As featured in The Wall Street Journal, Money Magazine, and more!

Search: citigroup

The Next Credit Crunch

This article was written by in Economy. 1 comment.


There are signs that the economy might be in more trouble in the near future. One of the symptoms of the recession was the credit crunch. Banks and other lending institutions tightened up their previously loose standards for extending credit, and in order to prop up their own organizations financially, banks held on to the cheap money afforded to them by the government rather than extending loans to small businesses needing the cash flow to expand or operate, extending the recession.

A number of policies were designed to help small businesses when practically-free loans from the government weren’t enough to encourage banks to do anything but prop up their balance sheets. The FDIC instituted a policy where they would insure noninterest-bearing accounts without a limit. This is different than the insurance consumers receive on up to $250,000 on savings and checking accounts. The extended FDIC coverage allows businesses to keep their operating accounts — which are mostly used for paying employees with direct deposit — at smaller banks, seen as being at risk for failing moreso than large, “too-big-to-fail” banks.

Captain Credit CrunchThis FDIC benefit is scheduled to end before January 1, 2013. The expected reaction is for small businesses to take their operating funds out of community banks and return to larger banks, where size is assumed to correlate to strength. Small banks, which have recently begun extending more credit to local businesses, will no longer have the funds to continue this practice.

There is a chance that the FDIC program will continue, but that requires dependency on politicians being interested in changing the direction it gave the FDIC and being willing to continue the expense, whether from government (public) sources or from fees received from FDIC member institutions.

At the same time the potential shift from community banks to large, national banks hangs over the head of those who are concerned about the possibility of another credit crunch, big banks have already reined in their lending. In the first quarter of 2012, credit card and bank lending has dropped.

JPMorgan Chase, Wells Fargo, Bank of America and Citigroup cut their lending by a collective $24 billion in the first three months of the year. That was a change from last year when lending rose $34 billion at the nation’s four biggest banks in all of 2012.

Plan for the next credit crunch now

The individuals hurt the hardest during a credit crunch are people barely living paycheck to paycheck, relying on credit cards to meet their financial obligations, but by far the worst of the credit crunch is felt by small business owners who rely on bank credit, particularly during times of recession, to stay in business.

Families with the most exposure in a credit crunch can prepare by growing and nurturing an emergency fund. I’ve been promoting emergency funds during the best and worst economic times, and those who use the good times to shore up resources to survive the hard times make it through. It’s an economic policy as old as the Bible. Small business owners should take the same approach.

With a credit crunch, interest rates will continue to remain low, encouraging a money to flow as freely as possible. Those who qualify for borrowing with the stricter criteria in a credit crunch can take advantage of the opportunity to borrow money at low rates and invest in hard assets with a physical presence. Real estate and art come to mind.

Photo: mary_thompson
CNN, Fortune

{ 1 comment }

Three Banks and One Insurer Fail Fed’s Stress Test

This article was written by in Economy. 7 comments.

After the recession, the Federal Reserve developed a stress test for banks and financial firms too big too fail. The stress test looks at the financial condition of these corporations and simulates a new recession. Under the simulation, based on a worst-case scenario, not an actual economic forecast, banks pass the test if the companies have sufficient capital to continue lending; if not, they fail.

Here’s the doomsday recession scenario or assumptions applied to the banks’ financial condition:

  • An unemployment rate of 13 percent.
  • A 50 percent drop in the stock market.
  • A 21 percent drop in the real estate market.

Citi Checking Account Piggy BankThis scenario, which isn’t a prediction for the future, is non far-fetched. The recession in 2008 produced similar or worse results in the stock market and housing prices.

Overall, the banks fared better with this year’s test than with last year’s same analysis. The improvement is due to increased capital at the corporations. The companies lowered dividends to keep more money on hand for emergencies.

While fifteen of the nineteen banks were found to have sufficient capital to withstand the recession without assistance, four bank holding companies or financial institutions in the test failed to meet the capital requirements: Ally Financial, Citigroup, SunTrust, and MetLife.

Officials from the banks quickly responded to the Federal Reserve’s results.

Citigroup said it remains among the best capitalized large banks in the world. However, it said it would not be able to raise its dividend as it hoped, and would submit a revised capital plan to the Fed. Ally said it supported the idea of stress tests, but it disagreed with a number of the assumptions the Fed made, including overstating the bank’s potential mortgage losses. SunTrust could not be reached for comment. Metlife said it was unfair to apply the same tests to insurers as it did to banks.

These companies’ failures isn’t too concerning for customers. Customers shouldn’t be worried that their savings accounts aren’t safe or their insurance policies are in danger. No one has ever lost money in an FDIC-insured bank account. If these corporations don’t improve their financial situation by raising more capital or paying less to shareholders, a recession might result in more government intervention in the companies’ continued operation. The lack of sufficient capital in these financial institutions might lead to another bail-out scenario.

While not concerning from a personal perspective, there is reason to be somewhat concerned with the Federal Reserve’s findings. Financial institutions haven’t adequately planned for systemic risk. When banks fail or need a government bail-out, capital infusion, or partial nationalization, all taxpayers are affected. Shareholders need to be concerned. Will the recent bail-outs still fresh in people’s minds, the public and policymakers have likely lost its appetite for using taxpayer money for assisting banks that are “too big to fail,” and might rather see a firm like Citi go bankrupt rather than submit to a government takeover.

ᔥ Federal Reserve
↬ Fortune

{ 7 comments }

Judge Rejects Citigroup Lawsuit Settlement

This article was written by in Investing. 3 comments.

The Securities and Exchange Commission, an organization designed to regulate and oversee the financial industry, is charged with acting in investors’ best interests. Most of the time, however, the SEC works on behalf of the large financial companies under its purview. As a result, when consumers demand that companies be held accountable for misleading investors or playing a role in a systemic collapse of the economy, the regulators tend to look the other way. Some companies get by with a slap on the wrist, settling lawsuits with a paltry penalty.

That appeared to be the case recently when Citigroup and the SEC came to an agreement whereby the company would pay $285 million, or 7.56% of that quarter’s profit, to settle a lawsuit that charged that the company did not properly disclose the risk when selling collateralized debt obligations (CDOs) and bet against the same investments the company sold to investors. The benefits of a settlement like this would be that Citi could pay the small fine from its cash reserves without admitting wrongdoing, promise they’ll never break the rules again, and continue to operate business as usual.

Judge Jed S. Rakoff of the Federal District Court in Manhattan was not pleased with the resolution or collusion between Citi and the SEC. The judge rejected the settlement because it was not fair, reasonable, adequate, or in the best interest of the public. He demanded the company and the regulator to shed light on the facts of the case, something this settlement might have avoided, protecting the company from any real criticism. A settlement would mean that affected investors could not sue Citi, but if the SEC were to successfully win a case against Citigroup, proving the company was in the wrong, that decision could be used by harmed investors who sue the bank. At the core of the matter is whether a company should be allowed to avoid admitting guilt.

The trial will begin in July 2012.

DealBook

{ 3 comments }

Citi Settles Lawsuit for $285 Million

This article was written by in Investing. 2 comments.

Without admitting any wrongdoing, Citigroup has settled a major lawsuit. The Securities and Exchange Commission claimed that Citi misled investors, and to settle the claims, the financial behemoth was ordered to pay $285 million to customers.

The issue focuses on collateralized debt obligations (CDOs) in 2007. The bank packaged subprime mortgages, loans with a good chance of defaulting particularly as the real estate market was not in a good position, into investments for sophisticated clients. According to the SEC, Citi didn’t disclose the real risk in these investments, so by selling the mortgages, Citi shifted the risk of default away from the company.

Furthermore, to appear unbiased, Citi claimed to investors that a third party selected the loans packaged into the CDO, but the bank did have a role in this selection, making it possible for the selection to be limited to loans most likely to default. While Citi earned $160 million in trading fees, the investors lost several hundred million dollars by November 2007. The biggest investor in Citi’s CDO has declared bankruptcy.

The investors affected most by Citi’s misleading claims are not individual investors or even most institutional investors. Individuals wouldn’t have had access to these investments at the bank. The $285 million in this settlement won’t be distributed to everyday Citibank customers, so unlike the Bank of America overdraft fee lawsuit, customers should not be looking for refunds from the bank. The Citi settlement funds will be distributed to the sophisticated companies who lost money investing funds through the bank’s Citigroup Global Markets division.

In the third quarter of 2011, Citi has reported a profit of $3.77 billion, at least on paper, helped in part by an accounting trick that allowed the bank to change the value of its debt. The financial industry took a hit with the recession, received government assistance, and is now profiting significantly while other sectors in the economy are still recovering. This settlement reflects 7.56% of this quarterly profit, which might seem significant, but is a slap on the wrist for the bank as Citi can easily handle this payment and has likely set aside funds for this outcome.

Washington Post, Wall Street Journal

{ 2 comments }

Bank of America Settles Overdraft Fee Lawsuit

by Flexo
Bank of America Lawsuit

If you qualify for the Bank of America overdraft lawsuit settlement, you may have already received a postcard in the mail from the bank. Here is information on the overdraft lawsuit, only one of many class action lawsuits against Bank of America. If you recently received a check from Bank of America for about $98, ... Continue reading this article…

1,037 comments Read the full article →

Citigroup Accused in Death of Customer

by Flexo

Three months ago, a healthy 49-year-old business man walked into a Citibank office in Jakarta, Indonesia to discuss the matter of a $5,500 debt on his Citi Platinum credit card. The events that followed are unclear, but four hours later, the man left Citi offices in a wheelchair. Citi cars drove him to a nearby ... Continue reading this article…

8 comments Read the full article →

Updated: Hackers Steal Credit Card Numbers From 360,000 Citi Customers

by Flexo

The latest big business security breach affected Citigroup and about 1 percent of the company’s credit card customers. Hackers were able to access the customer database, finding customers’ names, credit card numbers, and email addresses free for the taking. The hackers were not able to gain access to other personal information, like Social Security numbers, card ... Continue reading this article…

14 comments Read the full article →

Federal Reserve’s Secret Bailout Helped Banks Profit During Crisis

by Flexo
1422847855_a0b53f1582_b[1]

While the Federal Reserve was publicly providing money to member banks at interest rates of up to 0.5 percent during the financial meltdown of 2008, a different, less public program bailed out Credit Suisse, Goldman Sachs, and Royal Bank of Scotland with short-term loans with an interest rate of only 0.01 percent. Those banks received the bulk ... Continue reading this article…

10 comments Read the full article →
Page 1 of 512345