The Banking Emperors' New Clothes
How can you tell when a banker is lying - a major, top five, money center bank CEO? Their lips are moving, Jamie Dimon (JPMorgan Chase) excluded of course.
With mark to market rules changing today - probably -- the ban stocks are back! The bank stocks are back! As a trade, not an investment -- so please read on about the banking emperors and their new clothes. Or lack thereof - and for you younger people with the new American education, look up Twain, Mark to learn more about emperors' clothes at Citigroup and Bank of America.
I write about these two embarrassingly discredited CEOs and their companies because the ultimate lie - the changing of mark to market rules - will come about today under Congressional interference with a supposedly independent group, the Financial Accounting Standards Board. The new rules essentially say a bank can use their own model if an asset is to be held for a long time and is illiquid. The market is way up pre-open, banks stocks are rising, everyone is happy.
Of course, the emperor - in this case, emperors Pandit (Citigroup) and Lewis (BOA) - have no clothes. My teenage twin sons understood, over dinner last night, what was going on and figured out the banks are using the change to avoid mandatory increases in capital - and this move will actually repel private capital, the intent of the administration. Better yet, once the stress tests are complete and the toxic asset auctions begin, the rule changes will boomerang on Citi, BOA and other banks sing them. How so?
Once the auctions are in place, how can banks claim they are illiquid? Once the stress tests are done, the debate on the definition of core capital will accelerate and where will the banks hide? But, more importantly, once the auctions begin, banks that aggressively dump toxic assets and take their hits will have far more transparent books and will be able to attract private capital. At the same time, banks that obscure and obfuscate and continue to hide bad assets inside of their own models will not be able to attract private capital - now. And their stock prices will fall as investors assume not just dilution in the future but a re-casting of current profits sometime in the future when they finally sell assets they said they were going to hold for a while and have to adjust previously declared profits.
If you think I am wrong about this, consider how Citi dealt with its near insolvency when Mexican bonds blew up in the late 1980s - even backed by Brady bonds it took them, if I remember correctly, five to seven years to write them down. And those were pocket change compared to what they are sitting on now.
Vikrim Pandit said his company, Citigroup, was profitable in January and February. Dimon said March was rough - and based on history, who are you going to believe? Not to mention Pandit was talking about operating profits - without write downs of those annoying toxic assets. Pandit failed to discuss the $1.2 trillion dollars in off balance sheet assets of unknown quality never, and I mean never, discusses in public. In addition to the two trillion in assets everyone is worried about. If they are great assets that could support his Tier I capital, why are they not on the balance sheet Mr. Pandit. He also did not mention how much they are losing in earnings power with the end of their broker franchise, now part of a joint venture with Morgan Stanley. I still have most of my liquid assets at Citi - my broker and his entire group of eight left for Well Fargo and Wachovia Securities. Like many others at Citi - of course, he too will be moving on once Wells is forced by circumstance to sell Wachovia's brokerage operation.
Ken Lewis was on CNBC this morning and I had to turn it off or lose my breakfast. Everything is about to get sunny - sort of - according to Lewis. The same man who bought Merrill Lynch for ten times it's value, did not know what was on their books but went ahead and bought the company anyway using shareholder money to fulfill his personal ambition. He now has his fully diverse bank complete with legendarily avaricious stock brokers - a model that worked real well for Citigroup, right? In the interview he talked about an economic turnaround sooner than any CEO should and also bragged about paying back $400 million in TARP money. If memory serves, he got $20 billion - so he paid back two cents on the dollar and is bragging about it. I am also a BOA customer - in their private banking program - excuse me, I was in their private banking program. I was kicked out because I don't have a quarter of a million in a Merrill Lynch brokerage account. I called my banker - of fifteen years - and learned if I moved assets over to stay in the program, and I want real banking information, about mortgages and such, my broker will refer me to an 800 number. Good move Ken. I am moving on - looking at the private banking program at a smaller regional bank.
The bottom line: the Wall Street Journal article this morning talking about how investors are getting back into Citi "because it looks cheap and I am down 50%" points out the reality - that stock, and to my mind many other bank stocks are trades, moving on headlines and technical factors. They are terrible investments with another trillion dollars in write downs and greatly reduced earnings power for three to five years due to their own mistakes and the recession.
