Citicorp - Vikram Pandit's ejection

When a CEO and COO both are sudenly ejected we assume a corporate power-play. In this case the failure that appeared to trigger hands-on Chairman Mike O'Neil's acceptance of Pandit's and Havens's resignations, according to the FT, is the Federal Reserve (US banking regulator) decision to "fail" Citibank's stress test results and stop its proposed share buy-back and insist the bank build up its reserve capital instead - an argument that could also be applied to non-guaranteed bonus pay-outs. Pandit's original appointment to head up Citi was opposed by the FDIC. Pandit also had a reputation for impatience and angry outbursts - not surprising in view of the travails of Citi in 2007, a bank that would have been broken up if not for the international legal and regulatory cost complications. The problems of the stress tests on the 19 top US banks are onerous on top of their dumbed-down macro-economic simplicity. Three failed last March. It is simply remarkable that Citi could not deliver sufficient intelligence to do this job well. The Fed reviewed the bank balance sheets to determine whether they could withstand a crisis that sends unemployment to 13 percent, causes stock prices to be cut in half and lowers home prices 21 percent from today's levels. Citi's failure was a shock. Analysts expected the bank to pass after it reported two years of profits and some expected the bank to increase its dividend to 10 cents a share and buy back stock. Pandit opted to buy back stock, to reward shareholders, try to boost the stock after over 80% fall and thereby annouce return to normal health. Instead the stock fell in the after-market. For banks that failed, the Fed can stop them from paying dividends or buying back stock. The Fed can also force them to raise money by selling additional stock or issuing debt. In fact regulators can force the bank to do anything it deems necessary including selling assets. Smith Barney was sold by Citi at below book value. The Fed has conducted the stress tests each year since 2009. March this year was the first time that the results were made public. The problem is really that banks on both sides of the Atlantic have never had it spelled out to them clearly and forcefully what their central banks (regulators & government) have done for them and what is expected of them. Banks are like any major private corporations extremely unwilling in any case to give in to regulator and government pressure, to be dictated to, because that sends a long term precedent. They have failed to appreciate what the regulations (Basel II etc.) demand, essentially that the banks are fully conscious of their macro-economic circumstances. This also demands having risk officers and macro-economists in the boardroom, which most bank main boardrooms fear and resist absolutely because it means granting techical experts the power to stop short-termist high risk decisions. The Credit Crunch overlay on recession (US and UK beginning in 2008) doubled the nominal (unrealised) capital losses of the major banks. The central banks and governments stepped in and effectively refinanced half of the loss in expectation that this would be recovered over a few years out of collateral and security cover of bad loans and investment losses. The banks had to recover the other half by selling assets, cutting costs and rebalancing their balance sheets. The continuing weak economies of the US and UK and later of the Euro Area when it entered its full recession after 2011, meant that assets including operating units had to be sold bekow book value (at a realised loss) and cost-cutting has been sluggish (not least to maintain bonuses and because major risk accounting and general ledger systems all need replacing). Changing the profiles of balance sheets cannot be done quickly except in derivatives exposure, which does not according to the accounting rules make a big enough difference to capital reserve requirements. The most important changes in the balance sheets require US and UK banks especially to shift loan exposures from property lending to industrial production and that means from higher to lower margins. The banks are most reluctant to do this even though it would do most to improve economic growth, especially by boosting small business lending. A macro-political problem is that banks resist mightily the idea that they should forego short term profits for longer term economic health. This is the battleground that regulators if given enough political support must focus on. It is what the banking regulations are primarily concerned with - the role of bankiing in the wider economy.