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My Citi Was Gone

Ann Logue March 3, 2009 18

citigroupI have a lot of thoughts about the quasi-nationalization of Citigroup, because I am a Citibank shareholder. Some of those shares were acquired in the traditional capitalist manner; my husband placed an order through his online brokerage account. (We thought we were so smart, buying shares at $5 and change!) Some of the Citi exposure came through socialist means: I’m a U.S. citizen, so Timothy Geithner doubled down on my stake.

What happened? Subprime mortgages and global financial collapse aside, Citigroup may have become too big to manage. It is definitely too big for another bank to take over; Chase was willing to take over Washington Mutual accounts, but it could not handle the account volume of Citi, too.

Citibank has long pushed the financial supermarket idea. By offering banking, brokerage, and insurance services under one umbrella, Citi hoped to make it easy for customers to deal with them. It also hoped to squeeze more profits out of each person who walked through the door. But it was always a tough sell. Savvy investors don’t want any one institution to know everything about them; they’d rather play a few different companies off of each other. They’ll shop around for an extra 0.50% on a CD, work with a few brokers to get the best stock ideas, and move their insurance business whenever they find a better premium.

Also, diversifying among several firms reduces the risk of problems – from the Madoff risk at one extreme to the simple headache of limited access when something goes wrong. If you lose one credit card on an overseas trip and need to get home, it’s nice to have another card with a different bank. If a teller is mean to you and you decide to move all of your business in a huff, it’s easier if there isn’t that much to move.

The underlying problem with the financial supermarket is management. How can anyone be on top of everything from how nice and knowledgeable the tellers are to the risk levels of complex derivatives trades? The President of the United States has an easier job, because the president isn’t expected to post a profit. Also, he can print money and drop nuclear bombs to get things done. Vikram Pandit, the CEO of Citigroup, doesn’t have those nifty tools. He couldn’t even split the company up into more manageable pieces, because that would have taken away critical assets needed to prop up the banking business.

Now, the U.S. has a complicated relationship with socialism, and not just with Medicare and Social Security. The basic tenant of Marxism is collective ownership of the factors of production. Alaska is a socialist paradise, because the citizens own the oil; but I’ll bet Sarah Palin would be offended if she reads that. (Not bloody likely! Unless the music folks add more Van Halen coverage.) Americans in Alaska and elsewhere have private pension and 401(k) plans, participate in company stock ownership programs, and take flyers on interesting investment ideas through their E*Trade accounts. Hence, most companies are ultimately owned by average American citizens. Marx would be thrilled.

Citi is still a for-profit, shareholder-owned corporation. The equity has not been wiped out; the government is just one of many shareholders. But the government’s interests here aren’t identical to mine. My family’s little Citi stake was acquired in the hopes of making a killing when the company returned to glory. The government’s goal is to keep the bank from collapsing and taking the rest of us down with it. That would be a good thing for my family, I understand, but it might not lead to fat dividends that would pay for Catholic high school tuition.

Will the nationalization of Citigroup work? Whether looking at this as a private shareholder or an American taxpayer, I just don’t know, and I don’t think that anyone does. The government has a strong interest in a robust financial system. Capitalism only works if property rights are protected and contracts are enforced, and a key part of that is keeping the banks that hold money and process payments solvent. That’s why the government has its own bank, the Federal Reserve Bank, to serve as a banker to the banks.

The nation’s capitalists will have to accept some government intervention to keep capitalism functional. Vikram Pandit will have to deal with a new set of shareholders. And who knows? I might see my dreamed-of profits if the government bought its Citi stake at rock-bottom and sells those shares later.

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About the author: Ann Logue View all posts by
Ann Logue is a freelance writer and consulting analyst who is fascinated by business and technology. She has a particular interest in regulatory issues and corporate governance. She is the author of "Emerging Markets for Dummies" (Wiley 2011), “Socially Responsible Investing for Dummies” (Wiley 2009), “Day Trading for Dummies” (Wiley 2007), and “Hedge Funds for Dummies” (Wiley 2006), and has written for Barron’s, Institutional Investor, and Newsweek Japan, among other publications. As an editor and ghostwriter, she worked on a book published by the International Monetary Fund and another by a Wall Street currency strategiest. She is a lecturer in finance at the University of Illinois at Chicago. Her current career follows 12 years of experience as an investment analyst. She holds a B.A. from Northwestern University, an M.B.A. from the University of Chicago, and the Chartered Financial Analyst designation.How's that for deathly dull?

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  • http://www.popdose.com DwDunphy

    Ann, remind me to ask you whether I should be kicking or sticking with my rapidly deteriorating mutual funds.

  • http://thevitaminkid.blogspot.com autodidact

    This is a fine discussion, in theory. There's a bottom line question, the elephant in the room if you will, which hasn't been addressed. How much “toxic waste” does Citi own? To keep this lumbering dinosaur of leverage still breathing, how much capital infusion will be required from the gub'mint?
    Nobody knows, because a lot of the toxins are held in opaque areas of the balance sheet. Real losses are not being recognized or exposed. Does this not lead to “zombie banks” just like Japan, who also did not reveal their horrible loan losses? The current plan is to kick the can down the road, dribble in more capital as needed through conversion of preferred Citi shares to common shares, and hope for the best. I think they're turning Japanese, I think they're turning Japanese, I really think so.

    I still cannot see why it isn't better to close the bank, pay off depositors up to the FDIC limit, sell off what can be sold, and bondholders/shareholders have to take the haircut. I've owned companies that were driven into the ground, leaving my shares worthless. If you buy stocks, that is the risk. There are plenty of banks who did not make irresponsible loans and involve themselves in shady derivatives. Why are we propping up the failures? Why not let the people who've proven they can manage a bank take over the mismanaged bankrupt banks? Why is the taxpayer once again being asked to subsidize irresponsibility? Capitalism, shmapitalism. I'll tell you what this is. It is not socialism. It is not capitalism. It is cronyism.

    These are basic questions which have not been answered to my satisfaction.

  • steve

    Yep, this is indeed scary stuff. How far can the 'culture of bailout' go. I agree w/auto, let failures fail and let the chips fall where they may. Be it a bank, GM, or an insurance company. I don't care how big they are or how much of an institution they are, the economy is a system – a living breathing system that has behaviors and complexities that very few can fully understand. If we start messing with it like this, who knows what will result. It's like dicking around with the atmosphere and the weather, the consequences could be devastating.

    All I know is, I've diligently saved my money, spent far less than I make, and been fiscally responsible all my life. Now I'm being penalized for that and I will be supporting people an institutions who have done the exact opposite. It disgusts me and frankly I've lost a lot of faith in my country.

  • Standing Damaged

    Just one lil note – the Federal Reserve is NOT a government istitution. It's a private for profit mess, see California Federal Court case Lewis vs United States – the judges' decision says it all.
    But face it, as soon as it became Geithner and Summers (sumners? sp?) I knew what we were seeing was more of the same.The real owners and rulers are going to continue looting and we are going to continue being wage slaves.
    Damn change, when do we see some folding money : )
    I tend towards thinking this all became dangerous when 2 things happened – people became convinced that wealth was paper symbols instead of actual things and they gave corporations human rights without giving them human responsibilitys. siiiiigh

  • JonCummings

    Yeah, but the failure of the institutions where people keep their money (unless you've got it in a mattress, in which case, what's your address?) will make it considerably more difficult for you to save money effectively in the future. Re-inventing the wheel is not a viable option when it comes to the financial system–and neither is depriving people of all deposits over the FDIC limit, and punishing 401K/mutual fund shareholders, in order to liquidate failing banks.

    The BEST hope is that, via partial or total — but temporary — nationalization (including a housecleaning of the dim bulbs who got us here), the financial system can be straightened out with at least some return of the taxpayers' money. I wish Obama would stop vacillating and get it over with–the market's tanking anyway, so if that's what he's hoping to avoid then he's standing on a platform from which the train has already chugged away.

    It's easy, and understandable, to want to take the straight conservative attitude here–they screwed up, so fuck 'em! Let 'em fail before we spend one taxpayer dime!–but it's simply not realistic. The banks, the policymakers, the regulators (ha ha) and the public all colluded to get us here. This rescue/nationalization is going to happen, it is going to hurt, and we're all going to hate it. But I haven't heard one viable scenario for what happens AFTER Citi, or BoA, and/or the others fail.

  • http://thevitaminkid.blogspot.com autodidact

    What happens is that we'll have a deep recession or a depression, but the debt load weighing down the system will be markedly reduced because the loans will quickly be written off. Also, current taxpayers and your children and grandchildren will be relieved of the massive debt the government is incurring. Without these added debt and tax burdens, the economy may recover faster. The Obama way has already been tried. Japan. It's already been proven to fail. Way to go, Obama.

    You liberals want to complicate things that are simple (a financial crisis caused by too much debt) and simplify things that are complicated (climate change). Ha ha.

    It's not a matter of wanting to f*ck anybody. They played high stakes poker. They lost. So let 'em lose. Good grief. Is America a new kind of Las Vegas where your loss at blackjack means you get to reach over and grab a handful of your neighbor's chips? That's just nuts. Stop trying to defend the indefensible.

    People have been given a gift — an increase in the FDIC limits. If they were concerned about deposits over that amount, they should have moved some dough to another institution.

    What's going to happen is that we will still have a grinding recession or depression, only with massive debt (plus increased taxes, plus more energy taxes, plus increased regulation) burdening down any budding recovery. This is plain-as-the-nose-on-your-face obvious. I guess the country has to learn the hard way. I don't have any special gifts at understanding business or markets. But human nature does not change. The “rescue plan” spells doom. And the stock market knows it.

  • http://avarana.blogspot.com MarlboroTestMonkey7

    Hmm, Hi.
    Has anyone tried to predict what would happen if this paper economy were really to be left for dead? what amount of social unrest and trust failure would carry on to the “safe” financial institutions?

  • JonCummings

    Right now the stock market doesn't know anything, except that its hair is on fire.

    We're simply sitting on opposite sides of the ideological wall here–my side screaming, “Do something!” and your side screaming, “Do nothing!” (Your side also points over the wall at my side and screams, “Japan! Socialism!” while we scream back, “Hoover!”) As my side is the one that happens to be in power (I'll have more on this tomorrow), I'd suggest that “Do something!” will win out, and our guesswork will be tested.

  • JonCummings

    Are there “safe” financial institutions? I heard over the weekend that there are “dozens of shoes that haven't even dropped yet.” Though your point is well taken. The outrage from those millions who are threatened with being driven from their homes, lose their insurance annuities & 401K investments, etc., etc., in the event of a Citi or BoA collapse no doubt would put enormous pressure on governments at all levels as well as the surviving banks and other businesses.

  • http://thevitaminkid.blogspot.com autodidact

    Ditto that. Corporations, given the rights and power they have now, are the abomination that makes desolation, to use a biblical metaphor.

  • steve

    You guys all make great points – left and right. Non of us knows for sure. From the center, I'm just as baffled/scared/frustrated. I'm not gonna take the far-right battle-cry of “Socialism!”, but everyone has to admit what's proposed (and will be signed – even w/the 8500+ earmarks….another promise broken Mr. Messiah…) is a move toward the direction of Socialism. And lefties won't admit it (because they want it), but Socialism's never worked. We shouldn't be moving in that direction. Granted, we'd still be to the right of most of Europe, but we're moving that way. And our economy has always made theirs look anemic mainly because they chose to cuddle up to a more Socialist system, while we stayed right. Now we have unemployment #'s approaching theirs.

    You can say this bill/bailout is temporary, but tell me anything in government that's temporary? Once these programs are created (like tatoo removal), they will keep asking for the money teet. It takes an act of God to stop a government funding program. It's like taking a wild animal, putting it in a zoo & feeding it etc. You can't put it back in the wild, it'll die. Where will folks get their tatoos removed if we stop funding it with my money? How will GM surivive w/out the gov teet once they keep sucking off of it?

    And lastly, the worst thing about this bill is what it will do to charitable donations, which is just deplorable and frankly disgusting. Even far lefty talking heads on TV have criticized that part of it, but since the Messiah likes it, he'll still sign it, charities and his no-earmark promise be damned.

  • JonCummings

    Be careful to distinguish between Obama's new 2009-10 budget bill and the omnibus bill that's about to get signed into law, which actually represents most of the 2008-09 budget (begun under Bush & the last Congress). The latter one is the one with all the earmarks.

    And while I don't share your knee-jerk aversion to every project that's being funded this way — nor do I think Obama should waste his time opening the bill back up to itemize the pork — I do wish that he had expressed his distaste for the earmark process rather than trying to sweep the whole issue under the rug as “old news.” (Apparently he's holding a meeting of some sort on “fiscal accoutability” or some such thing tomorrow, as a way of placating you and Angry-Pants McCain.)

    The charitable-donations bit will die quickly, and Obama will label it “compromise.” See how that works?

  • steve

    “Express his distaste” for earmarks? He promised to get rid of them, oh what short memories we have. I don't like people for whom I vote to just blatantly break their promises. He's getting pretty good at it.

    I want a prez whose words mean something. Right now, his mean nothing. When I see him on TV now, I hear the teacher from the Peanuts cartoons – whlaa whlaaa, whlaa whlaaa. Same as W, except W couldn't even spell that right.

    It's ironic, but the last one who kept his word was Jimmy Carter, and he was a failure. But he was honest and his words meant something. I think I'll take that….

  • JonCummings

    If Obama went in right now and blew up this omnibus bill for the CURRENT fiscal year–a bill he had no hand in creating–then spent a month or two spending his political capital cajoling lawmakers into giving up earmarks they snuck in there last October and November, he wouldn't be able to get to the business he NEEDS to get to. And by the time he did, he'd have considerably less “hand” (to quote Seinfeld) to get his own agenda passed for NEXT fiscal year.

    I know you're an absolutist on this earmark thing, but honestly–prioritize, man! Give Obama a chance to use his mojo to keep earmarks out of the legislation that he actually has something to do with. If he makes no effort to do that, we can talk. Until then, it's just irrational to throw him on the slag heap over this.

  • grahamhmichaels

    Citi is still a for-profit, shareholder-owned corporation. The equity has not been wiped out; the government is fidelity 401k just one of many shareholders. But the government’s interests here aren’t identical to mine. My family’s little Citi stake was acquired in the hopes of making a killing when the company returned to glory.

  • kevinrussellersel

    We fidelity 401k MUST boycott all fast food businesses, especially those like Burger King — for our own health if for no other reason. Studies have shown that eating red meat and grease greatly increases the heart attack rate and clogs our blood vessels. I'm not a vegetarian, but have now realized I need to eat more veggies, especially the green ones. More importantly, we need to send a message to Burger King, McD's and others. The only language they understand is when their gross revenue drops because of the boycott. Vote with your dollars. Eat Slow Food.

  • http://www.bankadvisor.org/Chase-Bank-CD-Rates.php Chase Bank CD Rates

    yikes, and how are those funds doing now?

  • http://www.bankadvisor.org/Chase-Bank-CD-Rates.php Chase Bank CD Rates

    yikes, and how are those funds doing now?