Citi Bows to Pressure and Doubles Down

Company Research, News, Newsletter

Citigroup (C) today relented to fierce political pressure and will increase its lending by $36.5 billion over the next few months, with the bulk of those loans going towards mortgages.  Citi and other banks have been widely criticized for significantly decreasing their outstanding loans since receiving TARP funds late last year.  Citi in particular has taken a beating in the media regarding its use of bail out funds.  Late last month, the company was excoriated in the media regarding the impending delivery of a new $50 million Falcon jet.  More recently, Citi came under fire after details emerged of a consulting contract with its former chairman and CEO Sandy Weill which entitled him to utilize Citi jets for personal use.  Both of these issues gave an untimely black eye to the beleaguered company, which resolved them by canceling delivery of the jet and getting Mr. Weill to renounce his access to the planes.

Count us in the crowd of those wondering when Citi and other banks would begin lending the TARP funds that were originally intended to lubricated the credit markets (Recurring TARP Nightmare).  Citi very publicly released its plans for some of the TARP funds, as it is belatedly learning to play the public relations game in this period of intense scrutiny.  Never mind the fact that the $36.5 billion is less than the less-publicized $75 billion in new loans that the company extended in the fourth quarter.  Now, it appears that Citi is bending over backwards to try to appease both Washington and the taxpayers in order to reassure them that Citi will be a good steward of the TARP funding.  This is probably necessary, particularly at a time when executive compensation and virtually every expenditure on Wall Street is under scrutiny.

All of this highlights the fact that TARP funding, while necessary, comes with a lot of strings attached.  Earlier today, Tom Sullivan of Fox Business perhaps put it best when he said (paraphrased), Citi now has a 535 member board of directors that are micro-managing its management.  Congress should sit back and say here’s our goal, Citigroup; meet it, but we’re not going to tell you how to get there.  However, as the last couple of weeks have shown, Citi management is not fully in control of the company’s fate.  Instead public opinion and possible backroom, government negotiations are determining what is in the best interests of the company.  Even today, Citi is reportedly trying to back out of its agreement with the New York Mets for naming rights to their stadium.  This was thought to be a done deal and Citi’s signage is already up throughout the brand new stadium.  Today, Citi’s CEO Vikram Pandit had this to say:

“TARP capital will not be used for compensation and bonuses, dividend payments, lobbying or government relations activities, or any activities related to market, advertising and corporate sponsorship.”

This is a dicey pledge as TARP funds are all part of one pot of money in Citi’s coffers; even if the company does lend appropriately there may be complaints about every other management decision that isn’t to Washington’s liking.  The government has paid some $45 billion to Citi via TARP and now politicians feel empowered to steer Citi in whatever direction they deem does the greatest public good.

To be fair, we would like to see Citi lend more freely as the government has back-stopped more than $300 billion worth of its toxic assets to date.  Citi’s balance sheet shows far less risk because of the government’s bailouts; however, how the bank’s management opts to run the company should be up to Citi and should not be the concern of power-hungry politicians.  When each spending decision faces laborious scrutiny, management is likely to become paralyzed, which is not the best situation for either Citi or the government’s TARP investment.

Ockham Research Staff @ February 3, 2009

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