Saturday, January 10, 2009

Hex and the Citi

The "hex" is both Robert Rubin and Citigroup's importance to the markets and the economy.

Mr. Rubin is stepping away from his consultancy to Citi and will leave the board when his term expires. He is not stepping away from his 9-figure total compensation over the years. This despite the unrefuted reports that he was the person who pushed Citi to up its risk profile in mid-decade. Citi is a failed company primarily for two reasons: it never integrated its acquisitions, and it went wild on its risk profile. Everywhere Meredith Whitney, financial analyst extraordinare at Oppenheimer and Company, reviews riskiness of a financial company's strategy, loans, capital base, etc., Citi is there.

Mr. Rubin reportedly did a fine job as co-chief of Goldman Sachs. As Clinton's Treasury Secretary, he was, along with Greenspan, the face of the good times that enabled the stock-buying bubble in the late 1990's. However, the reason I knew to broadly get out of the stockmarket in 2000 is that it was reported that the 1990s economic expansion was the only one in U.S. history in which the financial strength of companies declined. Given how much equity was raised in IPOs, and how many deals were done for stock rather than debt, this (now old) news sounds surprising. Many want to think that financial irresponsibility began in the Bush years, but this is a seamless matter. Rubin and Greenspan: what a reassuring pair.

Very near the end of the Clinton Presidency, I had lunch with a man who was a third-generation Washington political insider. He said that he and his family had never seen Washington so "for sale" as then. He said the corruption was bi-partisan.

In that context, let us put the repeal of Glass-Steagall. The company that pushed hardest for this was Citi. Is it a surprise that Mr. Rubin ended up co-Chiar of Citi, after having pushed for the legislation that removed the Depression-era safeguards embodied in the Act?

Now we are faced with the possibility of another depression, and the reality of a significant recession. Citi is effectively already in receivership. Smith Barney appears to be headed to another zombie, Morgan Stanley, which may know how to run a brokerage. (I was a Smith Barney client for years and know whereof I speak re Smith Barney.)

Given how badly Lehman's failure roiled the markets, what will the reality of an actual rather than virtual bankruptcy or receivership of Citigroup do? And could BofA be next? (Their stock charts are similar.) Though "C" is below $7/share, it still has a $36 B market value. I say it's worthless absent political decisions. If, with this history, Mr. Obama wants to make Mr. Rubin an advisor to him or wants to offer him an actual position, I would both be surprised and disappointed.

For a more pointed and trenchant commentary on Mr. Rubin, please see the following: "Jesse's Cafe Americain" and yesterday's post, Citi Unloads Robert Rubin and Salomon Smith Barney. (As someone who has had a professional relationship with some members of Mr. Rubin's family, I cannot endorse Jesse's quote from Pliny the Elder, but I'm always impressed by erudition. I checked the validity of the Latin and its attribution, and they are accurate, so far as I can tell.)

With this backdrop, consider that the recent stock rally, which was widely taken to be an Obama rally, stalled as soon as the following occurred:

Diane Feinstein complained publicly both about Leon Panetta's nomination to head CIA and (perhaps more important) that she was not "consulted" about it;
Rahm Emanuel has reportedly been "knifing" rivals;
Leading Democratic Senators have criticized the Obama "stimulus" plan as "trickle-down";
Criticism of Obama in the press has surfaced, such as by decrying the use of poll-tested words such as "recovery" rather than "recession";

In short, while all observers expect him to give a marvelous speech on Inauguration Day, reality is setting in. From a markets perspective, a great speech is already "in" the market. Bill Clinton had been a Governor for many years but still had a steep learning curve as President. Mr. Obama has had virtually no executive experience and is from the Senate but not of it. Imagine if FDR came into office not 8 or 9 months after the stock market bottomed, but instead was elected in 1930 and took office when all the financial and economic action was to the downside. Now imagine that he had never been a Governor, that his uncle had not been President, that he had not had a senior role in the Navy. Would he be more FDR or Hoover in our collective memory?

One final point. Last year, Barry Ritholtz at published a marvelous cartoon at his blog, now reachable at It showed firemen putting out the fire at the bank while they ignored the fires blazing in retail, manufacturing, and other sectors of the economy. The follow-up now, with Citi on life-support and others perhaps teetering, is that the firemen used up a lot of water but did NOT put out the bank fire. And the other sectors, medical excepted, are still on fire. Not good.

Thus, the point of view here is that while Mr. Obama is on the right track with his calls for better regulation, and Paul Volcker is a superb choice as an adviser, the focus is excessively on multi-year construction projects and a tax cut, neither of which will work any magic immediately. Meanwhile, the banks are still burning. And tent cities have been springing up in Reno, Seattle and many other cities. These people need help now. And since the states by and large are maxed-out financially, there is lots of traditional help-the-poor work for the Feds to do.
(I would much prefer to help those so disastrously hurt by this economy rather than try to resurrect the previous high level of construction activity that helped lay us so low.)

It's therefore looking more likely that the stock market has made another lower high. Louise Yamada has a 6000 target for the Dow Industrials. Could Citi going into formal receivership put it there, and perhaps more rapidly than one would like to think possible?

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