Citi: Off the Banking Reservation

Last night I put up a post about Citi (C) throwing in with the Congressional Democrats on mortgage cram-down legislation. I speculated that Citi was probably just doing its new masters’ bidding. Since then a couple of stories, both from Housing Wire, have come out that adds a bit more meat to the bone.

The first reports that Citi did indeed break with the banking fraternity in endorsing the proposal.

“ABA was not a participant in the recent agreement between Citigroup and Congressional proponents of mortgage cram-down legislation,” said Floyd Stoner, the executive director Congressional relations & public policy at the ABA. “ABA is opposed to the agreement because it will leave in place overly broad mortgage cram-down authority and other provisions that will harm thousands of banks across the country that have made, and continue to make, good loans."

The ABA has traditionally been a tight and powerful industry group. For Citi to split off on an issue of this size is not a trivial action. One could speculate that the tsunami that has hit banking may well have fundamentally changed the relationships within the group. Or, you could have the take on it that Paul Jackson has.

It’s certainly interesting timing for Citi to break with the pack; the bank has received $52 billion in bailout funding from the government, more than its peers. It’s also got a loss-sharing agreement in place covering $306 billion of its loans and securties, as the Wall Street Journal noted in a story Friday morning.

In other words, to the extent that any cram-down push leads to higher loan losses, Citi may actually be somewhat sheltered from those losses — meaning taxpayers could end up picking up the tab. The Journalsuggested that other banks are likely to line up behind Citi to support the bill, but will look to obtain similar loss-sharing arrangement in exchange for their support.

A lobbyist on Capitol Hill, however, said that the banks likely face a “fat chance” of getting such concessions from lawmakers, were they to push for it. “With Citi’s support, it doesn’t matter what the MBA says on this issue as much,” said the lobbyist. “A break in the ranks of financiers puts Congress in a power play.”

All of which underscores just how good it may have been to be first in the government handout line through this mess; critics have long suggested that the government relief efforts to the financial sector have singled out clear winners and losers. The cram-down agreement reached yesterday may be the first of a growing set of evidence to support that argument.

If there is some truth in what Jackson has to say, and I suspect there is, then it’s a good warning sign of the dangerous path we're wandering down. The Citi cave-in is a perfect example of the influence government can have on private enterprise once given a lever. There have been a lot of levers handed to the political class lately and you can rest assured that they aren’t shy about using them.

Comments

[Aryana:]

The good news is that Pandit is staying and Rubin is leaving, and the merger of MS and SB. The sooner you cut your losses the better your chances of survival and Pandit is prescient enough to take the opening gambit. He is also lucky that WFC out bid him in his quest for Wachovia -a bank with substantial toxic waste acquired from the acquisition of World Savings(the master of Option ARMS)- lest he would have increased the radioactive half life of Citi's liabilities, making it even more difficult for Citigroups turnaround. Jettisoning the culprits is a good gambit and Rubin resignation was an excellent choice in that it manifested that Citi means business and there are no ands, ifs or buts on their glide path back to being the leading US bank interrnationally. At least Citi has begun exterpating its toxic assets and retiring those directors that played a major role in its contamination. Being the only major bank to acquire guarantees from Uncle Sam - a loss-sharing agreement in place covering $306 billion of its loans and securties - definately gives it an edge if the economy continues to go into a whirlwind. A failure of Citi would have far reaching ramifications that would hurt the dollar and subsequently the average American. Pandit and company have prepared Citi by fortifying the ramparts for a worse case economic onslaught, however I do not believe the world is coming to an end nor do I believe any nation on earth is even close to toppling the mighty dollar, at least for another 20+ years. Until the housing market stabalizes, which I don't expect until the spring of 2010, we should not expect too much growth. All we should expect is cutting back on losses and minimizing expenses and this is exactly what is on the menu de fare at Pandit's Citigroup.

Jan 10 04:26 PM

[bosun.j:]

"The Citi cave-in is a perfect example of the influence government can have on private enterprise once given a lever. There have been a lot of levers handed to the political class lately and you can rest assured that they aren’t shy about using them."

If the Bankster freaks hadn't abused their trust they wouldn't have the political class down their throats!

Silly Banksters want taxpayer money but don't want to be held accountable for how they use it. Screw 'em. Drag 'em out in the street, give 'em a speedy trial followed by a first class hangin' !

Jan 10 11:36 PM

[jmorace:]

It's not a cave in if C gets an advantage over its 'competitors' as C will have the taxpayers cover the cram down loses but the other banks won't. It's just plain typical of the crony capitalism of these overwhelmingly large corporations. They need to be broken up. Dismantle them so that none are to big to fail and we wouldn't be faced with these gangsters holding us, the tax payers, hostage in the first place.

For capitalism to thrive there needs to be fair play. We are so far from that in the US that its hard to use the word 'capitalism' to describe what we've got going on even modified with "crony" or "gangster".

Look out below.

Jan 11 11:20 AM

[Oregonrain:]

I think "users" comments are very good. Keep in mind that mortgages are virtually the only debt that cannot be reduced in a BK action at this point. Nice going ABA lobby.

The issue here is that most independent observers believe that the only way to really move on is to start the painful process of writing down toxic assets. Some of this has been done but not nearly enough.

If we are to avoid a "zombie real estate market" for the next 20 years or so this has to happen. This will allow people working with homeowners (so called loan mod companies) to have a "hammer" to wield when negotiating work outs. Other than that the banks will just tend to "kick the can down the road" by offering the same crap (that is the technical term) they did the first time round. (easy first year payments with a ballon).

The major issue is that it will very likely become necessary for the courts to appoint "special masters" or others to take on the case load. At this time there are just not enough BK judges to process the wave that will come.

But, with all that said...it is something that has to be done with the Feds back stopping the banks that have some legs after this is all over and letting the most irresponsible fail...and wipe out the equity and debt positions of the people who took on the private sector risks.

Jan 11 03:46 PM

[Tom Lindmark:]

Oregonrain,

Your comments were well put. I tend to disagree on the cram-down issue but you stated your position well.

Jan 11 08:18 PM

[Gob:]

bosun, try looking up the Community Reinvestment Act and getting back to us.

Jan 13 02:17 AM

[bosun.j:]

"The Act requires the appropriate federal financial supervisory agencies to encourage regulated financial institutions to meet the credit needs of the local communities in which they are chartered, consistent with safe and sound operation."

It's the last six words of that sentence that The Banksters ignored. It was also the "packaging" of mortgages as securities and trading them multiple times to obscure their origin.

I stand by my indictment of the Bankster class and their huckster henchmen!

On Jan 13 02:17 AM Gob wrote:

> bosun, try looking up the Community Reinvestment Act and getting
> back to us.

Jan 13 02:59 AM