ensure that MBIA pays valid claims on insurance it issued on defaulting bonds

TO BE NOTED: From Reuters:

"Banks sue MBIA over $5 billion restructuring

Wed May 13, 2009 9:53pm EDT

NEW YORK (Reuters) - A group of major banks including Citigroup Inc, JPMorgan Chase & Co and Barclays Plc has sued MBIA Inc, charging that the bond insurer illegally restructured its operations by moving $5 billion of assets and leaving a key unit effectively insolvent.

The group of around 20 financial institutions and affiliates are seeking to ensure that MBIA pays valid claims on insurance it issued on defaulting bonds, but did not put a value on such claims.

MBIA, along with rival bond insurer Ambac Financial Group Inc, suffered huge losses in the recent financial turmoil as they were hit by claims on insurance policies they issued on repackaged debt, which turned out to be more risky than they assumed.

A spokesman for MBIA, which reported a profit of $697 million last quarter, declined comment on the lawsuit, which was filed on Wednesday in New York State Supreme Court.

The company's shares fell 9 percent in after-hours trading to $5.16, after falling more than 7 percent in regular trading on the New York Stock Exchange.

In the suit, the banks charge that MBIA acted illegally when it created a new municipal-bond insurance business earlier this year, making it free of its contractual obligations to policyholders.

As a result of moving $5 billion in assets, the banks said in their court documents, that MBIA Insurance -- the operating unit which pays claims -- is now "effectively insolvent" with no means of paying claims.

The banks claim that MBIA could instead have used its own cash to strengthen the balance sheet of MBIA Insurance, but it chose to spend more than $900 million repurchasing its own stock and debt and lending money to its asset management business. As a result, the suit claims MBIA executives will benefit while policyholders are left facing losses.

Other major banks party to the suit include units of: ABN Amro, BNP Paribas; HSBC, Bank of America Corp, Morgan Stanley, Royal Bank of Canada, Societe Generale, UBS AG and Wachovia Bank.

(Reporting by Bill Rigby; editing by Carol Bishopric)"

This makes equity valuation somewhat mystical when stock prices are very low and current earnings are neglible

TO BE NOTED: From Inner Workings:

"Does P/E Mean Anything for Bank Stocks? May 6th, 2009
By David Goldman

What is a stock? According to the Nobel Prize winner Robert Merton a stock is a call option on the assets of the firm. It is undated, so that the option is perpetual. This makes equity valuation somewhat mystical when stock prices are very low and current earnings are neglible. In the case of Citigroup, for example, at yesterday’s close of $3.31 a share, a 10-year option at the money should have cost about $3 per share — almost the entire value of the stock price. A 10-year, at the money option on JPM at the money should have cost about $18, or slightly over half the stock price. And an at-the-money 10-year option on MSFT should have cost about $6, or a third of the stock price.

There are two components of the stock price, in short: the option value of possible future cash flows, and the discounted value of cash flows that are more or less predictable. Citigroup has no cash flows at the moment; JPM has some. MSFT has a lot. Ivolatility.com has a basic options calculator that will pull in data and allow the user to play with assumptions.

Citigroup will be a zombie for years. It won’t have a lot of cash flows. If it ever regains even a fraction of its former franchise, though, its stock price will be five or ten times what it is now. That’s pure option value. Price-earnings ratio means nothing.

Valuation of bank stocks, in short, is highly uncertain: it requires a set of assumptions about future earnings that cannot be extrapolated linearly from current data.

An interesting question is: why should Citigroup’s stock price rise as implied volatility on its options falls? If the stock is a call option on the company’s assets, shouldn’t it be worth more if volatility rises?

Volatility, as the above chart from ivolatility.com shows, has been plunging,

The answer is that short-term volatility has very little to do with the long-term, ten- to twenty-year volatility of the firm’s assets. The prospect for a big move up or down over the term adds to the option value of the stock."

definitive winners and losers, which is exactly the opposite of what the government wanted to do

TO BE NOTED: From Bloomberg:

"Short Selling of Banks Accelerates as New Financial Stress Test

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By Edgar Ortega and Elizabeth Hester

May 4 (Bloomberg) -- Short sellers, the bane of Wall Street executives last year, are back.

The number of Citigroup Inc. shares borrowed and sold short increased sixfold since Feb. 27, the day the U.S. Treasury announced it would convert some of its preferred shares in the New York-based bank into common stock.

Short interest in Bank of America Corp., MetLife Inc. and American Express Co. climbed more than 40 percent in the same period, according to data compiled by Bloomberg. In total, short sales of the 18 publicly traded financial companies undergoing government stress tests were twice as high on April 15 as they were at their peak last year in July, two months before Lehman Brothers Holdings Inc. collapsed.

“People are either positioning themselves for the potential of a preferred-to-common conversion, or they have an increased perception of risk in these companies,” said Andrew Baker, an equity strategist at Jefferies & Co. in New York.

The Federal Reserve plans to release results of the tests on May 7. At least six of the 19 firms under review will require additional capital to absorb losses if the recession worsens, people briefed on the preliminary results said last week.

Short sellers borrow shares and sell them hoping to make a profit by replacing the stock after prices fall.

Douglas Cliggott, manager of the Dover Long/Short Sector Fund in Greenwich, Connecticut, said he is shorting some bank stocks on expectations they will lose value as earnings deteriorate. New York-based hedge fund manager Daniel Loeb is betting that financial firms needing more capital will exchange preferred shares for common to bolster their balance sheets. He’s seeking to profit from the price difference between the two securities by buying preferreds and shorting the common.

Converting Preferreds

Citigroup is in the process of converting as much as $52.5 billion of preferred, including $25 billion held by the government. Charlotte, North Carolina-based Bank of America, the largest U.S. lender by assets, will change $25 billion to $45 billion of preferred shares into common to raise capital, said Richard Staite, an analyst at Atlantic Equities LLP in London, in a report to clients last week.

Wells Fargo & Co., based in San Francisco, and three smaller rivals -- BB&T Corp., SunTrust Banks Inc. and Regions Financial Corp. -- also may have to turn their preferred shares into common as a result of the stress tests, according to analysts at New York-based Creditsights Inc.

To entice investors to accept common shares, companies may offer preferred holders a premium to the current price, said Phillip Jacoby, a managing director of Stamford, Connecticut- based Spectrum Asset Management Inc., which oversees $6 billion. Citigroup is offering holders of the $2.04 billion 8.5 percent Series F preferred $21.70 worth of common shares, 24 percent more than their price of $17.48 as of May 1.

Tangible Common Equity

By exchanging preferred for common, banks would be able to increase their tangible common equity, or TCE, a measure of how much capital a firm has to withstand losses. The financial yardstick strips out intangible assets, goodwill -- the premium above net assets paid for acquisitions -- and preferred stock, including shares issued to the U.S. Treasury.

Regulators want TCE to equal about 4 percent of assets, up from an earlier target of 3 percent, people with knowledge of the situation said last week. Seven of the banks under review have ratios of less than 4 percent, company reports show.

“Banks are going to need more capital,” Jacoby said. “Treasury doesn’t care about dilution. All they care about is financial mass and loss-absorption ability to offset what could be more nonperforming loans and writedowns in the future.”

‘Vicious Cycle’

The increase in short selling occurred as the S&P 500 Financials Index posted its best two months since 1989, when Standard & Poor’s started keeping records. The 80-member index has surged 41 percent since Feb. 27.

Stephen Wood, who helps manage $151 billion as senior strategist at Russell Investments in New York, said the stress tests will narrow the breadth of the rally.

“It will end up resulting in a differentiation of the shares,” Wood said. “It will be a vicious cycle for the companies that are not doing well. The share price will go down in anticipation of dilution with the issuance of new shares.”

Short sellers were accused last year by Wall Street chief executive officers, including Lehman’s Richard S. Fuld and Morgan Stanley’s John J. Mack, of using abusive tactics to attack firms.

SEC Ban

Fuld, 63, told congressional investigators on Oct. 6, less than a month after Lehman filed the biggest bankruptcy in history, that short sellers played a role in a “storm of fear” that led to the demise of the 158-year-old firm. Mack, 64, helped persuade government officials in the days following Lehman’s collapse to suspend short selling, which he said was sending his New York-based firm’s shares into a free fall.

The U.S. Securities and Exchange Commission imposed an emergency ban on bearish bets on more than 900 finance-related companies for a three-week period that ended Oct. 8. The agency also tightened requirements on delivering borrowed securities and imposed rules that require hedge funds to privately report short sales to the agency.

The SEC will convene a meeting May 5 to discuss proposals for restricting short sales, including an outright ban when a stock’s price declines.

“The ban last year crushed a lot of hedge funds and their investment strategies,” Perrie Weiner, a partner at the law firm DLA Piper in Los Angeles, said in a telephone interview. “There are much cooler heads now. They are looking at ways by which they can say, ‘We’ve got a better regulated market, and we are on the road to recovery.’”

Short Interest Rising

Short interest rose after Feb. 27 for 14 of the 18 publicly traded companies under review by the Fed, according to Bloomberg data. Citigroup’s increase was the biggest at 509 percent, followed by New York-based insurer MetLife at 66 percent, American Express at 44 percent and Bank of America at 42 percent. The average increase for the 18 companies was 47 percent. It was 201 percent excluding Citigroup.

Representatives for Citigroup, Bank of America, MetLife, and American Express declined to comment.

Detroit-based GMAC LLC, the auto and mortgage lender that received a $6 billion government bailout and is one of the 19 companies undergoing stress tests, wasn’t included in the Bloomberg data because it isn’t publicly traded.

The total short interest for the 18 firms as of April 15, the last date for which New York Stock Exchange data are available, was 2.1 billion shares, or 7.1 percent of those available for trading. That compares with 1.05 billion shares on July 15, or 4 percent of those available for trading.

‘Winners and Losers’

Excluding Citigroup, which accounted for about half of the increase, the total stood at 866.1 million shares on April 15, higher than all but one period last year and 2.9 percent shy of the July peak.

The number of shares sold short in Morgan Stanley totaled 52 million on April 15. While that’s down 12 percent since Feb. 27, it’s higher than the 45.3 million shares on Sept. 15, when Mack was lobbying lawmakers and regulators for a ban.

The large short positions will fuel volatility in stock prices when regulators announce the results of the stress tests, said Matthew McCormick, a fund manager at Cincinnati-based Bahl & Gaynor Investment Counsel Inc., which oversees $2.1 billion.

“With that massive amount of short interest, what those traders are saying is that they feel this process is not going to be managed well,” said McCormick, whose firm doesn’t own any bank stocks. “There are going to be definitive winners and losers, which is exactly the opposite of what the government wanted to do.”

Shorting Citigroup

Loeb’s Third Point LLC, which oversaw $1.8 billion as of April 1, was among investors shorting Citigroup stock and buying the preferreds. While the bank’s delay in completing the exchange has eroded his returns, Loeb told investors last week that he expects to reap gains when other banks swap preferred for common stock.

“We expect to see more opportunities in this area as restructurings create more movement in markets,” Loeb told his investors in an April 28 note. He confirmed the authenticity of the letter and declined to comment further when contacted by Bloomberg News.

Cliggott, whose fund beat 97 percent of its peers last year, according to Bloomberg data, said he’s short New York- based American Express and Goldman Sachs Group Inc. because of his outlook for diminished earnings for the two firms. He unwound his short positions in New York-based JPMorgan Chase & Co. and Wells Fargo, saying the outcome of the stress tests for those banks is “too big of a wildcard.”

“There are a fair number of people in the marketplace who believe many financial stocks are extremely expensive given the rapid contraction of earnings,” Cliggott said, citing the decrease in leverage in the industry as well as deterioration in consumer credit. “The government has added tremendous uncertainty about the future of the U.S. financial sector.”

To contact the reporter on this story: Edgar Ortega in New York at ebarrales@bloomberg.net; Elizabeth Hester in New York at ehester@bloomberg.net"

wring capital from private investors instead of U.S. bailout funds as a way of bolstering equity without ceding control to the government

TO BE NOTED: From Bloomberg:

"Citigroup Said to Weigh Capital Boost That Averts U.S. Control

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By Bradley Keoun

May 4 (Bloomberg) -- Citigroup Inc., girding for results of the Federal Reserve’s bank stress test, may try to wring capital from private investors instead of U.S. bailout funds as a way of bolstering equity without ceding control to the government, people briefed on the matter said.

Regulators have indicated to the New York-based bank, which got a $52 billion rescue last year, that another taxpayer-funded cash infusion won’t be required, according to one of the people, who asked not to be identified because the talks aren’t public. Discussions now center on how much of the government’s preferred shares in the firm must be converted into common stock, the person said. Under a plan set in February, the government would convert as much as $25 billion of its stake, for a 36 percent voting interest.

Getting money from private backers may help Citigroup dissuade the Treasury Department from converting all or part of its remaining $27 billion investment -- a step that may increase the government’s ownership to more than 50 percent and nationalize what was once the biggest U.S. bank. One likely solution for the company would be to convert $10 billion of privately held securities that could easily be added to the pending exchange, said Kevin Starke, who analyzes bank capital structures for hedge-fund clients of CRT Capital Group LLC.

“That would bring in another $10 billion of common equity, which could be enough to bring Citi over the threshold” required by regulators, said Starke, whose Stamford, Connecticut-based firm specializes in evaluating multiple classes of a company’s securities. He has no rating on Citigroup’s stock.

Government Control

Jon Diat, a Citigroup spokesman in New York, said he couldn’t comment on the stress tests. Michelle Smith, a spokeswoman for the Federal Reserve, which is overseeing the administration of the stress tests, declined to comment.

None of the largest U.S. banks has succumbed to government control, as insurer American International Group Inc. and mortgage-finance companies Fannie Mae and Freddie Mac did last year. The Treasury Department designed the Troubled Asset Relief Program, or TARP, so the government got non-voting preferred shares in exchange for bank-bailout funds.

The KBW Bank Index, which tracks the 24 biggest banking stocks, has plunged 63 percent in the past year, partly on concern that banks don’t have enough common equity, one of the most conservative measures of capital, to absorb mounting losses during a prolonged recession.

Treasury Secretary Timothy Geithner, who on Feb. 10 announced a plan to test how bank balance sheets would fare under a “stress” scenario where unemployment climbs above 10 percent, says the government will ensure the 19 biggest U.S. banks get enough capital to withstand the crisis.

Tangible Common Equity

The government says it will inject additional capital where needed and consider converting TARP preferreds into common stock.

Last year, the Treasury amassed $45 billion of preferred shares in Citigroup in exchange for bailout funds and another $7 billion of preferreds for a guarantee on $301 billion of the bank’s troubled loans and bonds.

Bank of America Corp., which like Citigroup got $45 billion of bailout funds, also may wind up partially owned by the government if its TARP preferreds are converted into common.

Citigroup, beset by mortgage-bond writedowns and surging losses on credit-card loans, has recorded a $36 billion net deficit over the past six quarters, reducing its tangible common equity to $29.7 billion as of March 31.

Some investors say tangible common equity is the most reliable portion of a bank’s capital because it excludes goodwill, the intangible asset booked when a company makes acquisitions. Goodwill may have to be written off in a market where the value of acquired businesses becomes suspect.

Asset Sales

Chief Executive Officer Vikram Pandit, 52, has announced a plan to sell “non-core” businesses to free up capital. Last week the bank said it would get a $2.5 billion boost to tangible common equity from the sale of its Japanese brokerage, Nikko Cordial Securities.

The bank also is selling majority control of its Smith Barney brokerage to Morgan Stanley, a transaction that will add another $6.5 billion to Citigroup’s tangible common equity. That deal is scheduled to close in the third quarter.

Regulators completing the stress tests are working with banks to forecast profits and losses over the next two years. The goal is to see how much their capital would dwindle in a severe recession, and force them to address any potential shortfall. The results are scheduled to be released May 7.

Dividends, E-Trups

Under Citigroup’s plan to convert $25 billion of the government’s investment into common stock, holders of about $27 billion of privately held preferred shares also will convert their stakes. Citigroup induced the private holders to participate by suspending dividends on the preferreds -- eliminating an advantage the securities had over common stock. The bank also agreed to convert the preferreds at a premium to their market value.

Citigroup may make a similar offer to holders of about $10 billion of enhanced trust preferred securities, known as E-Trups, which rank above regular preferreds in repayment order, according to CreditSights Inc. analyst David Hendler. The E-Trups are a bond-like security whose coupon can be deferred for 10 years without triggering a default.

Markets aren’t likely to warm to a secondary stock offering, and the bank may have trouble attracting investors who aren’t already entangled, he said.

“It’s hard to get third parties involved if the investors who are already there haven’t had their pound of flesh extracted,” Hendler said. “And the next class of investors to be in that donation mode are these E-Trups holders.”

Shareholders’ Cost

Since the E-Trups are trading at 40 to 60 cents on the dollar, holders probably would come out ahead if Citigroup expands its exchange offer to include them, according to CRT’s Starke.

“They just need to open the window wider,” Starke said.

Such a deal would come at the expense of common shareholders, who already have watched the stock price tumble 95 percent since the end of 2006. Citigroup last week fell 6.9 percent in New York trading to $2.97. Under the existing conversion plan, common shareholders would be diluted by 74 percent, and the dilution would increase if additional preferred holders were invited into the exchange.

Citigroup’s E-Trups issued in December 2007 with an 8.3 percent coupon surged 12 percent last week to 61.5 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

To contact the reporter on this story: Bradley Keoun in New York at bkeoun@bloomberg.net."

In practice, the banks will be under pressure to line up the new capital immediately

TO BE NOTED: From the NY Times:

"Citi Is Said to Require New Capital

By ERIC DASH

Citigroup is locked in negotiations with federal regulators over whether it needs to raise as much as $10 billion in fresh capital as a result of the government’s stress test of its financial health, according to a person briefed on the situation.

But the bank may be able to plug that hole with recent and future measures to raise capital — like asset sales and a big stock conversion plan — that could leave it with more than enough funds to satisfy regulators.

The size of any shortfall hinges on how much regulators will let the bank offset its projected capital needs with actual gains in the first three quarters of this year. Regulators are planning to let all 19 banks taking the stress test count, through the third quarter, any gains toward the cushion of capital they are required to hold against a worsening recession, according to people with knowledge of the plan.

But the calculations may add another layer of murkiness to the highly anticipated results, and could further undermine confidence in the exams themselves, by setting off a rolling reassessment of the amount of capital the banks must hold, analysts said.

Federal Reserve and Treasury Department officials said Friday they would delay the release of the stress test results until Thursday afternoon, several days later than they had originally expected, in part because some of the banks continued to disagree with the government’s initial conclusions.

The government plans to release both aggregate results for the entire group of banks and specific results for individual institutions, as well as estimates of the banks’ potential losses. The goal of the tests is to determine how much additional capital each big bank will need if the economic downturn proves to be deeper than expected. Many analysts expect several major institutions to be ordered to raise billions of dollars in additional capital.

Citigroup, Bank of America, PNC Financial and Wells Fargo and other lenders have been disputing the early findings of stress tests, arguing that they are in better financial health than the government has concluded, according to people briefed on the exams. Talks are expected to continue into next week.

The banks fear that if the tests require them to raise capital immediately, it may needlessly dilute existing shareholders if the economy worsens less, or less quickly, than regulators expect.

Regulators based their assumptions of how much capital banks need to hold in the future on the banks’ 2008 results. Now, if banks’ actual performance through the third quarter is better than expected, they can count that toward the amount of capital the tests would otherwise require them to raise, the people briefed on the matter said. Banks would also get credit for any business or loan portfolios they sell. Both actions would minimize the actual amount of capital the banks need.

But it also means that regulators may need to update their assessments of required capital as banks report their earnings in the coming quarters, which may create more uncertainty for investors who hoped that the results of the stress tests being released Thursday would be more definitive.

It is unclear whether the government’s capital requirements would change for a bank that reports large losses in the second and third quarters. Most banks enjoyed a rebound in earnings in the first quarter, but many have warned that those gains may trail off as the recession wears on.

“Conceptually it makes sense but it may not give investors the visibility they crave,” said John McDonald, an analyst at Sanford C. Bernstein & Company. On the other hand, he said, if the results of the stress tests Thursday provide a maximum amount of capital that banks can reduce on future events, “the risk is the banks raise more than they need and potentially dilute their shareholders or take on more government capital than necessary.”

The methodology could have a positive impact for a bank like Citigroup, which most likely needs billions of dollars of additional capital. On Friday, it announced the sale of Nikko Cordial Securities to Sumitomo Mitsui Financial, a large Japanese bank, in a move that would boost Citigroup’s tangible common equity by $2.5 billion. Citigroup has also announced the split-off of Smith Barney and plans to convert a portion of the government’s $45 billion preferred stock investment into common stock.

None of those actions counted in the preliminary stress test results that regulators revealed in secret last week to the banks. But regulators then allowed the banks to adjust those figures based on their actual first-quarter performance.

That could help reduce Citigroup’s total capital shortfall, though it is possible the bank may still need additional money.

Other banks, including Bank of America and Wells Fargo, are also pushing back hard on the regulators assumptions, including the severity of losses on assets like mortgages, credit card and commercial real estate loans, as well as their potential to generate earnings.

Banks that are ordered to raise capital will be required to submit a plan within one month and will have six months to actually raise the money. In practice, the banks will be under pressure to line up the new capital immediately, and several are expected to announce specific plans on the same day that the results are released.

Edmund L. Andrews contributed reporting."

Who in their right mind could be satisfied with the boards of Citigroup or Bank of America

TO BE NOTED: From Bloomberg:

"Bank of America Owners Declare War on Taxpayers: Jonathan Weil

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Commentary by Jonathan Weil

May 1 (Bloomberg) -- The votes are in at Bank of America Corp. And the message to America is unmistakable: It’s them versus us.

The big news from Bank of America’s annual meeting this week was that a majority of shareholders are content with the performance of the company’s directors. All 18 of them, including Chief Executive Officer Kenneth Lewis, were re-elected with at least 63 percent of the votes cast. All except Lewis and lead director Temple Sloan got more than 72 percent.

This outpouring of satisfaction leads to a question surely on many good citizens’ minds: What in heaven’s name could the geniuses who voted for these people have been thinking?

The same goes for the shareholders who cast their ballots last week to re-elect all of Citigroup Inc.’s directors, each with more than 70 percent of the vote. Even Citigroup’s CEO, Vikram Pandit, got a decisive majority.

Almost two years into America’s great financial fondue, we still haven’t tamed our nation’s systemically dangerous banks. That’s not just the fault of captive banking regulators, or cash-craving congressmen, or willfully blind credit-rating companies, or the people who run the banks. The shareholders who own the banks are just as much to blame.

Keep the Bums

Sure, Lewis is now out as chairman of Bank of America’s board, after a bare 50.3 percent of votes were cast in favor of splitting the bank’s chairman and CEO positions. Yet far from a revolt, this was more like throwing the bums in. Lewis’s replacement as chairman, Morehouse College President Emeritus Walter Massey, has been on the bank’s board since 1998. Doing what, exactly, is far from apparent.

These votes were the best chance we had for a taste of accountability at Citigroup or Bank of America, which together have received $90 billion of taxpayer bailout money. The banks’ shareholders rose to the challenge by flipping us all the bird.

It’s not as if anyone was asking them to place the country’s needs ahead of their own. No, the worst part is that so many of them were too lazy or stupid to vote in their own best interests.

Who in their right mind could be satisfied with the boards of Citigroup or Bank of America, which in the past year have destroyed most of their stock-market value, crawled like beggars in search of government rescue money, and turned their brand names into household curse words?

Don’t Rock Boat

There are some logical, if cynical, explanations. Perhaps some shareholders feel fortunate to have anything left of their stakes at all, and decided to reward the banks’ directors for driving such hard bargains with the taxpayers. Or maybe a bunch of institutional investors that do business with the banks, such as brokerage firms that vote their customers’ proxies, chose not to risk retaliation by rocking the boat.

The good-governance pundits say we should take note of all the votes withheld from the companies’ board members as a sign of restlessness. Charles Elson, the oft-quoted director of the John L. Weinberg Center for Corporate Governance at the University of Delaware, told a Bloomberg News reporter that the size of the opposition to Lewis and Sloan “symbolizes the deep level of discontent with the management of the company” and that shareholder activists had “made their point.”

The main point I see, however, is that the majority of these banks’ shareholders need to have their heads examined.

They have to know they face even more dilution of their stakes because the banks probably don’t have enough capital to avoid returning to the bailout trough. And Bank of America’s shareholders must remember how Lewis’s board royally hosed them in December, by not disclosing the 11-figure losses at Merrill Lynch & Co. until after the purchase of Merrill was completed.

Or maybe not. I’m all for shareholder rights and protecting investors from wayward managers and boards. This time, however, the investors needing protection are the American people, who seem destined to become the majority owners of these banks.

The rest of the shareholders at Citigroup and Bank of America are lucky they haven’t been wiped out already. They certainly deserve to be now.

(Jonathan Weil is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: Jonathan Weil in New York at jweil6@bloomberg.net"

the first option is to accelerate plans to sell unwanted businesses

TO BE NOTED: From the FT:

"Citigroup scrambles to raise capital

By Francesco Guerrera in New York

Published: April 28 2009 19:20 | Last updated: April 29 2009 00:29

Citigroup has told US regulators it could fill the capital shortfall identified in the government’s “stress test” by selling large businesses, asking more investors to convert their preferred shares into common stock and reducing its balance sheet.

Executives are trying to persuade the government Citi does not need more capital beyond its recent plans to bolster its battered balance sheet and cut costs.

However, with days to go before the results of the tests are announced, Citi, which has been bailed out three times by the authorities, is looking for ways to avoid receiving more government help if the authorities insist on an increase in capital.

Bank of America, another lender whose test has highlighted the need for funds, is in talks with regulators over its needs and the possibility of converting the government’s preferred shares into common stock, bankers said. Analysts have estimated BofA could require up to $70bn in extra capital.

Citi executives argue that divestitures, such as the planned $5.2bn sale of Japan’s Nikko Cordial to Sumitomo Mitsui, the possible expansion of an existing conversion offer, and cost-cutting would ensure it has enough capital to withstand the crisis.

People close to the situation said Citi could sell several units in Citi Holdings, the division that holds its non-core activities. Citi executives do not rule out shedding businesses deemed as core but argue that, if the company has to raise capital, the first option is to accelerate plans to sell unwanted businesses.

Citi has also looked at adding to its planned conversion of $52bn of preferred shares held by the government and other investors by including trust-preferred shares, although that idea was losing ground last night. Some insiders argue it could be difficult to persuade holders of such shares – a hybrid of debt and equity – to exchange them for common stock because they rank as debt and pay interest.

People close to the situation said both Citi and BofA were contesting some of the conclusions made in the stress tests. Citi executives, led by finance chief Ned Kelly, are believed to have told regulators the estimates for losses on credit cards – based on rising unemployment – are too high.

Citi is also asking regulators to take into account the capital boost it will receive from the expected sale of a majority stake in its brokerage unit Smith Barney to Morgan Stanley as well as the likely disposal of Nikko.

That deal is expected to generate an accounting loss, because Citi’s acquisition price for the business is higher than the likely sale price but it would still result in a cash boost for Citi.

People close to the situation cautioned that discussions between Citi, Treasury and the Federal Reserve were fluid and details of the plans could change ahead of the release of the results of the stress tests next week.

Some Citi executives believe the government may still have to convert more of its preferred shares into common stock, ­raising its holding above the 36 per cent it is due to take following the latest bail-out in February.

Citi shares closed down 5.9 per cent. BofA shares closed down 8.6 per cent at $8.15.

BofA declined to comment. Citi said its capital base was “strong”.

Additional reporting by Greg Farrell in Charlotte

Copyright The Financial Times Limited 2009"

At least six of the 19 largest U.S. banks require additional capital, according to preliminary results of government stress tests

TO BE NOTED: From Bloomberg:

"Fed Is Said to Seek Capital for at Least Six Banks After Tests

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By Robert Schmidt and Rebecca Christie

April 29 (Bloomberg) -- At least six of the 19 largest U.S. banks require additional capital, according to preliminary results of government stress tests, people briefed on the matter said.

While some of the lenders may need extra cash injections from the government, most of the capital is likely to come from converting preferred shares to common equity, the people said. The Federal Reserve is now hearing appeals from banks, including Citigroup Inc. and Bank of America Corp., that regulators have determined need more of a cushion against losses, they added.

By pushing conversions, rather than federal assistance, the government would allow banks to shore themselves up without the political taint that has soured both Wall Street and Congress on the bailouts. The risk is that, along with diluting existing shareholders, the government action won’t seem strong enough.

“The challenge that policy makers will confront is that more will be needed and it’s not clear they have the resources currently in place or the political capability to deliver more,” said David Greenlaw, the chief financial economist at Morgan Stanley, one of the 19 banks that are being tested, in New York.

Final results of the tests are due to be released next week. The banking agencies overseeing the reviews and the Treasury are still debating how much of the information to disclose. Fed Chairman Ben S. Bernanke, Treasury Secretary Timothy Geithner and other regulators are scheduled to meet this week to discuss the tests.

Options for Capital

Geithner has said that banks can add capital by a variety of ways, including converting government-held preferred shares dating from capital injections made last year, raising private funds or getting more taxpayer cash. With regulators putting an emphasis on common equity in their stress tests, converting privately held preferred shares is another option.

Firms that receive exceptional assistance could face stiffer government controls, including the firing of executives or board members, the Treasury chief has warned.

Today, Kenneth Lewis, chief executive officer of Bank of America, faces a shareholder vote on whether he should be re- elected as the company’s chairman of the board. While Lewis has been at the helm, the bank has received $45 billion in government aid.

‘Out of Our Hands’

Scott Silvestri, a spokesman for Charlotte, North Carolina- based Bank of America, declined to comment on Lewis yesterday. Lewis said earlier this month that the firm “absolutely” doesn’t need more capital, while adding that the decision on whether to convert the U.S.’s previous investments into common equity is “now out of our hands.”

Citigroup, in a statement, said the bank’s “regulatory capital base is strong, and we have previously announced our intention to conduct an exchange offer that will significantly improve our tangible common ratios.”

Along with Bank of America and New York-based Citigroup, some regional banks are likely to need additional capital, analysts have said.

SunTrust Banks Inc., KeyCorp, and Regions Financial Corp. are the banks that are most likely to require additional capital, according to an April 24 analysis by Morgan Stanley.

By taking the less onerous path of converting preferred shares, the Treasury is husbanding the diminishing resources from the $700 billion bailout passed by Congress last October.

‘Politically Constrained’

“Does that indicate that’s what the regulators actually believe, or is it that they felt politically constrained from doing much more than that?” said Douglas Elliott, a former investment banker who is now a fellow at the Brookings Institution in Washington.

Geithner said April 21 that $109.6 billion of TARP funds remain, or $134.6 billion including expected repayments in the coming year. Lawmakers have warned repeatedly not to expect approval of any request for additional money.

Some forecasts predict much greater losses are still on the horizon for the financial system. The International Monetary Fund calculates global losses tied to bad loans and securitized assets may reach $4.1 trillion next year.

Geithner has said repeatedly that the “vast majority” of U.S. banks have more capital than regulatory guidelines indicate. The stress tests are designed to ensure that firms have enough reserves to weather a deeper economic downturn and sustain lending to consumers and businesses.

‘Thawing’ Markets

He also said there are signs of “thawing” in credit markets and some indication that confidence is beginning to return. His remarks reflected an improvement in earnings in several lenders’ results for the first quarter, and a reduction in benchmark lending rates this month.

Financial shares are poised for their first back-to-back monthly gain since September 2007. The Standard & Poor’s 500 Financials Index has climbed 18 percent this month, while still 73 percent below the high reached in May 2007.

Finance ministers and central bankers who met in Washington last weekend singled out banks’ impaired balance sheets as the biggest threat to a sustainable recovery. Geithner has crafted a plan to finance purchases of as much as $1 trillion in distressed loans and securities. Germany has proposed removing $1.1 trillion in toxic assets.

To contact the reporter on this story: Robert Schmidt in Washington at rschmidt5@bloomberg.net; Rebecca Christie in Washington at Rchristie4@bloomberg.net"

We’re certainly not going to borrow from the federal government, because we’ve learned our lesson about that

TO BE NOTED: From the NY Times:

"April 29, 2009
Feeling More Secure, Some Banks Want to Be Left Alone

By GRAHAM BOWLEY and ERIC DASH

As Washington pushes banks to mend their finances, the banks are pushing back.

Emboldened by newfound profits and eager to shake off federal control, a growing number of banks are resisting the Obama administration’s proposals for fixing the financial system. Lenders that skirted disaster only months ago with the help of taxpayer dollars are now balking at government prescriptions.

Despite pressure from federal regulators, industry executives are taking issue with major elements of the president’s bank plan. Administration officials characterize each part of their three-pronged approach as crucial to bolstering banks and restarting the economy. But bankers are increasingly eager to extricate themselves from the government’s grasp, and worry that Washington will impose new restrictions on their businesses if the government’s already considerable role in the industry grows.

“The pushback has been pretty hard,” said Frederick Cannon, the chief equity strategist of Keefe, Bruyette & Woods and a specialist in banking stocks. “If we don’t address these issues, that could have a negative effect on economic growth, which in turn makes the banks’ problems worse.”

As the Obama administration marks its first 100 days, the banks’ resistance is complicating the government’s effort to solve some of the thorniest problems of the financial crisis. Opposition is building on several fronts.

Citigroup, Bank of America and other big banks are disputing so-called stress tests being conducted by federal examiners to determine how these institutions would withstand a deep, prolonged recession. The banks contend they are in better shape than the early findings suggest, although it is likely several will need to raise capital.

A Treasury plan to purge banks of their troublesome assets — a seemingly intractable problem — has received a lukewarm response in banking circles. Several big banks have declared they have no intention of participating in the program. Another major effort, one to revive credit for everything from car loans to equipment leases, has also gotten off to a slow start.

Administration officials said Tuesday that their efforts were going according to plan. They said that more than 100 private money managers had signed up for the program to buy troubled assets. “We are not flipping a switch here,” said one official, calling for patience. “These are intricate programs.”

But the disputes over the stress tests, which have been administered to 19 big banks, and a lackluster reception to the third effort, the Term Asset-Backed Securities Loan Facility, or TALF, are also potential worries.

Large banks are being put through a battery of tests to see whether they will hold up under pressure in the worst-case economic assumptions over the next two years. Big banks like Citigroup, Bank of America, PNC Financial and Wells Fargo are disputing some of the early findings, which suggest some banks may need to raise capital, according to people briefed on the exams. Because of the protracted negotiations with the banks and regulator infighting over how much information to disclose, officials now plan to announce the results on May 5 or 6, the third time the date has been postponed.

“There is concern among the banks that the stress test has led to uncertainty, the opposite of what is intended, and they would be diluting their shareholders based on a scenario that the regulators say themselves are unlikely to happen,” said Edward L. Yingling, the head of the American Bankers Association.

According to people briefed on the situation, the disputes center on several assumptions that regulators made in administering the tests. These include the severity of losses on assets like mortgages, credit card loans and commercial real estate loans, as well as the banks’ potential to generate earnings.

In a further challenge, the banks are also pushing regulators to relax the timetable for them to obtain new capital.

Some investors are prepared to buy problem assets from banks. What is less certain is whether banks will be willing to sell. Big money managers like BlackRock and Bank of New York Mellon said they had applied to raise money for the troubled-asset funds. While administration officials say they never expected every bank to participate, large banks whose involvement was regarded as vital to the plan’s success have said they will not be involved. Executives worry that whatever assurances the White House gives them, an angry Congress might impose new rules on banks that participate, particularly on pay.

Officials from Citigroup, Morgan Stanley, PNC Financial and a number of other big lenders that have received multibillion-dollar government bailouts are reluctant to participate or have refused so far to commit until more details are offered. Jamie Dimon, JPMorgan Chase’s chief executive, has said he believes that the Public-Private Investment Program — which depends on loans from the Federal Deposit Insurance Corporation — could be “good for the system” but that his bank has no intention of being either a seller or buyer. “We’re certainly not going to borrow from the federal government, because we’ve learned our lesson about that,” he said earlier this month in a conference about earnings.

Many banks are reluctant to sell their nonperforming loans because they could suffer big losses, forcing them to raise more capital. Others want to avoid the stigma of latching on to another federal program.

“Never mind the price,” James E. Rohr, PNC’s chief, said in a recent interview. “I wouldn’t want to be the first person and be perceived as a weak bank.”

D. Bryan Jordan, the chief executive of First Horizon, a big lender based in Tennessee, said the likelihood that his bank would participate was somewhat low. “We think we can get a lot more value out of them by working them out ourselves,” he said earlier this month in a conference call about first-quarter results.

Art Murton, an official at the F.D.I.C. who is helping to devise the troubled-loan program, said there had been “encouraging” levels of interest. To test the investor waters, the F.D.I.C. is planning a pilot auction in June.

The TALF program has also struck some as underwhelming. It was to ignite the market for securities backed by consumer and small-business loans, which dried up last year.

Policy makers said they planned to lend up to $1 trillion under the program. But investors took only $4.7 billion in loans in the first installment in March, and a further $1.7 billion in April, according to the Federal Reserve Bank of New York. Administration officials said, however, that the plan was restarting lending and would grow in coming months.

Citigroup, meanwhile, has been in discussions with the Treasury over overhauling its compensation system for traders and other employees, a person close to the talks said, as the bank awaits the government’s new compensation rules. Among the ideas discussed have been issuing warrants, permitting employees to buy stock rights at steep discounts and exempting traders from the new rules.

Louise Story contributed reporting."

further losses to debt holders of US banks will result in a boycott of US Treasury auctions

TO BE NOTED: From Via Naked Capitalism:

"Can Citigroup Be Restructured Without an FDIC Resolution?
April 17, 2009

text-to-speech MP3 audio version.

"In the modern world, science and society often interact in a perverse way. We live in a technological society, and technology causes political problems. The politicians and the public expect science to provide answers to the problems. Scientific experts are paid and encouraged to provide answers. The public does not have much use for a scientist who says, "Sorry, but we don't know". The public prefers to listen to scientists who give confident answers to questions and make confident predictions of what will happen as a result of human activities. So it happens that the experts who talk publicly about politically contentious questions tend to speak more clearly than they think. They make confident predictions about the future, and end up believing their own predictions. Their predictions become dogmas which they do not question. The public is led to believe that the fashionable scientific dogmas are true, and it may sometimes happen that they are wrong. That is why heretics who question the dogmas are needed." "The Need for Heretics"
Freeman Dyson

(Updated 4/20/09 to reflect FDIC response.)

First a final clarification about the Q4 2008 data from the FDIC. A reader of The IRA who is part of the regulatory community sends this comment regarding our last missive and our CNBC appearance on Tuesday with Dick Bove and Larry Kudlow. Says the reader: "Lots of Kool-Aid drinking going on out there with the financials. Your comment on the FDIC numbers is accurate, but does not go far enough. In the fourth quarter, WaMu's contribution to JPMorgan Chase (NYSE:JPM) should be fully reflected since WaMu got absorbed during the third quarter. In the fourth quarter, NatCity and Wachovia's income, expenses and charge-offs were reset to zero on the last day of the quarter, when they changed ownership as per pushdown accounting. So NatCity and Wachovia reported one day of income and expense results in their December 31 reports. Full year earnings numbers contained 95 days of WaMu (within JPM totals) and one day each of NatCity and Wachovia. All periods contained balance sheet amounts for WaMu, NatCity, and Wachovia. Those balance sheet amounts would have been affected by pushdown accounting, and in each case, since they changed control late in the quarter, we have no way of knowing how many non-performing loans they charged-off during the quarter in which they changed ownership. But these units all either filed their own Call/TFRs each quarter, or they were consolidated in the Call report of the institution that they were merged into. What is missing is the operating loss from WaMu during July, August & most of September; and operating losses from Wachovia and NatCity during most of Q4. In addition, the write-downs from purchase accounting did not get reflected in charge-offs, thus the US banking industry earnings and charge-offs for 2008 were way worse and will never be reflected in historical stats." So based on this input, if we consider the absence of data from WaMu, Wachovia and NatCity from the 2008 FDIC industry data, our guess is that instead of the profit of $10 billion in reported, the US banking industry in fact experienced a loss of at least that amount. Based on the anecdotal reports we have heard about Wachovia charge-offs, for example, the loss for the US banking industry in 2008 could be more than $25 billion. The only way we will ever know the truth is if the FDIC corrects the public record, again. We are going to be following up with a formal letter to the Board of the FDIC asking that they correct or at least footnote the incomplete information in the 2008 data for the US banking industry. If we can obtain the information above, informally, from FDIC officials, why is this data not part of the public record? In this way, investors, researchers and regulators will at least know what the true loss rate was for the US banking industry in 2008. Update: FDIC officials tell The IRA that their hands are essentially tied. First, the FDIC can only include in the record the data filed by institutions, so if the data is not actually in the call report, then the FDIC officials cannot report it. This "survivorship bias" has been in the data for some time, say FDIC officials, who add that this has always been the case but was made more pronounced by the adoption of purchase accounting in the mid-1990s. Finally, the FDIC notes that it did disclose that the industry would have been in loss but for the effects of purchase accounting, thus they feel that the public record is complete. Second, for users of the professional version of the IRA Bank Monitor, we have activated our beta test version of a new pro-forma tool to support bank M&A analytics. By specifying the RSSD IDs of two bank holding companies, the Bank Monitor will combine the balance sheets and income statements of the two entities into a pro-forma profile. Please contact us for additional information. Now on to the Zombie dance party, which is already in progress. Over the past several months we have been asserting that Citigroup (NYSE:C) is insolvent and needs to be either restructured or liquidated. Now that the Obama Administration has apparently decided to publicly list the results of the bank stress tests and since C is expected to be near the bottom of the list in terms of stress test results, the question comes whether the Obama Administration will move on resolving C before the May 4, 2009 released of the stress test results. We won't even refer to the Q1 results for C released this morning because, in our view, they really do not show the true condition of the bank nor the ultimate outcome that we expect to see with this institution. As of year-end 2008, C rated an "F" in the IRA Bank Monitor with a overall Stress Index score of 21 vs. the industry average of 1.8. As of the same date, JPM's Stress Index Score was 1.3. Unfortunately, it is becoming increasingly clear that the Obama Administration lacks the courage to resolve C. Economic policy guru Larry Summers reportedly bought the "systemic risk" argument hook, line and sinker, but the fact remains that with relatively healthy banks like JPM pricing debt at +350 to the curve, the real issue facing financials is not simply capital adequacy as the stress tests suppose, but rather the broader issue of credibility as going concerns. Even were JPM or Goldman Sachs (NYSE:GS) to actually redeem the preferred capital provided by the Treasury TARP program, none of these banks could survive today without government guarantees for their debt. One of the reasons that the Obama Administration provides for not taking action on C and other insolvent money center banks is that regulators lack the legal authority to act against a bank holding company (BHC) vs. the federally insured subsidiary banks. But this is not true. Federal regulators do have the power to compel management and board changes within BHCs. And they have two very powerful threats to use against officers and directors who do not take the "suggestion." First, the Fed and other regulators have the power to issue judicial orders and, more important, to commence enforcement actions against the officers and directors of a BHC. If you have never been the target of an enforcement litigation under Section 12 of the US Code, suffice to say that this makes civil litigation look tame. There is a rebuttable presumption of guilt and very serious civil penalties, including being barred for life as an office and director of a US financial institution. And by the way, the judges generally defer to the regulators. We cannot imagine an officer or director of C failing to resign if given the choice between a clean exit and several years of litigation with the OCC and Fed in front of an administrative law judge in Washington. And just for added weight, we can have President Obama make the call. Second and more important, the regulators have the ultimate threat of resolution, meaning the FDIC takes control of the subsidiary banks, bankruptcy for the parent holding company, years of civil litigation for the officers and directors, and also a possible enforcement action. Remember that when the FDIC takes over a bank and suffers a loss to the Deposit Insurance Fund, it files a claim against the bankruptcy estate of the parent BHC and can, if fraud or management malfeasance is suspected, begin an enforcement action against the officers and directors. With that background, it needs to said that the only thing standing between America and a solution to zombie banks is a lack of guts in Washington. We expect C to come it at or near the bottom of the 19 stress zombies next month. It also needs to be said that if there are not at least a few banks that "fail" the stress tests, then the process will be entirely incredible. Given this reality, how would we suggest dealing with C in such a way that minimizes the impact on the markets and the customers of C's subsidiary banks (remember C itself is a non-operating shell holding company)? We believe there is path other than FDIC resolution for the subsidiary banks and liquidation for C that may allow the company to address the issues of capital adequacy without C's bondholders taking a total loss and without the disruption to the markets that a traditional FDIC resolutions implies. Here in general terms is how we would address the issue: First, federal regulators need to impose immediate board and management changes at C. The new officers and directors should be selected based upon their willingness to take whatever steps are necessary to address the issue of capital adequacy of C's subsidiary banks, including the sale, restructuring and even liquidation of C in its entirety. This condition regarding the makeup of the new officers and directors is crucial to the success of what will be a voluntary restructuring process. Second, once a new management team and board are in place, then C must next formally contact the bond holders of C and invite them to form a creditors committee and enter into a negotiation to convert a significant portion of their debt into common equity. C has approximately $500 billion in long-term debt and another $400 billion in short-term debt. If roughly half of this $900 billion in debt was converted to common equity, then C's capital problems would be resolved without the need for an FDIC seizure of the group's banks, the need for further government assistance would be at an end, and more important, the bond holders would have a significantly higher probability of a recovery than in a traditional FDIC resolution. Indeed, part of the new capital proceeds from the conversion by bond holders could repay the C TARP investment in its entirety and without the need to go to the equity markets. Third and assuming that agreement could be reached with the bond holders, then C would approach regulators and formally request their support for a voluntary Chapter 11 filing by C, essentially a prepack restructuring under the FDIC's open bank assistance where the dominant creditors, namely the C bondholders, would support a petition by C management. The FDIC would also enter the bankruptcy as a creditor and assure the Bankruptcy Court that the FDIC was supporting the process and, most important, would not seize C's bank subsidiaries. The Fed and OCC would likewise support the process via official statements to the Bankruptcy Court. The prepack agreement between C management, the creditor committee and the FDIC would make the restructuring process fast, perhaps ending in less than a year if adverse litigation in bankruptcy is avoided. Suffice to say that with the bond holders, management and the FDIC all supporting the petition, it will be very difficult for other creditors to prevail - especially if the alternative is an FDIC resolution and a near-total loss for bond holders. To speed the decision process by bond holders, the FDIC could simply state that without full and unconditional agreement from all creditors, C will be resolved and the FDIC will commence an adverse litigation in bankrupty to recover all losses to the DIF, meaning a total loss to bond holders. Now you are probably wondering whether it is even possible for a BHC to file bankruptcy without immediately losing the control of the FDIC-insured banks. The answer is yes and the partial example is called MCorp, a Texas BHC that was forced into bankruptcy by creditors in 1989. Click here to read the FDIC study on MCorp, which was part of the Texas oil patch collapse and one of the most costly resolutions in FDIC history. But the cost to the FDIC of partially resolving the bank subs of MCorp pales in comparison to the current government assistance to C and other zombie banks. The MCorp case was complex and very contentious. The issues involved are very different from those facing C and other troubled money center banks, but the fact remains that while the OCC declared the subsidiary banks of MCorp insolvent, after cross litigation, MCorp was able to retain five bank subsidiaries with $3.2 billion in assets. These banks operated in bankruptcy while the parent was reorganized. Indeed, as the FDIC study notes, the success of MCorp in defeating seizure of the five subsidiary banks by the FDIC "led to the section of FIRREA that added provisions related to cross guarantees. The cross guarantee provision would be used most notably in the Bank of New England resolution." In the case of MCorp, had the cross-guarantee provisions that exist today been in effect, then the FDIC would have seized all of the MCorp banks and used those assets to reduce the loss to the Deposit Insurance Fund, as required by law. But with the case of C, the situation is the opposite, namely that by leaving C operating, albeit in bankruptcy and operating under "open bank" support, the FDIC, OCC and Fed can arguably make a case that this is the "least cost resolution" and also avoids systemic risk issues. Assuming that C's new management team and board is able to win the support of a) bond holders and b) regulators, then the way would be open to file a voluntary Chapter 11 petition and restructure C into a new format that aligns the interest of shareholders, the US government and the counterparties and customers of C's bank units. Specifically, once in bankruptcy, C should be restructured into a unitary national bank, with all of the subsidiaries of the group moved to beneath the lead bank, in this case Citibank NA. One of the evil side effects of the BHC structure that has been illustrated by the failures of WaMu and Lehman Brothers is the reality that the customers and counterparties of the bank subsidiary are actually senior to the debt holders of the parent BHC. This tension has caused a great deal of delay and confusion in moving forward with a solution to the solvency problems facing the large zombie banks. Foreign bond holders, like the government of China, have reportedly told the Obama Administration that further losses to debt holders of US banks will result in a boycott of US Treasury auctions. Not only would the unitary structure eliminate any conflict between creditors and customers, but it would also leave the Citibank NA unit as the top-tier, publicly listed company and the issuer of all of the remaining debt and equity. The restructured Citibank would have tangible common equity above 30% and half the debt it now supports. The BHC's interest expenses would fall dramatically and the excess capital would allow C management to quickly deal with all problem assets, sell operations and emerge from bankruptcy with a profitable, well capitalized bank. This outline does not address a number of technical issues related to the bankruptcy of a large BHC, but when you consider the alternatives - including the current approach of doing nothing being pushed on President Obama by Larry Summers, perhaps it is time to start thinking outside of the proverbial box. The US has already wasted months via inaction and political posturing. But if you understand that banks like C may very well be forced into a resolution before the end of 2009, perhaps it is time to start considering some creative alternatives before we are compelled, finally, to take effective action to start eliminating some zombies.

Questions? Comments? info@institutionalriskanalytics.com"

senior officials at the Federal Deposit Insurance Corporation privately discussed who might replace Mr Pandit if the bank needed more government aid

TO BE NOTED: From the FT:

"Fresh questions on Pandit’s future at Citi

By Francesco Guerrera and Joanna Chung in New York

Published: April 20 2009 23:38 | Last updated: April 20 2009 23:45

Vikram Pandit, Citigroup’s chief executive, will on Tuesday strive to convince investors that the company is on the road to recovery amid fresh questions over his future at the financial group.

Ahead of Citi’s annual investor meeting, it has emerged that senior officials at the Federal Deposit Insurance Corporation privately discussed who might replace Mr Pandit if the bank needed more government aid.

“It is unthinkable that Vikram could stay on if Citi requires more federal funds,” said a person familiar with the matter. “It is prudent to be thinking about different scenarios.”

The FDIC is only one of the regulators which has a say on whether Mr Pandit steps down if the government bails out Citi for the fourth time in six months following completion of the “stress test” of its health.

Any decision on Citi’s leadership will be led by the Treasury, which is about to take a 36 per cent stake in the company and will sanction further capital injections.

The Federal Reserve and the Office of the Comptroller of the Currency, which regulate national banks, will also have to bless top management changes.

People close to the situation said FDIC officials had discussed successors to Mr Pandit, who became chief executive in December 2007.

They include Ned Kelly, chief financial officer, Gary Crittenden, his predecessor and chairman of the division containing Citi’s non-core assets, and one of Citi’s new board members.

The new directors are Jerry Grundhofer, former chief executive of US Bancorp ; Michael O’Neill, former head of the Bank of Hawaii; Anthony Santomero, former head of the Philadelphia Federal Reserve; and William Thompson, former co-head of bond group Pacific Investment Management Co .

The FDIC and the other agencies declined to comment.

In a statement, Citi said: “Our recent quarterly results reveal the underlying strength of the franchise and Mr Pandit’s strategy at work to restore Citi to profitability.”

Citi shares have lost nearly 90 per cent of their value in the past year, following more than $50bn in writedowns and losses.

After closing at $1.02 in March, the stocks rallied, touching $4 last week. However, since Citi announced results on Friday, the shares have fallen 19 per cent, closing at $2.94 in New York.

Additional reporting by Julie MacIntosh in New York"