Thursday, July 16, 2009

Citi , B of A and Secret Deals With Regulators

The FT reports that Citigroup is close to a secret agreement with one of its main regulators that will increase scrutiny of the US bank and force it to fix financial (like those involving losing buckets of money), managerial (such as the fact that management caused and now can't stop the firm from losing buckets of money) and governance (such as those concerning directors that did nothing other than rubber stamp everything that management did causing the firm to lose buckets of money) issues. The agreement is apparently so secret that both the WSJ and FT got the story, but the WSJ figured it was old news and merely relegated it to the bottom of story about Bank of America's secret deal with regulators (keep reading, I'll get to it.)

The FDIC has been tightening the screws on Citi and wants the bank to strengthen its board and governance, improve asset quality, better manage its expenses and provide more information to regulators on its capital and liquidity. This supposed "agreement" between Citi and the FDIC would strengthen the FDIC's position in its dealings and its demands for detailed financial information as it deliberates over whether to include Citi on its list of "problem banks." Huh? Why does the FDIC need to strengthen its position in dealings? It regulates the bank and is guaranteeing a bunch of Citi's debt. If Sheila Bair asks for detailed financial information, Vikram Pandit better drop his sandwich and hand it right over. Furthermore, does the list of problem banks even mean anything? If Citi wasn't already on it after three government bailouts, then the list is completely meaningless. Adding to the hilarity of this article is the following line: "Agreements between regulators and bank's management and board- known as "informal actions" are not made public to avoid stoking investors' fears." You know, so secret that they somehow wind up on the front page of the FT. But then again, we're talking about Citi, and it's no secret that the bank is in deep doodoo.

Meanwhile, the headline banking secret being revealed at the WSJ concerns B of A. Supposedly Bank of America is operating under a secret regulatory sanction that requires it to overhaul its board and address perceived problems with risk and liquidity management. According to the article Bank of America is operating under a "memorandum of understanding" which gives the bank a chance to work out its problems without the glare of outside attention. But don't tell anyone, because nobody knows that there are problems at B of A. The order was imposed in May, you know after about three government bailouts, and the bank faces a series of deadlines, some at the end of July and others in August, say the story leakers.

What's wrong with this picture? Retroactive regulation doesn't solve problems. It would've helped a tremendous amount if these banks were actually regulated when they were making the serious mistakes that cost shareholders and our economy hundreds of billions of dollars. But go ahead, sign those memorandums of understanding if it makes regulators feel like they are actually accomplishing something.

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