Saturday, June 16, 2012

Joe Nocera and Citigroup as the safest bank

In his NY Times column, Joe Nocera makes the case for why the Vikram Pandit led Citigroup might be a better model for a safe bank than Jamie Dimon's JP Morgan.

If so, Citigroup shows how far banks have to go before they truly are 'safe'.

Regular readers will recall my post on Vikram Pandit's proposal in the Financial Times to protect opacity in the financial system.
Citigroup CEO Vikram Pandit rolls out a 'new way to measure risk' and strengthen the financial system. 
He observes that bank capital ratios are not very informative as there are a number of assumptions that go into calculating the risk-weightings of the assets.  To provide additional information, he suggests using a benchmark portfolio and then drawing inferences to Citigroup and other financial institutions. 
The last time the financial markets relied on a benchmark portfolio was for rating structured finance securities.  The rating agencies used a benchmark portfolio of mortgages.  We know how their reliance on this benchmark mortgage portfolio turned out. 
The lesson from that debacle is the importance of assessing the actual exposures and not some artificial benchmark.
At the end of the post, I expressed my hope that Mr. Pandit would act in the manner of Citigroup's other great leaders and be the first institution to provide ultra transparency and disclose on an on-going basis its current asset, liability and off-balance sheet exposure details globally.

In that past, Citigroup's leaders have taken leadership and ended practice that were damaging to the industry.  For example, John Reed was the first banker to step up in the 1980s and publicly recognize that the loans to less developed countries were worth significantly less than was being shown on bank balance sheets.

In the same vein, Mr. Pandit could lead and end the industry's black box disclosure practices.

Back to Mr. Nocera,

Instead, let’s focus on a bank chief executive devoid of swagger. An executive who doesn’t denigrate the importance of regulation. Who has actually come out in favor of the Consumer Financial Protection Bureau. And who doesn’t view banks as institutions that should be taking supercharged risks hoping to make supercharged returns for shareholders. I’m talking about Vikram Pandit of Citigroup. The Times’s Ben Protess once labeled him the anti-Dimon. Bingo....
By the time Pandit was put in charge in 2007, Citigroup was a sprawling, unmanageable mess. And that was before the financial crisis. 
One reason Citigroup acts differently than other too-big-to-fail banks is that no bank was so deeply humbled during the dark days of 2008. It didn’t need just one round of bailout loans from the Treasury Department; it needed two. No bank had more “toxic assets” than Citigroup. ...
Although it took him awhile to chart a course, Pandit eventually segmented the bad assets and has slowly been shedding them. He took much of the serious risk out of the bank’s balance sheet. He put aside enormous amounts of money to write off bad loans. And he gradually built up the bank’s capital — so that it could survive the next big shock, should it come to that. “Dimon talks about a fortress balance sheet,” says Daniel Alpert of Westwood Capital. “But it’s really Citi that has the fortress balance sheet.” 
The kind of risky “portfolio hedging” that caused JPMorgan all that trouble? Citigroup isn’t involved. It mostly invests its excess deposits in safe government securities. After Dodd-Frank was passed, it eliminated proprietary trading, not even waiting for the Volcker Rule (which has yet to be instituted). Mainly, Pandit is trying to bring Citi back to its roots as a commercial bank that makes its money the old-fashioned way: by making sound loans, to both consumers and companies.... 
And maybe if I were a shareholder, I’d want Pandit to take more risk. But, as a taxpayer, I don’t really care whether Citigroup maximizes its return. I care about whether Citi is taking steps to make sure that it is a safe institution operating with the full awareness that it owes something not just to shareholders but to the larger society. Among the things it owes is avoiding the kind of risks that require bailouts. Even if it means lower returns. 
Banks, as I’ve said before, need to become boring again, the way they were before shareholders began expecting double-digit growth as a matter of course. That’s the real difference between Jamie Dimon and Vikram Pandit. 
Pandit isn’t afraid to be boring.
Which should mean that Mr. Pandit isn't afraid to lead and provide ultra transparency.

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