Stress Test Incompetence

Seeing the news that the promised May 4 release of bank stress test information is going to be delayed so that the Fed (in league one suspects with the constitutional lawyer-in-chief and his team) can hold a series of debates with the wealthy lawyers representing Big Finance brought DoctoRx out of travel-preparation mode for a bit more venting and opining.

(Technically this is a Federal Reserve undertaking.  In this and most relevant bailout regards, the Fed under Ben Bernanke is as independent as a two-year old child is of Mother.)

A cardiologist, DoctoRx knows a thing or two about stress tests.  Let's just say it's his medical-legal opinion that the investing public has a right to sue all players involved for stress test-related malpractice.

Returning to the news of the day, the defeat of the mortgage cramdown bill today smells like a victory for Robert Rubin/Timothy Geithner/Larry Summers.  The administration appears not to have fought hard if at all for this bill.  Why?  EBR suspects that Mr. Obama wanted it to lose, or at least did not care much either way.  The President now wins twice.  Most important, Big Finance gets what it wants.  Second, he can pillory Big Finance because the public has no idea of his true alliances, and as well he can go after the Republicans for being the major opposition to the bill.  A great double game.  EBR thinks this view is not overly cynical:  when a President with the Congressional majority and popularity rating of Mr. Obama wants a bill passed, he gets it essentially through unless it's looney tunes.

Barack Obama may already have done as much for Big Finance in 100 days or so as George Bush did in eight years.  A crisis is, indeed,  a terrible thing to waste, and Mr. Obama is no wastrel when it comes to such matters.

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A Screed on Citi . . . and a Comment on JPM

Bloomberg.com reports: "Citigroup Reports $8.3 Billion Loss, Splits Into Two"

With an online straight face the writeup quotes Peter Sorrentino, a money manager who manages OPM (other people's money) and has lost them money because the fund he manages owns Citigroup shares. Mr. Sorrentino says, "It looks like a kitchen-sink quarter. Sweep it all in there and get this behind us.”

DoctoRx here. Bloomberg should have gone to someone who was short "C" rather than long it for a comment. In "Getting Better All the Time?" (Jan. 13, 8:16 AM) I stated that any individual who was long "C" was a "gambler" and any money manager who had been net long "C" was worse. The stock was about $5.60 then and is down about one-third in just three trading days. Yet it allegedly is valued by the market at $21 B. That's still real money.

Here are some additional comments about Citi.

Nouriel Roubini told me last month that Citi has continued to value its subprime CDO/CMO holdings way above market, at over 60 cents on the dollar.

When I became a Smith Barney client, I already banked at Citibank. Naively, I assumed that the coordination between Citibank and Smith Barney would make matters easier for us. But no!

Sandy Weill had never bothered to integrate Smith Barney with Citibank. You cannot make this stuff up. So Smith Barney used PNC as the correspondent bank. In 8 years with Smith Barney, it never affiliated with Citibank, or if it did so, no one bothered to tell me. Once I was on the phone with a Smith Barney stockbroker. His computer caught fire. More than twice, different SB brokers complained to me how antiquated their hardware and software were. Two brokers each were responsible for billions of dollars of client money. Yet neither one got his own Bloomberg terminal. So any half-way sophisticated question could not get a quick answer. Was that good for business? I think not.

Without going into details, I can comment on other points that make me wonder why Smith Barney was propounded as a jewel in the Citigroup firmament.

It would appear that with Smith Barney allegedly having been a crown jewel at Citigroup, the rest was, overall, costume jewelry.

NOW, we read in today's news that the all-stars at Citi are splitting the company into two companies. The term "creating shareholder value" is left out of the article (mercifully). Given that Citi knew the "dance" had ended a year-and-a-half ago, is the timing just perhaps a bit late here?

With "C" still retaining a $21 B market cap, there has to be lots of selling pressure from institutions that want to get out before the market cap goes the way of Fannie and Freddie, which is to say much closer to zero. My guess is that many individual investors of Citigroup will stick with the stock under the theory that it is not worth selling now, and perhaps it will come back significantly. I thus continue to believe that the risk-reward is not favorable toward Citigroup stock even at the current price.

SUMMARY:

Citi/Sandy Weill was/were the public prime mover for the repeal of the Glass-Steagall Act in 1999. Robert Rubin championed this legislation while Treasury Secretary and soon after leaving Treasury, joined Citi as co-chairman. Now, we have a credible source, Institutional Risk Analytics, allege that Mr. Rubin is in contact with Mr. Geithner up to several times a day.

From a financial standpoint, this appears to be a change of administration but may well not represent a real change from my standpoint as an investor. (Social policy may be a different matter where there may be real change from the new Administration, but this is not a political blog.)

Citigroup and Robert Rubin have been at the epicenter of the boom and the bust. I think that the rise and near-collapse of Citigroup is a more consequential matter in the sweep of history than were the collapse of Bear, Stearns or the bankruptcy of Lehman Brothers.

EPILOG:

Is JPMorgan Chase next to break down? Given the history of Mr. Morgan, the Panic of 1907, the subsequent formation of the Federal Reserve system in 1913, and the fact that the truly bad news is now "out" re Citigroup and BofA, this is also a historic and fraught topic. Both the JPM stock chart and the company's fundamentals are pointing downwards . . .

EPILOG 2: As I finalize this post, JPM stock has suddenly down 7% after a marginally up opening. Honest, I wrote this pre-open!

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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 www.ritholtz.com/blog. 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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