Passing next stress test is job #1 at Citi

"I'll put my jacket on and walk out the door," Citigroup (C) CEO Michael Corbat has told Chairman Michael O'Neill should the bank flunk the Fed's stress test next year. In a WSJ "inside baseball" account of the failure and Citi's efforts since, Corbat is described as having turned his attention away from moving the business forward for instead a laser focus on proving to bureaucrats at the Fed that Citi's global business model is one that can survive the next crisis.

"Are you targeting our business model? Our strategy," asked Corbat point-blank to Fed officials in a person-to-person meeting shortly after the stress test failure. For Citi to continue to operate all over the world, replied the Fed group, the bank needed to significantly improve its ability to operate and assess risk.

Corbat returned from the meeting with an urgency to simplify operations and overhaul aspects of the bank's risk apparatus, and Citi has since sold its Greek consumer unit and put its Spanish one on the block. "The federal government's overreach is excessive over these big banks, particularly of Citi," says longtime investor William Smith of SAM Advisors, urging Corbat to instead push back against regulators.

Becoming more clear is that a stress test failure next year will mean not just Corbat's job, but also a likely break-up of the bank. "Two extremes, from agitated investors to tough-minded regulators, will unite to break up Citigroup as too big to manage," says Mike Mayo.

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Comments (15)
  • danr66
    , contributor
    Comments (23) | Send Message
    Never bought into that "Too big to fail" routine, every complex problem has as solution. Corporations are shrewd enough to build faster and bigger than government watchdogs can comprehend. End result= pay back in fines (no jail time), appease the public, fatten the Treasury. Break up these corporate whales into accountable size businesses and maybe we'll have some economic stability.
    21 Jun 2014, 08:00 AM Reply Like
  • King Rat
    , contributor
    Comments (1831) | Send Message
    Sorry, pride is the only commodity more valued on Wall Street than profit.


    For all the problems rightists bring to the table, leftists have a skewed vision of "Wall Street" and "corporations" that fits with neither currently reality nor with history.


    Do nothing with Citi. If Citi fails next time around, the survivors will get to buy the pieces at a much SAFER price than forcing open a market of Citi's assets today. Forcing them to buy today at outrageously high prices will only put them at greater risk of failure down the road. Thus in effort to stave off systemic risk, regulators would actually be causing it.
    22 Jun 2014, 12:25 AM Reply Like
  • DeepValueLover
    , contributor
    Comments (11325) | Send Message
    Its time for Citi to sell off divisions and unlock value.


    Money is cheap and M&A is booming.


    This is getting ridiculous.
    21 Jun 2014, 08:31 AM Reply Like
  • Preferred Research
    , contributor
    Comments (807) | Send Message
    Agree, time to break up Citi. It will be worth more as separate, more focused companies.


    Same goes for JPM and BAC. Right now WFC seems to have solid controls, but I would be glad to see WFC broken up too, and I am a shareholder from way back in 2009 when they did the offering at 25.
    21 Jun 2014, 09:05 AM Reply Like
  • jstratt
    , contributor
    Comments (4012) | Send Message
    I agree with the government after all C has essentually lost everything several times during my investment career. As an example the Saudi Prince helped recapitalize C one time and he got cashed out in 2008.


    So as an example I sold all my shares in C above $50 in 2007 and bought shares back at $3 in 2009 or 2010. I still wish I had bought C back at $1 when I had the chance.


    All in all with C's ability to manage risk over the past 35 years there have been several times toilet paper was more expensive than a share.
    21 Jun 2014, 09:18 AM Reply Like
  • Patent News
    , contributor
    Comments (1475) | Send Message
    interesting.. whats the upside/downside if they pass/fail stress test?
    21 Jun 2014, 10:33 AM Reply Like
  • Harm Elderman
    , contributor
    Comments (2499) | Send Message
    The downside of failing a stress test is obviously unlimited.
    21 Jun 2014, 11:08 AM Reply Like
  • westbroox
    , contributor
    Comments (90) | Send Message
    Downside is always limited, to $0. Upside however is unlimited.
    21 Jun 2014, 04:09 PM Reply Like
  • Ajayyy
    , contributor
    Comments (325) | Send Message
    Only thing I can take away from this is that C is worth the risk and investment. It has underperformed the over-all financial sector and if a few things are done right it could start making massive gains. Those 2016 calls look pretty cheap.
    21 Jun 2014, 12:31 PM Reply Like
  • agaptrader
    , contributor
    Comments (66) | Send Message
    C above 48 and adding to one's position above 50 looks good. It has 10% upside and has a good potential to go to 55 or so..
    Check out my website for more comemnts -
    21 Jun 2014, 02:25 PM Reply Like
  • parw
    , contributor
    Comment (1) | Send Message
    The best solution for these business which are "too big to fail" is to forced them to pay all their bonuses in common stock which they would have to be held for seven years before they could be cashed. Managers would be more careful of their investment since they be the first one to lose in the price of the stock. Government would not have to bail them out or fined them these incredible sums of billions of dollars.
    21 Jun 2014, 02:27 PM Reply Like
  • Chancer
    , contributor
    Comments (4628) | Send Message
    Does C's "business strategy include the foreign operations failures in Mexico and China? Corbat cannot afford to be cocky with the Fed right now. He has to satisfy the Fed and get foreign operations under control. Firing more management dead weight would not hurt either. Corbat should meet the Fed hat in hand and bow deeply.
    21 Jun 2014, 03:51 PM Reply Like
  • User 25343473
    , contributor
    Comment (1) | Send Message
    Citi has always tried to cover its tracks by firing numerous people and blaming their law breaking on unauthorized staff actions. Of course their cover ups also involve law breaking (think Watergate). Mexico and China are recent examples of this, but their involvement in money laundering has been too widespread to blame on renegade employees alone.
    21 Jun 2014, 05:28 PM Reply Like
  • Jason B
    , contributor
    Comments (614) | Send Message
    C never failed the stress test in the first place. They are better capitalized than JPM and BAC...this was and remains a hatchet job.


    Funny how the Fed told BAC, JPM and GS their results ahead of time so they could adjust their ask. Shareholders should pay a visit to the Fed and just say "Hi".
    21 Jun 2014, 11:32 PM Reply Like
  • King Rat
    , contributor
    Comments (1831) | Send Message
    I cannot recall ever owning Citi or any major financials directly, mostly for the reasons Buffett stayed out of technology but I am shocked by the hatred being spewed against Citi here.


    No Citi is not TBTF. No company ever has been. Bankruptcy does not mean anybody loses their job or anybody loses their entire investment. What bankruptcy does is clear out NPAs and give quality assets to responsible outside interests. Management is often the first to go.


    What many people clamoring for breakups of "TBTF" corporations fail to realize is that if you do break up "TBTFs", you really magnify the wealth of the "TBTF" executives beyond the wealth they have now. Right now many have tens or hundreds of millions in stock options in their single company. If that company goes bust, so too do their options. Break up their company and they get options or warrants in the new, smaller companies.


    So anybody out there wanting to "punish an 'evil' corporate executive" should just let that executive's "TBTF" company fail.
    22 Jun 2014, 12:48 AM Reply Like
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