Friday, July 11, 2008

Citi Scales Down and Screws Up

The analyst who made her stardom on downgrades of Citigroup is polishing that star on the beleaguered banks crusty facde. Oppenheimer & Co.’s Meredith Whitney lowered her call for Citigroups Q2 earnings in Wall Street’s quarterly game of “beat the estimates”.

Citigroup will probably lose $1.25, compared with her prior estimate for a gain of 21 cents. She forecast Citigroup’s writedown at $12.2 billion.

The estimate of profit reverse comes with the entire industries failed earlier attempt to prop itself up following Goldman Sachs mea culpa. The cascade of worthless stock market news from Street owned outlets like Bloomberg that continues promo-gating the quarterly game of “we beat our own drastically lowered estimates”, is beginning to show signs of fray. Not even mighty Goldman Sachs propaganda machine could wipe away the reality of hundreds of billions in losses and write downs.

Analysts and investors are reversing their predictions that the worst of the credit-market contraction is over after more than $400 billion of writedowns and losses by the world’s largest financial institutions.

Vikram Pandit, the bank’s newly installed CEO is making many moves, any moves, but none that will make a difference. Under the crushing weight of the losses and write downs the pressure builds up and up, up to where the responses become spastic, failing.

Citigroup will begin a new bonus plan aimed at getting its senior executives to work for common earnings improvement across the entire company instead of only driving profits within their departments. According to the FT, the new system isan effort to increase co-operation and minimize in-fighting among the disparate parts of the sprawling financial services conglomerate.”

The plan is designed to fail because it fails to account for bankers most basic human failing.

The most wrong-headed part of the thinking behind the program is that it does not account for the fact that banking executives do their best out of personal greed. The current system of having every operation in the bank strive for its own best results already maximizes overall earnings. The profits from a number of successful divisions within the firm adds up to better financial results for Citi as a whole. Bonuses based on the performance of the the bank as a whole simply makes star executives believed they are being robbed by being lumped in with the company’s losers.

As usual the bank punishes the rank and employees, although in the case of a company that grew too fast too quickly on the wings of too many risky investments the job cuts are at least a justified begging.

In a conference call with shareholders last month, Gary Crittenden, the finance director, indicated that Citi may cut parts of its retail-banking and consumer-finance operations in certain countries where it considers the business to be too small.

“Citi has a presence in 106 countries,” said one source close to the company. “But does it really need to be in Greece, Slovakia, the Czech Republic and Italy? In a lot of those places it has no scale at all.”

And on it goes, despite the frenzied, desperate day by day maneuvers that will cut 18,000 jobs, write-down in excess of $8 billion, and raise at least $10 billion, (from where?) in addition to the $50 billion already diluting share holder value. Still the neediness for a banks life-blood cash, gets more dire and management gets more delusional.

Vikram Pandit, the bank’s recently installed chief executive, had just sent an e-mail to every employee in the company.

Headed “Our culture”, the memo praised the “remarkable efforts” from staff and the 200 years of history that ensured Citi would continue to be the “backbone of world commerce”. Citi would become “the greatest turnaround story of our age”, Pandit promised. “We can make this the best company in the world, bar none.”

Most of the 200 years of that history were spent as the City Bank of New York founded in 1812, but that profit history was wiped out in less that five years by the risk hungry methodology of Sandy Weill and the suicidal subprime credit binging of his successor, Chuck Prince.

And now Pandit come aboard to clear the decks more than right the ship. The frenetic activity will make headlines and delay itchy trigger fingers poised on the mouse, hovering above the sell button at best. But when all the huffing and puffing is done, Pandit will have done nothing, there was never really nothing he could have ever done; saddled as he is with the misfortune to reign with the albatross of huge exposure to the unstable credit instruments that began to blow up last year. So in the end it was the same old thing, slash jobs, raise cash, boost moral. But the hand outs from rights issues are drying up along with investors burnt patience, earnings in the post bubble burst are nowhere to be found and it will take a lot more than pep-mails and ill conceived bonus plans to repair the house that Prince ruined.

1 comment:

Don said...

Always interesting and informative reading your posts. Someone very attuned must have started you on your path with, oh say, The Creature From Jekyl Island?

An out of work demolition worker enjoys your blog. Drop by my notimefortrivia.com sometime. I am not nearly as financially informed as you, but occasionally I post something significant.
db