Financial News

Citigroup CEO says bank operating at a profit

NEW YORK - Embattled Citigroup Inc. surprised Wall Street Tuesday with news that the bank company has operated at a profit in the first two months of the year. But despite the upbeat news, Congress and the Fed continue to review strategies for dealing with a further deterioration of the troubled global banking giant.

Citigroup CEO Vikram Vikram Pandit said late Monday in a memo to employees and clients that  during the first two months of this year the bank had its best performance since the third quarter of 2007, when the credit crisis first triggered a wave of losses in the industry.

Pandit's memo said the company had generated $19 billion in revenues in January and February "excluding externally disclosed marks." A Citi spokesman said the company arrived at the profit figure by subtracting $8.1 billion in expenses for the two-month period, along with taxes and any one-time gains or losses. The spokesman did not provide details on those items.

Still, the memo helped provide the battered banking industry with a hopeful piece of news and helped lift the stock market. Citi stock, which had been hovering at about $1 a share, jumped by 40 cents. Other banking stocks also were higher, and the broader market was enjoying it best session in weeks.

But Citibank is hardly out of the woods yet. A report in The Wall Street Journal, citing people familiar with the matter, said that government officials have been looking for new ways to stabilize the bank should further problems arise. The Journal said the discussions are preliminary and wide-ranging, addressing possibilities that government officials do not expect to occur.

Also Tuesday, Federal Reserve Chairman Ben Bernanke called for a revamp of the country’s financial regulatory system. Speaking before the Council on Foreign Relations, Bernanke said  companies that are “too big to fail” must be subject to more rigorous supervision to prevent them from taking on excessive risk. Bernanke’s remarks come as the Obama administration and Congress begin to devise their strategies for overhauling regulation.

Citi has been among the hardest-hit banks by the ongoing credit crisis and recession. It has been forced to take tens of billions of dollars in write-downs and loan losses since late in 2007 as the value of its investments plummet and more customers fall behind on repaying loans.

The New York-based bank has posted five consecutive quarterly losses, including a fourth-quarter loss of $8.29 billion.

Late last month, in its third attempt to rescue the bank from collapse, the Treasury Department moved to take up to a 36 percent stake in Citi. The government will convert some of its $45 billion in preferred stock into common shares and is looking for private investors to contribute as well. Those new shares will dilute the value of stock issued before the conversion; if the maximum amount of preferred stock is converted, current common stockholders will see their ownership stake fall to about 26 percent.

The government has also agreed to cover a some of Citi’s losses on hundreds of billions of troubled assets and loans as tries to right itself.

The government’s investment has helped shore up the bank’s capital base, adding as much as $81 billions to the bank’s so-called “tangible common equity.” In his memo, Pandit said that would make Citi “the strongest capitalized large U.S. bank,” based on that measure. Ion his memo, Pandit said the bank’s deposits are “relatively stable.”

Government regulators are in the middle of a series of “stress tests” to determine how well the loans on the books banks that have take government bailout money can withstand a more severe economic downturn. Pandit said Citi is doing its own “stress test” on its portfolio of loans and investments backed by loans, using scenarios that are more pessimistic than the government’s.

Citi has been working in recent months to return to profitability. Among its plans, the bank is shedding assets and reducing staff to streamline operations. Citi has already announced a plan to sell a majority stake in its Smith Barney brokerage unit to Morgan Stanley.

Citi is also pursuing a plan to split its operations, separating the traditional banking businesses from the riskier operations that have been the primary driver of losses in recent quarters.

World's economies tumbling like dominoes

      Lately, I have been struck by how bleak and black the newspapers have been in their coverage of the economy. Not that I've been surprised, but one can never know when events in the economy will coalesce into the news that causes the masses to realize how difficult the environment is.

In reading the papers, it was obvious to me that it's becoming clear to everyone that "the next time down" is well under way, though the average person wouldn't call it that.
            1980-82 versus now
I was trying to remember the last time I had seen the economic news quite as ugly. For me, the 1980-82 period is the closest example I have lived through. Of course, it was quite a bit different. Many of the problems were a function of sky-high interest rates induced by then-Federal Reserve Chairman Paul Volcker (a consequence of money-supply targets, not interest-rate targets) to break the back of inflation.

What we are now dealing with is roughly 20 years' worth of massive speculation and excess leverage, championed by the United States and mimicked by other countries around the globe. It appears the potential for the newest round of financial weakness is being precipitated by economic problems in Eastern Europe, which are impacting the European banks, especially German ones.

We are at the stage now where economic weakness is feeding back into everything, making the situation more difficult for banks everywhere. And, it's becoming clear to nearly everyone that many banks are not just illiquid but insolvent.
            The globe took up our gauntlet
The "next time down" scenario that I outlined in 2004 is hitting now with full force. However, at the time, I hadn't really thought through the implications of the speculative nature of what had transpired in the entire world, because when I first started thinking about and discussing this outcome, the rest of the world had not gotten quite so drunk. But by the time the madness of the crowds finally breathed its last on the upside, the insanity we saw at home had been pursued in many other countries. Iceland is bankrupt, Ireland may be following suit, and who knows what others may join that sorry parade?

The one surprising outcome thus far is that the dollar has been able to stay as strong as it has (which I believe is a temporary phenomenon). It is becoming clearer to everyone that currencies -- the dollar included -- have no intrinsic value, as they are just pieces of paper. That's one big reason gold has been so strong recently.
              How we got here
Of course, one of the underlying reasons for the strength in gold has been the action of the governments and central banks around the world. Along that line, The Wall Street Journal on Feb. 18 carried an article titled "Synchronized boom, synchronized bust," in which my friend Marc Faber detailed just what the headline implies. None of this will be news to any reader of this column. But Faber's article is a well-written, concise explanation of how the world arrived at its current predicament, which makes it a worthwhile read.

A couple of important points that he makes regarding the government's meddling in the markets:

 • "It is not that the free market failed. The mistake was constant interventions in the free market by the Fed and the U.S. Treasury that addressed symptoms and postponed problems instead of solving them."

 • "Further interventions through ill-conceived bailouts and bulging fiscal deficits are bound to prolong the agony and lead to another slump -- possibly an inflationary depression with dire social consequences."

Not exactly a feel-good piece, but understanding where you are is an essential component of figuring out where you're headed.

Here are links to pages:

Advisers To Obama Wary of Bonus Tax

Stop the Presses: Congress Is Angry!

Obama says risks still haunt US financial system

Unwinding toxic firms tops Obama financial reforms

EU Takes Steps to Control Financial Fallout

Obama regroups, fine tunes financial overhaul

New bank bailout plan coming

http://money.cnn.com/

U.S. to Unveil Regulatory Changes, Plans to Remove Toxic Assets From Banks

Asian Stocks Climb on Expectations Government Stimulus Will Revive Growth

Hellman & Friedman Said to Consider $5 Billion Offer for Barclays iShares

`Bull-Market' Equities Rally Has Begun, Templeton Asset's Mark Mobius Says

Toyota Founding Family's Fortune Takes $447 Million Hit From Falling Stock

China Stocks Rise for Sixth Day; Baoshan, SAIC Gain on Acquisition Outlook