Vikram Pandit, chief executive officer of Citigroup (C), relinquished his position at Citigroup. He had been expected to stay for several more years. The resignation comes immediately after Citi announced that third-quarter earnings fell by 88 percent. Furthermore, the bank's stock had been trading below book value for an extended period of time. Apparently, there were clashes between Pandit and the Citi board.
This is a tough time for people running banks. Even some banks thought to be above reproach have experienced difficulties in recent times.
Jamie Dimon, chief executive of JPMorgan Chase (JPM), had been cruising along, even being crowned in many business articles the "King of Wall Street," ran into a "white whale" or a "London whale" whose trades cost JPMorgan several billion dollars.
Wells Fargo (WFC) was also sailing along and boom … it just got sued by Preet S. Bharara, the United States attorney in Manhattan. The suit claimed that the bank defrauded the government by lying about the quality of the mortgages it handled under a federal housing program.
Surprises and suits! No wonder commercial banks, in general, are selling at such low prices. First the government pumps up the economy with 50 years of credit inflation and ridiculous incentives to make more and more and more housing loans and then the government begs commercial banks to absorb some of the financial disasters that were created: Bear Stearns and Wachovia and Countrywide.
Now, in order for the regulators to "save face," the government has decided that commercial banks are the reason why what the government has done and is doing is not working! We read that the housing market is now recovering … but, guess what? However, the recovery is as slow as it is because of the concentration that now exists in the banking industry. So says President of the Federal Reserve Bank of New York, William Dudley.
And, JPMorgan, what about those losses in London? I think we need a congressional inquiry into how the whole "loss thing" happened and how it was handled. Oh, by-the-way, JPMorgan, what about that Bear Stearns deal?
"Four years on, with less than a month before the election, Mr. Schneiderman, who is the co-chair of President Obama's Residential Mortgage-Backed Securities Working Group, has filed suit." This from Andrew Ross Sorkin and the New York Times.
Sorkin quotes Dimon reflecting on the deal:
"Would I have done Bear Stearns again knowing what I know today? It is really close. What I know today is if they called me again to do something like that, I couldn't do it. My board wouldn't allow me."
The same with Wells Fargo. Wells Fargo "is considered to be one of the best lenders in the nation. That status put Wells Fargo in a position to buy the failing Wachovia in 2008 …"
Wells Fargo has now been accused for behavior taking place for more than a decade. Bharara claims that the bank had "engaged in a longstanding and reckless trifecta of deficient training, deficient underwriting and deficient disclosure, all while relying on the convenient backstop of government insurance."
And, then there is poor Bank of America (BAC). It has been hit with a ton of civil suits relating to its acquisition of Countrywide and its purchase of Merrill Lynch. No one bank seems to be safe today from financial "surprises" or from regulatory or governmental attack. And, this includes commercial banks that seem to have so far escaped the financial collapse.
Who is ultimately suffering? Well, Mr. Sorkin closes by arguing that the people paying for this situation are the shareholders of banks …many of whom were not even owners of the stock at the time of the misdeeds. Sorkin states, "Does this really offer a deterrent effect? Or is this just a nice way to garner headlines ahead of an election?
"The executives responsible, as usual, pay nothing. If there were 'deceptive acts,' the government could and should bring cases, if not criminal, then civil, against the individuals.
Fraud isn't something a company does; it is something people do."
Are the bank write-downs over? Will JPMorgan Chase experience any more "surprises" from traders? Are all bank balance sheets solid these days with all assets "marked to market" so that nothing is under water? How long will the lawsuits go on? How many lawsuits will be forthcoming in the future? Will the lawsuits drop off after the presidential election is over?
Who wants to be a commercial banker these days? Who wants to own stock in a bank these days? I certainly don't!
I believe that Mr. Pandit did the best he could at Citigroup. I don't know who could have done much better under the circumstances. Now, after five years, it is time for a change at the top.
The "new guy" is someone from inside the bank. This probably will make the transition as smooth as possible. However, is this what Citigroup needs? Maybe Citigroup needs someone to come in with "new" eyes and another idea about what the Citigroup business model should be.
Personally, I wouldn't want to be a commercial banker at this time. It seems to me that the government is going to play too big of a role in the future in banking. To me, the people in charge in the government want to define what the industry is and what the industry does. (I won't get into this too-big-too-fail controversy at this time.) I am afraid they will get their chance.
This, to me, is reason enough to not want to hold bank stock. The banking results of the future, seem to me, to be located in the hands of the government and I don't want to have to explain the results of my investment portfolio in terms of how the government has structured the industry.