By Joseph A. Giannone - Analysis
NEW YORK (Reuters) - Major U.S. banks have a credibility problem.
Citigroup Inc’s repeated assurances that it did not need additional capital, followed by its quick about-face in accepting billions of dollars in aid from the U.S. Treasury, has many investors wondering what other banks are hiding.
“The biggest question is what, as the owner of bank stocks, do you really own?” said Timothy Ghriskey, chief investment officer at Solaris Group. “It’s tough to say this won’t happen again.”
He added, “Financial institutions are leveraged companies, and any time you have a highly leveraged situation, it is based on faith and trust.”
After long insisting it was strong enough to weather plunging markets, Citigroup agreed on Sunday to its second U.S. government bailout package in two months. The bank is selling $20 billion of preferred stock, slashing its dividend and granting warrants.
Citigroup will unload most of the potential losses from $306 billion of risky assets to taxpayers.
One immediate result of Washington’s bailout was a relief rally on Wall Street. The Dow Jones industrial average climbed nearly 5 percent on Monday. Shares of Citibank, which plunged 60 percent last week, climbed 58 percent on Monday to end at $5.95 on the New York Stock Exchange.
“Obviously, our stock price was under a lot of pressure last week, and we wanted to try to address that,” Citi Chief Financial Officer Gary Crittenden told Reuters in an interview on Monday.
Yet the flip-flop is the latest in a series by U.S. banks this year, whose assurances of safety and soundness have been followed soon after by bailouts and rescue financing.
These episodes cast further doubt on statements made by banking executives and, investors said, could hurt the next financier that finds itself under the gun.
“Each time the government or companies admits to a problem, it creates further chinks in what confidence is left,” said David Dietze, who manages money at Point View Financial Services in Summit, New Jersey.
Back in March, Bear Stearns CEO Alan Schwartz and other executives insisted the No. 5 securities firm had ample capital and liquidity, only to see hedge funds drain the firm’s cash in a matter of days. Bear ultimately was sold to JPMorgan Chase at a fire-sale price of $1.5 billion and a $29 billion government backstop.
Lehman Brothers CEO Dick Fuld and other executives contended the No. 4 Wall Street bank had plenty of capital and solid assets, waging a war of words with critics who accused it of inflating the value of its illiquid assets. By mid-September, the firm lost the confidence of trading partners and collapsed into bankruptcy.
Likewise, Merrill Lynch chief John Thain repeatedly said the big brokerage had raised more capital than it needed, yet Lehman’s woes showed the vulnerability of a balance sheet burdened by mortgages and other hard-to-trade debt. Merrill rushed into the arms of Bank of America Corp.
Even survivors such as Goldman Sachs CEO Lloyd Blankfein and Morgan Stanley chief John Mack have offered rosy forecasts about the economy and financial markets that proved premature.
Michael Holland of New York money management firm Holland & Co said there are too many legal and regulatory penalties to think executives would willfully misstate their condition.
Even so, most investors said the market conditions have changed so rapidly, and deteriorated in such surprising ways, that executives cannot always be blamed for getting it wrong.
“The facts have been changing very rapidly in these institutions,” Holland said. “When we get a comment from a CEO, we don’t know what the markets will be like tomorrow.”
Not that it makes investors, who have seen their stakes wiped out, feel any better as they look ahead.
Point View’s Dietze observed it was only six weeks ago that the FDIC signed off on a proposed Citi takeover of Wachovia Corp, a struggling regional bank. Yet in that short period of time, Citi went from being a consolidator and rescuer to one of the rescued.
“If the government and the company missed it,” Dietze said, “to what degree can we investors be assured they now have their arms around the problems?”
Additional reporting by Jonathan Stempel and Dan Wilchins, editing by Matthew Lewis