Citigroup Too 'Interwoven' to Fail, Chairman Says

[DrDoom]

These welfare scum have no shame.....

As proof that Citigroup is one gigantic tangled mess, Citi Chairman Richard Parsons boasts Citigroup Too Interwoven to Fail

Citigroup remains too "interwoven" to fail even after the government has plowed billions into rescuing the banking titan and Congress has passed laws taking aim at financial behemoths, Citi Chairman Richard Parsons told CNBC.

"It's not a question of too big to fail," Parsons said in a live interview. "It's a question of too interwoven in the fabric of the global financial life to fail."

Parsons said allowing Citi to fail previously or in the future would be akin to having "the heart, the pump of the economic system fail because then everybody else dies."

"It's probably the most important private financial institution for maintaining our economic strength and presence around the world. You can't let an institution like that go down," he said.

Do these clowns even realize what they are saying? Parsons just gave a superb reason Citigroup needs to be broken up.

I suggest Citigroup should be forced to sell itself off piece by piece by piece, until it is not "too interwoven to fail". The same applies to Goldman Sachs and Bank of America.

Anything too big or too interwoven to fail, is simply too big.

In a free market with adequate fraud-prevention controls between various operations, these banks would likely not have gotten so big in the first place. They certainly would not have survived this global financial crisis if they did.

These gargantuan banks only exist intact because of Fed and taxpayer sponsored bailouts. Adding insult to injury, these banks pose the same systemic risk as before. Topping it off, Citigroup has the gall to brag about it.

Mish's Global Economic Trend Analysis: 98 TARP Recipients Close To Failure; Citigroup's Chairman Gives Reasons Citigroup Should Be Broken Up

[ArcticSplash]

Citi can function perfectly if its units were broken up and sold off to operate independently. See: Ma Bell.

The problem with Citi and to a lesser degree, BOA, is that it is so freaking huge the inefficiency in how it conducts business within is literally massive.



CitiFinancial can be easily broken off and CitiMortgage should be dissolved completely. I don't see any future where Citi should ever be allowed to underwrite mortgages again. Same with Bank of America.

[hammersklavier]

If you let me go on a tangent here, I disagree with this quote (about the Legacy Bank of Milwaukee, catering mostly to underserviced--usually poorer--clientele:

As Legacy Bank careens towards failure, it appears its customer base was not "underserved" but rather "overserved".

The issue isn't a "service" issue--if you do a neighborhood-by-neighborhood analysis, you'll probably find that Legacy Bank primarily services communities with few banking options. However, since financial service to this type of community is inherently riskier and bigger banks tend to eschew entrance into those markets, Legacy Bank is still providing a necessary service--even though it may not be able to do so profitably.

[ArcticSplash]

There's an important lesson about lending to those who are a credit risk. Don't lend if you can't do it at a profit.

Sub-prime lending has punishing interest rates, because the interest makes up for the fact that lots of people just aren't going to pay back the debt they agree to take on. It's just human nature. Actuaries specialize in figuring out just where that threshold is.

Legacy Bank cannot survive if it makes loans on assets that depreciate in value beyond expectation and has a high default rate. Deposits don't fix bad lending. Deposits are a liability to a bank if they're not turned over into profit-making lending.

Simple example:

For credit cards, the industry has discovered that default rate threshold seems to be about 10%. If you have 10% of all your accounts defaulting every year, then you need to be asking for > 20% in interest on balances to cover up for all that principal that is being destroyed when borrowers default in order to make a profit. Beyond this, there is no way you can lend at all without going insolvent.

If you go beyond that APR, you will lose all your top borrowers who pay on time, because they will close their accounts and go somewhere else. Your deadbeat borrowers will never leave you, and they will drag your balance sheet underwater like a boat anchor.

[hammersklavier]

I agree with that logic, but at the same time the implication in the article is that Legacy is (fairly frequently) one of only a handful of service providers, if not the only service provider, in the neighborhoods it serves. The way banks work may make a profitable situation in a market like Legacy's difficult if not impossible, but the need to serve its customer base remains.

[ArcticSplash]

I agree with that logic, but at the same time the implication in the article is that Legacy is (fairly frequently) one of only a handful of service providers, if not the only service provider, in the neighborhoods it serves. The way banks work may make a profitable situation in a market like Legacy's difficult if not impossible, but the need to serve its customer base remains.

It's very possible to do community lending in an area that's underserved or has a lot of unbanked people living in it. But you have to be tough as nails to do it, though. Which means as a banker, you can't sit on your ass all day and play golf. The only way a bank can survive in a poorly served, low-income area is to operate with a brick-and-mortar model.

In an underserved market that the big banks avoid, you're fighting several forces. You have people who earn low-incomes and have small-profit businesses, and you are going to have higher credit risks who are going to have a higher tendency to default on you. With those cards, you as a banker will have a harder time getting interbank loans from other parts of the system to help fund the operations of your bank, so if you do decide to make riskier loans, you need to keep higher reserves, which means you lend out less.

The banks who make this work go out of their way to make themselves known in the community so people who live there will turn to them as a primary source of lending.

People are going to default less often if they get a feeling that you are the only person who will give them credit at a fair deal and if they ruin the relationship with you, their financial life could be hurt. The people who go to payday lenders would much rather go take a signature loan out if they knew they qualified for one. That means you will get put on top of the list of creditors at getting paid back. If you're tough at collections and repossessions as well, you'll scare away the deadbeats and keep the customers in your community who are going to help you prosper. Let the deadbeats stay at the payday lenders and try to find the people who will be loyal.

Having employees at the bank who know the personal histories of some of the customers is also a valuable tool. For those people you can look beyond the credit score and gauge how much credit to extend and on what terms. For those you don't know, you go full-doc on them and read their histories. For people-based banks, that means you need your lending to be flexible. If someone is having a hard time with payments, you sit down with them and try to re-fi them so you avoid default, protect the customer's credit score, and make a customer who is even more loyal.

Customer service in the lobby is also important, but it's nowhere near as important as the profit making part of the bank. And people will judge a bank much more severely based on what happens to them in a credit situation rather that what happens in the lobby. People are lazy to change banks... but they get pretty motivated to pull their accounts out when they are given a denial for things like mortgages or car loans, but less so when they are offered credit but the customer rejects it due to the cost.

Successful banks also kill themselves off by trying to outgrow their competition. They do this by writing bad loans and offering too much for customer deposits to try to steal business. Every time banks do this, it winds up weakening the bank and putting it at risk to get its head cut off with defaults. Healthy retail banks grow through osmosis, not by opening up hundreds of branches in a year and doing massive buy outs and writing tons of trash loans.


Credit unions often enter these underserved markets more often than banks do, and they manage very well. Standalone banks that operate in very small towns also run this model and many of them have survived this recession intact. I still have accounts at a very small rural bank down in TX, I know the bank president and 1/2 the employees working there now have known me since I was in diapers. It's in a town with a very low median income and only has a few wealthy customers. It's survived intact and unchanged since 1906.

Community banks and credit unions don't set growth as sole goal, like the megabanks do. Megabanks always monitor AUM (assets under management). Credit unions and community banks that are healthy put more emphasis on stable loan growth and deposit growth with low default rates.

[ArcticSplash]

Payday Loans - Predatory Lending Association (PLA)

This is f_cking brilliant. It's very well done.

[phillyaggie]

Actually, Citi has been selling off huge chunks of itself ever since Vikram Pandit took over. They even sold off their premium brokerage/money management unit for the rich...Smith Barney. What remains of Citi is indeed fairly more globalized than practically any other U.S.-based financial institution. Citi, for example, is the Number 1 underwriter of new stock IPOs in India. Not Morgan, not Goldman, not HSBC or Nomura.

Someone here (or may be some other online forum) in fact was railing against Pandit about a year ago for selling off huge chunks of the company at firesale prices. Turns out, he sold off most of what the previous two CEOs had gathered over the past decade, including most of the toxic loan portfolios. Now with the government having sold off its shares (for a nice profit to the Federal treasury) in the company, Citi may even be ready to start paying dividends again. Some others have already upped their stockholder payouts...GE having raised its divvy twice in the past year (remember, GE got clobbered by its banking unit which held a lot of toxic debt).

[MorganNick]

Citi has come to normal position from the setbacks they had.Even though they sold out shares,think they took in the company's interest in the long run to over the recession.