Surprise! Citi and BoA need more capital!

Shocked, shocked: Fed Pushes Citi, BofA to Increase Capital

The most non-news news item in many years, but chalk it up in the good news category, if only because it seems to indicate some glimmer of reality leaking into proceedings. Some excerpts:

The findings suggest that government officials are using the stress tests to send a tough message to struggling banks. Bank of America and Citigroup have been the highest-profile problem children in recent months, but it is unlikely that they are the only banks the Federal Reserve has determined might need more capital.

Industry analysts and investors predict that some regional banks, especially those with big portfolios of commercial real-estate loans, likely fared poorly on the stress tests. Analysts consider Regions Financial Corp., Fifth Third Bancorp and Wells Fargo & Co. to be among the leading contenders for more capital. Wells Fargo declined to comment. Representatives of Regions and Fifth Third didn't respond to requests for comment made late in the day.

Not surprisingly, the geniuses who led us into this disaster are still in denial:

Executives at both banks are objecting to the preliminary findings, which emerged from the government's scrutiny of 19 large financial institutions. The two banks are planning to respond with detailed rebuttals, these people said, with Bank of America's appeal expected by Tuesday.

And, under the bad news column, file this gem of illogic:

....banks directed to raise more capital shouldn't be viewed as insolvent.

Two more little bits from the article I found amusing:

1. Bank of America's capital hole as measured by the regulators is in the billions, said people close to the company, placing added pressure on management as the company prepares for a Wednesday shareholder meeting in Charlotte.
2. It isn't clear how big a capital deficit Citigroup faces

That last one is just perfect. Kinda like figuring out how many holes it takes to fill the Albert Hall...

"Nagging worries" about the banks

That's the word Jack Healy uses to describe the 4.3% sell off in the S&P today (S. & P. Down More Than 4% as Financial Fears Return)

Those concerns were fueled by a few things:

1. The realization that BoA's 'earnings' were mostly due to accounting changes and one-time events, neither of which is sustainable
2. The Goldman accounting gimmickry from last week which was so obvious to all really sunk in over the weekend. Trust in Goldman is shaken, even on Wall St, and folks wonder why the gimmick was buried on page 7 of their earnings report
3. The Obama plan floated in the Times today to convert existing loans to banks to common stock is really just shuffling deck chairs, and does absolutely nothing about underlying insolvencies
4. Ken Lewis being frank for the first time in a while in announcing that credit conditions will get significantly worse
5. The realization that the consumer is really in bad shape, which has been obvious, but which has been overlooked. Housing is not bottoming, retail is hideous, employment will continue to weaken, home equity is gone, savings have been stripped, etc etc....

Thing is, these 'nagging' worries will continue to nag until some form of the inevitable and overdue nationalization takes place, alas.

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The only things holding this back are 1. fear of political repercussions (Socialist!) and 2. hope that the economy is improving, and banks will heal as consumers do. But consumers aren't healing, and once the next round of badness blows in in July, august, September, the failure to have taken dramatic action will appear to have been the bigger political (and economic) miscalculation...

Citi is bankrupt, in every sense

As if that's any news. But see this from Zero Hedge via Egan Jones (emphases mine): http://zerohedge.blogspot.com/2009/04/citi-market-barometer.html

Accounting and government magic - the recasting of FASB157 enables financial institutions to defer the recognition of losses with the result that C's March trading profits swung from a $6.8B loss to a $3.8B gain. Another item worth reviewing is the decline in interest expense from $16.5B last year to $7.7B this year. Nonetheless, much more equity capital is needed. Beyond the conversion of preferred to common, watch the form of any additional capital. The Fed and Treas. have guaranteed $306B of C's assets, have injected $45B in preferred and converted to common leaving few additional options. The problem is that C has $2T of assets ($3+T including off balance sheet assets) whose values are depressed by 10% to 20%. C needs to be watched.

For you math minors, 10-20% of $3T = $300-600Billion. Just Citi, mind you, and on top of all the rest of the money wasted on these dopes (criminals?) As for equity capital, where does a $4.00 stock raise it? You guessed it! The Feds!!

Really amazing that they still exist qua C. This firm has been a blight for most of its existence, not to mention the lifeline they were thrown in 1991. Here's hoping that Pandit's absence from the conference call (Whereth Pandit?) is indeed a sign of things to come - most especially hoping for a forced restructuring (eg bankruptcy).

Break these guys up, and do it ASAP

Whereth Pandit?

I'm struck that Citi did its conference call this morning absent the presence of Mr Pandit. One could argue that this was the most important call in Citi's long and much-checkered history, and the CEO couldn't make it. Hmmmmm

What else might be occupying him? PTA at the Dalton School? A co-op board meeting? Dealing with the lawn care guys now that spring has sprung? A flat tire? That pesky #6 train? Emergency last-minute baby-sitting? Hangover?

Or possibly a meeting avec lawyers and the Feds as to how/when to behead him?

Enquiring minds want to know.....

GE and Citi earnings reports - spring 2008 redux...

They, again, remind me of Spring 2008, post-Bear. Like the eye of a hurricane. There's much more bad stuff ahead, and few - esp Citi - seem willing to face reality.

In Citi's case, note that they put aside $2.7Billion in reserves for loan losses, whereas yesterday JPMChase put aside 4$billion. Anyone really think that Citi's portfolio is healthier than Chase's? Please speak up.

Some of the bad stuff clearly in our (and the banks') future:

1. The CRE disaster has only just begun. The largest real estate bankruptcy in the nation's history passed yesterday with nary a peep (General Growth Properties: Largest Real Estate Bankruptcy Thus Far ), but there's no reason to think that malls, office buildings, condo complexes, sports arena, entertainment complexes etc are gonna suddenly be in great demand
2. The consumer is getting sicker, not healthier. Much badness ahead on credit cards, student loans, car loans, and the ongoing decline in residential real estate shows no signs of bottoming, despite rumors to the contrary (Housing Construction Fell Again in March) Since the moratorium 'expired' foreclosures have surged.
3. Speaking of the consumer, unemployment is clearly headed towards 10+%, easy. Probably 11+%. Worse than the stress tests presume, and the Administration forecasts. Much more downward pressure on spending in the future, with subsequent problems for CRE, corporate loans, small business loans, etc etc....
4. Other Macro problems remain, esp in Europe and Japan. How bad can these get? Well, I'd be planning for the worst, as the worst has consistently been surprising people ever since august 2007. I rather took the Central and Eastern Euros at their word two months ago that their situation was dire. Not much has happened since then (save for more $ for the IMF from the G-20 - but the UK might suck that up) to cause one to think things there are materially better. If Central and Eastern Europe go down, dominoes fall, starting with Austria (65% leveraged to Eastern Euro banks), then Germany, France etc get very strained. not to mention the slow-motion disaster that the UK has become. Spain, Italy, Ireland, Iceland, Ukraine, Latvia, etc are already in the tank. As for Japan, well, see this: Japan Says Economy in ‘Severe' State, View Unchanged US Banks - esp Citi, remain extremely exposed to all these problems
5. Despite all the brave talk from Chase and Goldman about giving TARP money back, Citi (and BoA) do not have that luxury. And all banks will see the huge but temporary revenue gift from all the Agency purchases the feds dropped in their laps disappear next quarter. By late Q3, aerly Q4, these guys will be running on fumes, again.

Complacency at green shoots is very dangerous.

US banks and 'profitability'

The recent ummmm 'rally' in equities has largely been driven by wee little comments by our banking ummm errr 'leaders', notably Pandit, Dimon, and Lewis (Citi, Chase, BoA), who in near-unison last week informed us that they had been profitable in January and February. CNBC rejoiced, and stocks rose: "Hey - didja see Citi's up by like 150%, all the way to $2.50!!!"

Well, forgive me for being a tad skeptical. We've seen no real numbers thus far (and won't for another month) and what little has been made public is rather ambiguous. And, oh - haven't we been through about 100 rounds of previous reassurances from these very same bankers that all is well?

Here's one example of a statement that should cause one much pause: In Mr Pandit's leaked (haha) internal note to employees he notes, among other really good news, that 'deposits have stabilized'. Huh? Deposits have 'stabilized'?? In the midst of an epic flight to cash, in the teeth of massive governmental guarantees of deposits all over the globe, all Citi can muster is 'stabilized'? Please already. Any normal and healthy bank has seen a huge influx of deposits of late (albeit one that could vanish in a moment's notice) yet here's Citi basically telling us that "fewer people are taking their money from us and fleeing to competent institutions that do not need regular and massive taxpayer bailouts and which do not threaten the foundation of global prosperity as we know it"

Gee, color me persuaded.

And, as my pal Derek pointed out over the weekend, banks are seeking 'profitability' in shameful ways, one of which would appear to be milking unemployment benefits: http://www.cnn.com/2009/US/03/13/unemployment.fees/index.html

Excerpt:

According to the U.S. Department of Labor, 30 states offer direct deposit cards to the unemployed. Many of the nation's biggest banks have contracts with the individual states. JP Morgan Chase, for instance, has contracts with seven states and has pending deals with two others, according to Chase spokesman John T. Murray. About 10 states, the Labor Department says, pay by check only.
The National Consumer Law Center says fees range from 40 cents to a high of $3 per transaction, if the debit card is used at an out-of-network ATM. Most banks give jobless debit card users one free withdrawal per deposit period, which averages every other week in most states. But consumer advocates, including the Law Center, say the unemployed "should be able to obtain cash and perform basic functions with no fees."

So, bank profitability is partly driven by the explosion in unemployment? This is good news? This is ethical? This makes fundamental good business sense?

"Private Assets" continued

More from Dr Setser:

It increasingly looks like the US is inching toward severely diluting the common equity of a set of banks where sovereign funds have substantial stakes, if not wiping out the existing equity entirely. That potentially — as Larry Summers warned in a former life — is a foreign policy issue. Summers pondered this topic at last years Davos session on sovereign funds:

[Suppose] the SWF of country A makes an investment in a major bank in country B. The bank gets in big trouble. Is there any control in the world that can assert, that with billions of dollars on the line, their head of state and foreign minister are not going to get involved in the negotiations?


Me, Keating, here now: So, as we lead the world towards economic collapse, we're actively going out of our way bite the hands that feed us...

Tell me why this makes any sense whatsoever

What does make sense is to nationalize all US banks with assets over $5Billion ASAP, sort out the mess and the lies, fire most of 'management' at most large banks, and then perform the necessary triage (eg let Citi and BoA die).

No one is too big to fail.

Except the US. But if we do not deal with reality sooner rather than later, look out below