Citigroup Questions

Are you reading thousand-word stories about how Citigroup (C) managed to propel the stock market upwards on Tuesday? Bear in mind this: Citigroup rose the grand total of 40 cents per share -- which means that its contribution to the 379-point rise in the Dow was a whopping 3 points. And at $1.45 a share, Citi is still, to all intents and purposes, trading at zero.

The optimism about Citi wasn't that Citigroup itself might actually be solvent, so much as the idea that if even a seemingly-insolvent bank like Citi managed to eke out a profit this year, then everybody else in the banking sector might actually have something approaching a future.

All of which provides me a good excuse to answer some questions I just received via email from Sarah Jaffe, and then add one of my own.

First off, can you break down what's really meant by "nationalization" as is currently being discussed by people from Paul Krugman to Alan Greenspan? What's being called nationalization isn't really complete nationalization, but more like receivership, right?

I can't speak for Krugman or Greenspan, and it's certainly true that different people mean different things by the term. I generally use it to mean a situation where the government controls the bank: the easiest criterion to use, I think, is to ask whether the government can appoint a majority of the board of directors. That's entirely consistent with the government owning less than 100% of the equity in the bank, of course, which might be considered "complete nationalization". But it's not receivership.

Do you remember when nationalization became a part of the debate over the financial crisis? Was it Bernie Sanders' alternative bailout proposal, or somewhere else?

Speaking personally, I started pushing nationalization seriously in mid-January, in posts like this one. But the real debate over nationalization is older than that: I date it back to the debate over the original TARP, when there were a lot of people saying that if the government was going to inject $350 billion into troubled banks, it should get a concomitant ownership stake in return.

A USA Today/Gallup poll showed that Americans favored the idea of nationalization but were opposed to the word. We see the term "socialist" being tossed around a lot in reference to Obama, so I wonder if he's afraid to propose nationalization because the term itself is scarier than the actual practice. What do you think?

Of course language matters, and there's a good chance that if major banks do end up being nationalized, the government will try its best not to use the word. After all, no one has really used the word "nationalization" to describe what has happened to Frannie and AIG, despite the fact that they have surely been nationalized.

Steve Waldman wrote "We nationalize because, in a capitalist economy, investors get to keep the profits they endow, even when the investors happen to be taxpayers." Do you agree? Disagree? Is nationalizing the banks a "socialist" idea or is it in fact the proper capitalist response, expecting a return on government investment of tax dollars?

Nationalizing banks can be a socialist idea, if it's done in the way that, say, Francois Mitterrand did it in 1981. If you're an ideologist who believes in "the common ownership of the means of production, distribution and exchange", then you'll naturally want to nationalize the banks. On the other hand, the likes of Alan Greenspan are hardly socialists, and it's an equally natural consequence of the idea that capitalism is all about letting businesses fail. If you have a bank which is too big to fail, and the government is forced to step in with public funds in order to keep that bank alive, then it's invidious and full of moral hazard to let the former owners retain any of the upside. That's much more capitalistic than socialistic.

Is it primarily the giant banks, like Citigroup and Bank of America, that are in trouble, while smaller institutions are just fine?

Yes, pretty much. Obviously the FDIC has been closing down quite a lot of smaller institutions of late, but they're not systemically important, and most smaller institutions really are fine.

Finally, my own question:

I bought some tickets on the internet, and paid using my Citibank credit card. The gig is in New York, where I live, and the tickets were priced and paid for in dollars. But when I got my credit card bill, there was a 3% "foreign transaction fee" added on top, on the grounds that the website in question -- although it billed in dollars -- was actually located in the UK, not that that's remotely obvious by looking at it.

When I phoned Citibank to ask about this, they seemed a bit confused, and couldn't work out whether the "foreign transaction fee" was for simply sending money abroad, or whether it was for currency exchange. In any case, they said, it wasn't their fee, it was a fee imposed by MasterCard, and I should really take this up with MasterCard. They transferred me, and MasterCard weren't particularly helpful, but did say that they'd never charge more than 1% for anything.

My favorite part of the conversation with Citibank was when I asked how I was meant to know that the website had a foreign billing address and that therefore I would be charged this 3% fee. Oh, they said, you should phone them up and ask before you buy anything from them. Does Citi really think that I should try to get through on the phone to any website I'm thinking of buying from, just to make sure that they don't have a foreign billing address? Any light that anybody could shed on this whole issue will be gratefully received.

Comments

[Steven Hansen:]

alway use american express. no foreign transaction fees. no bs about using the card more than 200 miles from your mailing address when a dispute arrises.

Mar 11 05:51 AM

[bthomas:]

I recently observed a Citi commercial in which the characters were each describing how they are cutting back their expenses by doing things differently. The point apparently is that Citi will be there to help us through this down turn. Seem a little audacious? Maybe it's just me? I guess we should just thank Sandy and his minions.

Mar 11 06:42 AM

[gtmcduffy@g...:]

This propelled the market:
bloggingstocker.blogsp...

Mar 11 07:38 AM

[kuppyus:]

There are a few issues about the Citi earnings that seem to be not mentioned:

1. After all of the misleading internal information and inability to even value the assets owned, how are we to believe the reported numbers for profitability?

2. One item that never is mentioned is related to the prior large losses reported. In most businesses, when a loss if going to be reported, it is advantageous to overstate the loss and write-off or write-down questionable values. The theory is simply that if you are going to report a $10 billion loss, the effect is just as bad as reporting a $12 billion loss and creating a cushion of $2 billion. If the business in fact turns around a little and the extra $2 billion in losses prove to be unreal, the company will go from a $12 billion loss to a $2 billion profit without really doing much.


We have no idea where the miracle of profits have materialized nor do we have any idea as to the quality of the reported earnings. As significant shareholders, we have a right to know and not just rely on some internal memorandum that could well prove to be false.

Mar 11 08:01 AM

[Tradememe:]

It is true that the movement of Citigroup should not affect the market. But we are dealing with mass psychology and not rational thinking based on mathematics.

Mar 11 08:29 AM

[battman:]

After getting all this government money, how can they even pretend to turn a profit?

Mar 11 08:36 AM

[monday1929:]

Maybe the Entire Crash and Depression is a Brilliant marketing ploy!! How foolish we critics and shorts must now feel. Those Harvard MBA's really Do know what they are doing!


On Mar 11 06:42 AM bthomas wrote:

> I recently observed a Citi commercial in which the characters were
> each describing how they are cutting back their expenses by doing
> things differently. The point apparently is that Citi will be there
> to help us through this down turn. Seem a little audacious? Maybe
> it's just me? I guess we should just thank Sandy and his minions.

Mar 11 08:49 AM

[Harry Tuttle:]

You have it backwards. The market first rallies, THEN people look for explanations. In a complex World, there is ALWAYS some kind of explanation.

For instance, had the market gone DOWN 5% yesterday, some could have pointed out the article in the Financial Times discussing the deterioration in credit spreads.

After all, after a 40% rally, Citi's common stock is at $1.40. Hardly an endorsement. Their balance sheet still stands at $3 trillion (they have 1T off the books)

Mar 11 09:18 AM

[The Good Ne...:]

It was not just the Citigroup profit outlook alone that sparked this rally, but really a confluence of factors that have been building, combined with three statements, from Citi, from Bernake, and from Barney Frank. It appears as though we may have reached a tipping point...
mast-economy.blogspot....

@The Hand - be careful right now with AMEX particularly if you are traveling. I am sure that you have a backup, but there is significantly growing evidence that they are squeezing many customers leaving them potentially hanging on a trip... [cutting credit lines, or even shutting it off if they don't like the current balance] (just happened to me and a quick check on the web reveals I am not alone... just be careful my friend)

Mar 11 09:22 AM

[Larrysyr:]

When Citi reports their quarterly earnings, will there STILL be a profit? I'd take anything coming from that direction as suspect. At best.

Kuppyus - Your strategy of overestimating losses in a down year is known as the "big bath" and usually results in a stock going up. The problem with Citi is that they can't report large enough losses to create the flexibility you describe due to the regulatory requirements to maintain a certain capital level.

Mar 11 09:44 AM

[happyeconomist:]

1) your question on the FX fee. A foreign website might have a deal with Mastercard that if someone buys a product outside of their country (even if you credit card is denominated in that currency), Mastercard will charge you for the exchange. Ie the foreign website needs to be paid at the end of the day in sterling for selling USD tickets, the agent fee. And you end up paying for it. Mostly because you don't have any leverage viz MC.....you got the short end of the stick.

2) on Citi, a small glimmer of wishful thinking from Pandit. The bank's fundamentals are still awful. Every business is sliding down, revenue decrease, while they still have pending write-offs (HINT: he didn't say anything about the net result, just revenues/expenses). Another reason to avoid the penny stock is the pending doom and gloom on the credit card and commercial real estate portfolios....the next icebergs.

Mar 11 10:59 AM

[samwise:]

if this is nationalization this seems a rather expensive approach to doing it. As I understand it now (key word is now, right?)the government is taking these institutions over in order to force the bankers themselves to deal with the toxic assets. This actually seems like a good idea--but then what? Even if the Bank gets the toxic assets off its books, does it still survive? In other words, Buffet said these "toxic assets" are the most valuable thing the banks have. It's basically impossible to know anything because when the government itself ESPCECIALLY AT THIS LATE DATE still can't explain what the outcome should be AS IT RELATES TO THE RECIPIENTS, whose to say, right? As it relates to the government itself--or at least the Fedeal Reserve--what does seem to be occurring is the creation, for lack of a better term, of a Bank of the United States. As an aside, I did notice HSBC was doing a rights offering which seemed like an amazingly good deal.

Mar 11 11:36 AM

[Not Jerry A...:]

Citi - is key at adding fee's onto your credit card...I never leave a balance on mine but constantly have small 1-20$ fee's...My most recent one was because my "interest rate had gone up since I hadn't opted out" of something they sent in the mail -- i explained that I hadn't received anything in the mail stating that my rates would be going up and why would I accept higher rates anyway? I also explained that I didnt even have a balance as the card was paid in full the prior month...

Usually these types of calls take hours - yet it was about 5 minutes and they credited my account...Go's to show they've been doing it to many customers...One dollar fee to a million customers add's up over time..Check your statements everyone!! Don't take sht from the failing firm, they'll be trading like aig and fannie mae in no time..

Mar 11 11:47 AM

[Chris B:]

"if the government was going to inject $350 billion into troubled banks, it should get a concomitant ownership stake in return."
----------------------...
I agree. If taxpayers are going to suffer the direct AND systematic risks of these too-bit-to-fail institutions, we should also enjoy any upside potential. To simply hand out money to the banks would be redistributionist. Taking bond and equity stakes that will themselves guarantee the survival of the instituion is the kind of behavior that capitalists like Warren Buffet are involved with. To claim that this is "socialism" is to reveal a misunderstanding of that term.



"most smaller institutions really are fine."
----------------------...
These small institutions are also pure commercial banking businesses, not the type of investment/commercial hybrids allowed for since the repeal of Glass-Steagal in 1999 (e.g. Citigroup, BAC). Now, imagine if these healthy pure-play commercial banks were still the dominant players in making loans to businesses and consumers? Would the housing collapse have led to a credit crunch / deflationary near-depression? No. And the fact that these small banks are still thriving despite this mess is the proof. When commercial lending depends on investment banking returns, you have situations like 1928 and 2007. It's no coincidence. Time to relearn the lessons of our grandfathers.



"When I phoned Citibank to ask about this, they seemed a bit confused, and couldn't work out whether the "foreign transaction fee" was for simply sending money abroad, or whether it was for currency exchange."
----------------------...
Your rational response to this poor service and money gouging behavior would be to reduce your usage of this financial "service." I'm always shocked by how many people just accept such fees and double-digit interest rates for the supposed convenience. It's like a tax we pay in exchange for using electronic money (Of course, even people who pay by cash/check pay about 2% more for EVERYTHING to cover other people's transaction fees, but I digress.). Then those same people who give the credit cards thousands of dollars for - nothing - freak out when gasoline prices go up, even though this will cost them less.

The last time I shopped for travel, I was amazed to discover that my local old-fashioned physical travel agency could get me lower fares/rates than any of the websites (plus far better service). In exchange for the inconvenience of physically going there, I got a better deal and far superior service (THEY called ME with free upgrade offers from the airline and hotel). There's always an alternative to crappy service and high fees.

Mar 11 11:51 AM

[Carneades:]

The three magical statements listed below are from some of the least credible sources one could imagine:
1) Vikram Pandit has literally plead with the Government to be given another chance. An internal "memo" from this man does not suffice as proof of profitability.
2) Ben Bernanke has consistently been wrong in his official pronouncements. Whether deliberately or not is the only point worth debating.
3) Barney Frank indicated, several years ago, that he would like to "throw the dice" on Fannie and Freddie.

While we would like to see it otherwise, yesterday's rally can only be classified as a bear market bounce, the catalyst of which is the eternal optimism of many market participants.

TheValueatRisk.blogspo...


On Mar 11 09:22 AM Good News Economist wrote:

> It was not just the Citigroup profit outlook alone that sparked this
> rally, but really a confluence of factors that have been building,
> combined with three statements, from Citi, from Bernake, and from
> Barney Frank. It appears as though we may have reached a tipping
> point...
> mast-economy.blogspot....
>
>
> @The Hand - be careful right now with AMEX particularly if you are
> traveling. I am sure that you have a backup, but there is significantly
> growing evidence that they are squeezing many customers leaving them
> potentially hanging on a trip... [cutting credit lines, or even shutting
> it off if they don't like the current balance] (just happened to
> me and a quick check on the web reveals I am not alone... just be
> careful my friend)

Mar 11 12:36 PM

[bricki:]

I was in Korea once about 10 years ago and found my Amex card useless. Not a happy camper about that.

Yesterday's rally was a nice relief to the constant bad news but a true turn in the market and economy will only be recognizable after something a bit broader (and probably on in retrospect) than an internal memo from a bankster with scant credibility. This hardly even qualifies as a bear market rally.

Calling bottoms is a fool's game. If you believe in America maybe now is the time to start accumulating. If not buy something else like silver bullion. Or you could diversify and buy some of both.

Mar 11 02:42 PM

[vreporter:]

On your credit card issue:

You were not billed in USD. It was converted for display in USD. You were charged because the vendor you transacted with WAS NOT ABLE to bill in USD.

This is definitely the job of the vendor to clarify and you should definitely know who you are purchasing from when making any online transaction.

Your knowledge of such simple matters defies your integrity in covering such important issues in the financial malaise! Maybe you'd do better with a nationalized payment system so that your consumer ignorance was covered by unified regulation!

Mar 11 03:04 PM

[mac.barron:]

The way that the U.S. Treasury has been hijacked is the greatest heist in all of history. If someone ran for the Senate on the promise of seizing back all personal gains from the executives and directors of AIG, Citi, Bank of America, et al how far would that campaign get?

Mar 12 02:20 AM

[Moon Kil Woong:]

Rallies like this are almost always mostly short covering. People saying Citibank is the key to a healthy stock market and is the reason for the rebound can only be found on the likes of CNBC. American prosperity is in our hands, not the people who rip off the taxpayer.

Mar 12 02:40 AM

[Bugs:]

You are getting real old with your attacks on Citigroup. Pick another bank to Dr Doom. Maybe HSBC. Both of you should go abroad and attack Citi where you can do more damage and leave this auduence some peace from your daily doom.

Mar 12 04:26 AM