Inside Financial Services

Mike Mayo’s Wrong About What’s In Store For Citigroup

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CLSA’s Mike Mayo is as excitable as ever:

Citigroup faces “do-or-die time” as the Federal Reserve administers an annual stress test to the struggling bank, an analyst said.

“Either Citi gets it done or it’s time to more aggressively break up the company,” Mike Mayo, a banking-industry analyst at brokerage firm CLSA, told Crain’s New York Business.

Citi has flunked the test twice in the past three years, and insiders say Chief Executive Michael Corbat probably can’t survive another failure. The bank submitted its paperwork earlier this month and should get results in mid-March. [Emph. added]

Actually, Citi failed its stress last year not because regulators found its financial condition wanting. The company has ample capital, and passed the “quantitative” portion of the test without a problem. Rather, Citi missed on the qualitative part. In particular, the Fed indicated it had concerns regarding the company’s ability to project losses in “material parts of its operations.”

“Taken in isolation,” the Fed’s report said, “each of the deficiencies would not have been deemed critical enough to warrant an objection, but when viewed together, they raise sufficient concerns regarding the overall reliability of Citigroup’s capital planning process.”

My translation: “We flunked Citigroup because we felt like it.” A year later, the company is financially stronger now than it was then.  It’s also smaller and simpler, having exited (or in the process of exiting) multiple businesses worldwide and shed $40 billion in assets. Will Citi pass its stress test this year? Who can say? The regulators seemed to act somewhat arbitrarily in 2014 and I don’t know why they might not again in 2015. But I’m at a loss to see why Mike Mayo’s permanent default solution to fixing the company—breaking it up—is either inevitable or such an obviously good idea. Regulators have such sway over banks now that if they wanted Citi to get small in a hurry up they’d order it to do so and not bother waiting for the results of any stress tests. Nor are the advantages of Citi’s global reach likely lost on them.  And the regulators certainly understand the company’s financial strength

So, no, should Citi fail its stress test again, it won’t be clear that “it’s time to more aggressively break up the company.” I’m not sure why Mayo would even say that except that (this being Mike Mayo) he seems to prefer to always strike a faux-provocative pose.

What do you think? Let me know!


3 Responses to “Mike Mayo’s Wrong About What’s In Store For Citigroup”

  1. oy

    I can think of someone else who likes to strike a faux-provactive pose from time to time.

  2. jsc173

    I still say the proper completion of the sentence, “Citi is too big ________”, is “to manage.”

    I worked there at a senior level for ten years and had enough interaction with folks like John Reed to know that they were constantly hopping from crisis to crisis and mostly kept their fingers crossed that “blowups” would only happen every four or five years. Imagine the guy spinning the plates . . .

    That tells me that no mortal can ever manage this beast. It’s dysfunctional and whether through intelligent action or calamity, it should not continue to exist as it does today.

  3. Almas

    they don’t do it bigger in Texas? Have we so soon frototgen Enron? The ill-effects of Texas greed and corrupt politics are not so easily frototgen by those whose lives are ruined. And now, once again, this same sort of pond-scum is allowed to take control. Do all of this state’s mistakes have to reach Texas-size portions to be addressed?These moneychangers are lead stories in magazines, written about in the Newspapers, and some make the 6 o’clock news. Then there is silence and nothing more. It is as if everyone develops amnesia, right after the information is disseminated. It is as if no one can acknowledge what is right-in-front of his or her eyes. The culprits and henchmen continue: as if no one sees anything is wrong, and God is in his heaven, and all is right with the world.Sitting here, reading Texas Monthly Magazine, I am stunned. The article is titled, Bob Perry Needs a Hug. It is a powerful piece on the housing crisis, political power, intimidation, and injustice. It is all spelled out clearly; and it is written simply so, no matter what your level of education, you cannot miss the point. The story is actually a postscript to the November 2005 issue, Hurt? Injured? Need a Lawyer? Too Bad!, by Mimi Swartz. No one got sued because these articles told the truth. It is in black and white for anyone to read; and no one seems outraged, or even ashamed. Worst of all, it is ongoing; and no one is even stopped or punished. It is just dually noted in the text.In another venue, is the new book, Blocking the Courthouse Door, by Stephanie Mencimer, Chapter Three; Mess with Texas: George W. Bush and the Texas Tort Moguls. It reads like chapter one from the starship, Enterprise but it is all true! It is an eye-popping look at the people in power, who spun tort reform like cotton candy and hand fed it to us. This expos is an in-depth assessment of the incredulous and ongoing assault on the American consumer. Indeed, this is an assault that began right here in the great state of Texas. Is this state now the breeding ground for infamy? ( Infamy: evil reputation brought about by something grossly criminal, shocking, or brutal 2: an extreme and publicly known criminal or evil act 3: the state of being infamous) How well defined must these actions be?Government agencies are bought and paid for, and the owner’s name is mentioned as off-handedly as if it were in the society page. The same names appear that are found in the magazines and the newspapers, and these people are allowed to continue to stomp down any fear of reprisals with their checkbooks? Have we, the people, just given up? If we no longer think we matter then we don’t.It is all so absurd; it makes me think it is a bad dream or has to be make-believe. It brings to mind a fairy tale by Hans Christian Anderson called The Emperor’s New Clothes . Remember it? The emperor is narcissistic, powerful, and vain. He struts around in new clothes to gain the admiration of his subjects. His only passion is his attire. He is so bad that he attracts swindlers to his court, and they play on his vanity. They sell him on the idea that they, for a price, can weave cloth so magnificent and elaborate that it has special power and is completely invisible to everyone who is stupid or not fit for his post. The emperor, even-though he cannot see this material, cannot admit it because he would be, in essence, admitting he is stupid and unfit for his post. So he sends for his yes men’. They, fearing reprisal, tell him what he wants to hear. They assure him they see the fabric, and it is as magnificent as befits a man of his station. He somehow has convinced himself that their approval of his preening, condones his ridiculous behavior.His aids suggest that he should have new clothes made from this splendid material for the great procession that was the following day. Throughout the night, the swindlers made motions of looming and weaving, cutting and sewing nothing. All the while, attesting to the king that it was the most exquisite outfit ever to be worn. There was great excitement in the kingdom as every one had heard of the emperor’s unbelievable threads. The rascal swindlers lifted up their arms to the emperor as if they were holding something. They proceeded with their scheme and asked the king to remove all his clothes so they could help him on with the new ones. They gave him the make-believe trousers and mantle. They remarked that the fabric was so light, it was as if he were wearing nothing, but remarked that was the beauty of it.All of his ministers cried out in unison, Magnificent. The emperor looked at himself side to side in the mirror as if to observe the clothes that were not there. No one dared tell him the truth, as they would have declared themselves stupid and unfit for their posts. A canopy was held above him as he strolled out to greet his admiring public. They oohed and aahed along the route as he waved and smiled, confident of his importance. But all at once, a hushed little voice shockingly spoke up from the crowd. A small child gasped, But he is not wearing any clothes! People began to whisper to one another what the child had said, ’til everyone was saying, But he isn’t wearing any clothes. The emperor himself had the uncomfortable feeling that what they were saying might be true, but he had to go through with the procession. So, he drew himself up and walked with his head higher than before; and the courtiers held onto the train that wasn’t there.The moral of the story there are a lot of naked people strutting around in Texas, desperately in need of a child’s honesty.There is a real sickness in today’s society when we have to search for that small child’s voice in the masses to shed light on the horrendous, disgraceful truth, and finally get some kind of movement started. Something has to done about defective, atrocious, uninhabitable housing; and we need to stop the homebuilders who shamefully erect them, ignore new homeowners’ complaints, change the company name, and then go right on building.Something has to be done NOW to protect consumers. Consumers are the very fabric of the American dream. We need to halt the resulting wave of decimation throughout our nation’s economy. Something has to be done about reversing Tort Reform so the system is fair again.

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