Global Agenda: The Citi never slips

We have major institutions doubling and tripling their estimated losses - and firing CEOs as penance.

November 8, 2007 21:02
Global Agenda: The Citi never slips

Business ethics 88. (photo credit: )

The crisis is moving along smartly, with the barriers between what most people are prepared to believe, or even think about, and between the stark, awful reality, narrowing steadily. This week, banks around the world - even Swiss ones - have been queuing up to announce larger write-offs and increased losses from subprime debt instruments, in many cases before the ink had dried on the announcements of their original estimates of these losses. More than anything, this rapid reversal has blown away the façade that the subprime disaster was a) small-scale, b) localized by industry sector and/or by geography, and c) something that would impact earnings and share prices for, at most, a couple of quarters. Instead, we have major institutions doubling and tripling their estimated losses - and firing their CEOs and other senior honchos as a form of punishment and penance. Let's leave aside - for the moment at least - the absurdity inherent in this ritual, in which people who received huge pay packages because of their supposed managerial skills, but who then failed in their jobs, are "awarded" (that's the term used) packages worth at least millions, often tens of millions, and for CEOs, well in excess of $100 million, when they are sent packing. If that's penance, it's hardly surprising that Mammon, God of Wall Street, has so many slavish adherents, all of whom chant Gekko's mantra 10 times a day: Greed is Good, Greed is Good, Greed is Good. As for punishment, the only people being punished in this spiel are the rank-and-file shareholders, whose dwindling funds are being ruthlessly raided to enable the penance ritual to be performed limehadrin. Usually, when a firm admits its stored-up losses and fires its boss, the markets react positively, reasoning that the boil has been lanced and the body will now recuperate. But that is not the case now. The reason shares in the financial sector are being remorselessly pummelled is that market players are absorbing the horrendous and shattering realization that there is not going to be a quick fix to the so-called "subprime crisis" - because there is no such quick fix. On the contrary: the estimates of total losses of $150-200 billion, which as recently as August were considered wildly pessimistic, are now mainstream. Since the first round of write-offs by the world's (and especially America's) biggest banks amounted to only $20b., and the second round may take us to the $50-70b. level, it's not hard to see why investors are now either in shock or in panic. It really is going to get much worse, and it is also going to take quite some time doing so. Those emerging from shock are beginning to get to grips with another, still more awful prospect: that even the supposedly mega-disaster now being complicated is just one iceberg in a mountain range of them. After all, when we say that "it's" going to get worse - what do we mean by "it?" Until now, "it" has been defined fairly narrowly, as the "subprime" crisis, relating to mortgage debt, mortgage-backed securitized debt (MBS) and other financial instruments built on them. But in the same way as the "assumptions" (read pious hopes) that the "problem" would be limited to subprime borrowers, and then that the "crisis" would be confined only to institutions engaged in mortgage lending, and then that the credit "crunch" would impact only US financial institutions, each in turn proved to be fallacious - so too the idea that only mortgage borrowing would prove problematic is being re-examined. If the reality turns out to be that consumer lending as a whole is under threat, and that credit card debt and the securitized instruments derived from it - along with the whole bloated structure of consumer debt in the US - are all wobbly, then the situation is truly horrendous. Within the context of "it's going to get worse," both "it" and "worse" take on entirely new and infinitely more threatening meanings. Against this background, it is hardly surprising that the unthinkable has moved rapidly to thinkable and then writeable and thus on to being the hot topic. One outstanding example of this is the future of Citibank: the question is not who the next CEO or chairman might or should be, but whether the largest financial institution in the US and the ultimate, both in concept and practice, in the evolution of the financial supermarket, will survive - and in what shape. The issue is not - yet, at least - whether Citi might go bust. Hefty though its losses are, they are nowhere near that magnitude. What is under discussion is whether it is possible, let alone desirable, to allow this mega-institution to lumber on, or whether it would be better to break it up into the components from which it was assembled - investment banking, commercial banking, asset management etc. The alternative is that someone - maybe another Saudi prince, as happened in Citi's last existential crisis in the early 90s, or some newly-minted Russian billionaire - come along and buy the whole thing and try and make a go of it. The same applies, in principle, to Merrill Lynch and to many others, including foreign entities such as UBS. If, indeed, $150b. in capital is going to be wiped out because of sub-prime losses - Nuriel Roubini, the number one global bear on this issue, now estimates $238b. from subprime alone and double that from all sources - then a bunch of big names are going to either be expunged entirely, or severely shrunken, or find themselves under new ownership, with the previous owners suffering severe losses along the way. That is the easy part to understand, once you are prepared to think about it. But because these are banks, their loss of capital means they will be forced to lend less - which means that the whole structure of the American economy, which is now built on ever-increasing amounts of debt, will be shaken to the core. So, when you think about it, you realize that it's better not to think about it. [email protected]

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