What did Citibank do?

[MaxPowers]

Can somone help me understand what did Citibank do to fail? And what is all this money going to do for them? And why are they giving themselves bonuses and buying airplanes if they are begging for money?

[disneysteve]

There is a very good article in TIME magazine this week that explains what caused all the problems with the big banks. Basically, the Fed loosened the restrictions on the banks leveraging their money. Instead of lending out $15 for every $1 of deposits, they started lending $30 for every $1 of deposits. Plus, the banks made riskier and riskier loans (sub-prime). When folks started not repaying what they borrowed, the house of cards started collapsing since those loans weren't actually backed by bank assets. Essentially, the banks were lending money that they didn't actually have, hoping to get the money back from future payments. When those payments didn't materialize, they were screwed.

[MaxPowers]

What do you think about all the bonuses these guys are getting? And their pay is ridiculous!

[simpleyme]

I would like to think that I caused them to go down LOL

they treated me like crap so I quit using their cards then they bought the firm I invested with so I moved my money to get away from them ;-)

I wold like to think others did this to so they lost the use of money from people with a firm footing
but since they get the big bailout I feel they have gotten to me again anyway

[Broken Arrow]

DisneySteve provided a good synopsis.

Too add, Citi's corporate culture was one of global expansion and unchecked greed. Ex-CEO Sandy Weill was an empire builder who, in retrospect, built a giant house out of glass. That glass was made out of the once highly profitable but now highly toxic financial products based on sub-prime mortgages.

They did hire consultants and economics professors who warned them of the toxicity, but ultimately rejected their warnings because it was, again, too profitable to pass up. Citi gulped up a substantial amount of toxic CDOs, perhaps the most out of any bank.

It also did not help that the subsequent ex-CEO, Charles Prince, continued with Weill's ideals. Bottom line, you had a bunch of guys with big ambitions, big egos, and only looked at the (short-term) gains while ignoring the risks. Bad things happen when you only look at the gains and ignore the risks.

As for the big bonuses... yes, it is indeed insane. On a related note, Citi was recently publically ridiculed for buying a brand new $50 million company jet. Now, admittedly, I don't know the details surrounding that contract, but the timing of this is, quite simply, a public relations disaster. Supposedly, they got a direct telephone call from the Obama administration to "Fix It!" and they did. They dropped the purchase.

Rightfully so, the TARP money will come with a lot of strings attached and a lot of strict governmental oversight. From the corporate management's perspective, it also means too much red tape, paperwork, and Uncle Sam constantly breathing down their necks. Oh, and there is also a severe limit on how much management bonuses can be. So, believe it or not, but most management would prefer not to use the TARP money if they can help it. And I have a feeling that's why Ford anyway is trying to avoid using TARP.

[disneysteve]

What do you think about all the bonuses these guys are getting? And their pay is ridiculous!

I think bonuses, in any industry, should be based on performance. If the company is losing billions of dollars, nobody should be receiving a bonus.

[disneysteve]

Rightfully so, the TARP money will come with a lot of strings attached and a lot of strict governmental oversight. From the corporate management's perspective, it also means too much red tape, paperwork, and Uncle Sam constantly breathing down their necks. Oh, and there is a severe limit on how much management bonuses can be. So, believe it or not, most management would prefer not to use the TARP money if they can help it. And I have a feeling that's why Ford anyway is trying to avoid using TARP.

According to the TIME article, at least for the banks, the TARP money really didn't accomplish anything because of the way it was distributed and the strings attached. It wasn't "free" money but rather a loan. Since the terms require it to ultimately be paid back, the banks just sat on it. They couldn't use it to free up credit and lend it out. Doing that would have just worsened their leverage problem. I believe both BoA and Citi are not only worth less now than they were in October but they are worth less than the amount of TARP money they received.

It is a really bad situation all around.

[red92s]

On a related note, Citi was recently publically ridiculed for buying a brand new $50 million company jet. Now, admittedly, I don't know the details surrounding that contract, but the timing of this is, quite simply, a public relations disaster. Supposedly, they got a direct telephone call from the Obama administration to "Fix It!" and they did. They dropped the purchase.

I understand the uproar about the jet, but honestly, that purchase was probably made 12-18 months in advance of delivery (just recently). It's not like corporate jets roll off an assembly line. If it's similar to buying most large capital equipment, you are putting a substantial amount of money up front when they begin construction. Canceling the build after a certain point probably results in stiff forfeit of monies, since these are one-off aircraft built to order. Citi's BEST play was probably to take delivery then sell the jet on the market (which has got to be weak now, but still).

[GREENBACK]

I understand the uproar about the jet, but honestly, that purchase was probably made 12-18 months in advance of delivery (just recently). It's not like corporate jets roll off an assembly line. If it's similar to buying most large capital equipment, you are putting a substantial amount of money up front when they begin construction. Canceling the build after a certain point probably results in stiff forfeit of monies, since these are one-off aircraft built to order. Citi's BEST play was probably to take delivery then sell the jet on the market (which has got to be weak now, but still).

Regardless of any money already spent, This would be a PR disaster to a public that would only look at the jet as an arrogant example of pure corporate greed.

[red92s]

Regardless of any money already spent, This would be a PR disaster to a public that would only look at the jet as an arrogant example of pure corporate greed.

From a PR perspective, I think they had essentially bottomed out before the whole jet thing. Taking delivery of a $50M jet (that you ordered and paid for when you were raking in profits) just makes for good drive-time radio.

[GREENBACK]

I think Citi will come out of this mess in some form but they'll have a lot of rebuilding to do. I believe this whole jet drama would be something they would have to wear for a while. 50 M isn't all that much money in terms of reputation and they really need to rebuild that starting now

[srblanco7]

There's a good article on Portfolio.com titled "The End" that gives a decent explation of the current crisis. It's on their "most read" list last time I looked.

A quick summary -
1. In the "old days" the banker that made your mortgage loan to you had a real interest in your ability to repay the loan to the bank that they worked for. Not true in recent years as most mortgage loans were sold off to investors.

2. Subprime mortgage loans were "bundled" and sold as an investment product (a bond). Once they were "bundled" the Ratings Companies (Moody's, Standard & Poor etc) re-rated them as AAA investments. I gather the AAA rating was based on the theory that it was unlikely that property values across the Country would decrease simultaneously (pretty bad assumption) and therefore the risks associated with the bundled product were lower.

3. As DisneySteve mentioned - Investment Banks increased their leveraging from approx 10 to 1 to 30 to 1. The increased ratio somewhat attributable to the fact that investment banks went from private partnerships to public corporations. As such, the risk of loss associated with the leveraged postions was transferred from the Partners to the Stockholders.

4. And - to make matters even worse - there were investors who "shorted" the subprime bonds (in essence they bet against home prices continuing to rise). The banks used the money from the short positions to create "mirror images" of the bonds and then sold these off as well, thus multiplying the effect many times over.

[disneysteve]

I just read an article today about securitization, the process of bundling loans into investment instruments. That only started about 30 years ago and gradually expanded until it got really out of hand. It was a perfectly fine idea when it started. Then it got twisted and stretched into riskier and riskier products.

[srblanco7]

I just read an article today about securitization, the process of bundling loans into investment instruments. That only started about 30 years ago and gradually expanded until it got really out of hand. It was a perfectly fine idea when it started. Then it got twisted and stretched into riskier and riskier products.

Can you post a link to the article? I'd be interested in reading.

[disneysteve]

Can you post a link to the article? I'd be interested in reading.

It was also in this week's TIME magazine.