Wednesday, February 25, 2009
Zombies Must Die
The government taking over a bank presents plenty of problems. Among the challenges, Federal Reserve Chairman Ben Bernanke said this week, is “that you tend to lose the franchise value, that the counterparties and others don’t want to deal with you because they don’t know your future.”
—The Wall Street Journal, February 20, 2009 [emphasis added]
Those are the words of the current Fed Chairman, and we are not making them up.
According to Mr. Bernanke, Citigroup—CitiSmorgasbord, as we like to call it—has a “franchise value” that might be “lost” if the U.S. Government took over what Wall Street has marked down to a per-share price of less than the loose change in your pocket.
In fact, at yesterday’s close of slightly north of $2.50 a share, you could give up your morning Starbucks latte and instead buy a share of Citigroup stock, with enough change left over to buy a share of Fannie Mae, if you really wanted to speculate.
How’s that for “franchise value”?
Now, we here at NotMakingThisUp don’t take Citigroup, or its franchise, lightly. Our business happens have an account ensconced within the computerized bowels of that firm. So we’d like very much to see the place survive.
Still, we have our doubts.
Created Frankenstein-like by Former Master of the Universe Sandy Weill, who extracted about a billion dollars from the place before sailing off into the sunset just a few short years ago, CitiSmorgasbord is in its current form little more than a zombie bank—the kind of lifeless, destructive financial force U.S. wonks used to make fun of when they roamed Japan years ago.
(We don’t bring up Mr. Weill’s name lightly. Indeed, we find the furor kicked up over the $400 million “CitiField” fiasco supremely ironic, given that Weill himself has been slapping his name on buildings at places like Cornell University, thanks to the far-more-than $400 million dollars the same firm paid him during its heyday, before the era he helped perpetuate came to grief.)
While Citigroup indeed has a franchise, and maybe several, we have no confidence that the “franchise value” of Weill’s Balkanized Empire—net of all liabilities, seen and unseen—is much more than the current market price.
In fact, we worry it may be much less. A quick look at the months-old balance sheet tells us that at September 30, 2008, Citigroup had nearly a trillion in debt, with shareholder’s equity of $126 billion.
Berkshire Hathaway, meanwhile, had almost exactly the same shareholder’s equity, at $120 billion, but only a twentieth of the debt: $47 billion, to be exact.
Which financial services firm would you rather do business with?
Given that we cannot bank with Berkshire Hathaway, however, we here at NotMakingThisUp have in fact made sure our deposits at CitiSmorgasbord are below the FDIC-guaranteed threshold—just in case.
And that’s the guts of the problem, that “just in case.” Because everybody from bond traders to hedge funds to plain old checking account holders are wondering about “just in case,” and acting accordingly.
In light of that persistent drain of both goodwill and cash, will Citigroup’s so-called “franchise value” prove any more enduring than the “franchise value” of Washington Mutual, or Wachovia, or Lehman Brothers proved to be?
Still, while we have no rooting interest in the stock itself, nor in any other ailing institution whose main business was lending money with abandon, paying whopping bonuses to the men and women who lent the money, then writing off the loans, firing the men and women who lent the money, and asking the government for help, we do have an interest in seeing the American economy stop bleeding.
And it seems to us the best, simplest and most direct way to do this is to do exactly what the new Administration has said it does not want to do: nationalize the zombie banks.
The notion that Citigroup and any other zombie bank could be less badly run under a Government shareholder than they have been under ownership by the Fidelitys and Vanguards of the world, is hard to fathom. Bernanke’s concern that the “franchise value” of the Balkan Empire that is CitiSmorgasbord would somehow be lost seems to us the figment of a fevered imagination clouded by too many white papers.
So why not get it over with already? Wipe out the shareholders whose job it was to hire managers to run the business effectively, and preserve for the taxpayers whatever potential upside might come as owner, rather than merely absorbing all the downside as lender-of-last-resort.
Knowing the U.S. Government backing is not only implied but tangible, depositors would feel better about their deposits and creditors would feel better about their credits.
And Bernanke’s argument that “the counterparties and others don’t want to deal with you because they don’t know your future,” would evaporate, because right now those counterparties don’t have a clue what Citigroup’s future is.
Nationalized, they would know that the floor was in, and credit default swaps would drop from the 460 level to whatever the U.S. default swap is running these days. Markets could focus on rebuilding—not on speculating about what-more-bad-news-might-happen-tomorrow.
The only “franchise value” worth protecting here is not that of CitiSmorgasbord or any of the other zombie banks roaming Wall Street: it is the franchise value of the United States of America. And the best way to stabilize the patient is to stop the hemorrhaging, and get the blood flowing to the rest of the body. And to do that, the zombies must die.
I Am Not Making This Up
© 2008 NotMakingThisUp, LLC
The content contained in this blog represents the opinions of Mr. Matthews.
Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way: such inquiries will not be responded to. This content is intended solely for the entertainment of the reader, and the author.
Posted by Jeff Matthews at 8:53 AM