit’s predecessors. It can be reasonably argued that the Old Lane principals were overpaid for their fund. They are not, though, principally responsible for the bank’s biggest problem, which is that it cannot readily move to an “on-balance sheet” strategy because it doesn’t have the people to implement one. You can thank Sandy and Chuck for that. In principle, Citigroup can raise new capital in a short period of time, albeit at the existing shareholders’ expense. But it cannot readily re-create the cadre of lending and credit officers.
However that is resolved, the bank needs the cash flow from good businesses to pay down the losses of the bad businesses. A key “good business” is the US credit card business. While actually smaller in terms of cash flow contribution than the international card business, it is incurring higher losses and political heat. A good expression of that heat is a proposed law called the Credit Cardholders’ Bill of Rights which was introduced in the US House by Representative Carolyn Maloney (D-NY). While Ms Maloney is a liberal Democrat, a lot of her constituents are employed at banks, and you can be sure that she is acutely aware of the risks of over-regulation.
The bill restricts the ability of card issuers (such as Citigroup) to change the terms of card contracts, including what is called “any-time, any-reason repricing”, retroactively increasing interest rates, and using arguably misleading terms such as “fixed rate” or “prime rate” when those are neither really fixed nor prime.
Banks such as Citi do not seem to appreciate the level of anger among the consuming public about some of their disclosure and billing practices. As one congressional person says: “This is a great campaign issue. The Democratic candidates really love it, and keep asking us for more material. If it gets to the floor, it’ll get 300 votes. Usually we have a dialogue with the banks, but on this bill they’re taking a scorched earth approach – no compromises. If it gets to Bush he’ll veto it, which would be great for Democrats in November.”
Citi, as a leading credit card issuer, would be wise to remember cardholders are also voters. If its management and their peers don’t compromise with the public, the terms they will ultimately have to accept are only going to get worse with time.
johndizard@hotmail.com
