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CNN New York
Earnings season heats up this week with Citigroup powering past analyst expectations for the first quarter. The major banking firm reported net earnings of $4.4 billion, the highest income its reported since second quarter 2007. The results for the bank, one of the hardest hit institutions in the financial crisis, suggest that the firm may finally be recovering.
The latest numbers from Citi and other top banks, including Bank of America and JPMorgan Chase, have far beat industry analyst expectations, due in large part to strong performances from their trading divisions. Several other key banks are due to report this week, including Goldman Sachs on Tuesday.
Investors have their eye on Goldman Sachs, but not just for its earnings report due out tomorrow morning. Two members of Congress called for an investigation into the bank’s role in the mortgage market collapse on Sunday. The Securities and Exchange Commission accused Goldman Sachs of fraud related to the sub-prime mortgage collapse in a civil lawsuit on Friday. The news sent stocks tumbling. Shares of Goldman Sachs plunged nearly 13 percent. JPMorgan Chase and Bank of America both lost about 5 percent. And more backlash from Europe. Britain’s Prime Minister, Gordon Brown, accused the investment bank of “moral bankruptcy”, echoing calls for an investigation. Germany also said it was considering legal action against the bank.
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Too big to fail, it appears, may be too big to solve.
Connecticut Senator Christopher Dodd's recently proposed financial reform bill creates a team of regulators with the authority to shut down troubled institutions. It calls for capital and liquidity requirements. It requires banks to fund a $50 billion bailout fund, as well as draft so-called living wills — detailed plans drawn up in advance of how the firms should be shut down if they run into trouble.
Yet, policy experts and economists from both ends of the political spectrum say the bill does little to end the problem of banks becoming so big that the government is forced to bail them out when they stumble. Some say the proposed financial reform may even make the problem worse.
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Andrew Ross Sorkin
New York Times
On Thursday, two of the biggest — and among the most tarnished — names on Wall Street will testify in front of the Financial Crisis Inquiry Commission in Washington: Charles O. Prince III, the former chairman and chief executive of Citigroup, and Robert E. Rubin, a former top adviser and director of the bank. On the watch of these men, Citigroup lost more money than almost any company in history, requiring an extraordinary government bailout.
There are, of course, many important questions for the commissioners to ask these men about how and why the bank filled its balance sheet with so many bad subprime loans, taking on enough risk to nearly topple the system.
But there is one small question, not so obvious, that has been crying out for an answer for years, and it has nothing to do with exoticisms like C.D.O.’s or C.D.S.’s. Instead, this question is about incentives and compensation on Wall Street and a mind-set — a group-think really — that pervaded not just Citigroup but the entire industry.
CNN Financial News Producer
Citigroup surprised Wall Street today by delivering its first profit in more that a year… well, sort of anyway. The company reported net income of $1.6 billion during the first quarter, up from a loss of $5.1 billion a year ago.
But here’s where it gets confusing: after you factor out an accounting change and factor in dividend payments made to the government on preferred stock related to the banking bailout, Citigroup actually posted a loss of $966 million.
Since the credit markets began to unravel in late 2007, the company has posted net losses of nearly $30 billion. That led the government to take a $45 billion stake in Citigroup in the form of preferred shares and warrants to help stabilize the bank.
Program Note: For more on the economy and the banking crisis watch Ali Velshi tonight on AC360° at 10 p.m. ET.
Chief Business Correspondent
Citi is something like 20 percent of US bank assets. By contrast, back in the Savings & Loan crisis, ALL of the S&L's COMBINED were less than 10 percent of US bank assets.
Here's what happens if a company as large as Citi fails:
– Investors and depositors, fearing failure of smaller banks, would take their money out, triggering further bank failures across the country.
-There would be less money available for loans to support economic recovery
CNN Financial News Producer
Thousands more workers got bad news today as companies in fields ranging from financial services to retail announced job cuts. All told, five companies said they would eliminate more than 8,300 positions.
-PNC Financial Services Group plans to cut 5,800 jobs, or nearly 10% of its workforce, following its acquisition of National City last year.
-Liz Claiborne is cutting 725 jobs, or 8% of its workforce, in response to what it called a "challenging retail and economic environment."
-King Pharmaceuticals will reduce its workforce by 22%, or 760 jobs.
-Rockwell Collins, a maker of aviation electronics, plans to eliminate 600 jobs
-Huntington Bank says it will eliminate approximately 500 positions, or approximately 4 percent of its workforce, throughout 6 states by March 1.
The US government has seized control of Citigroup's staff Christmas party budget and set tight restrictions on the use of its corporate jet in exchange for its $45bn (£28bn) bail-out.
The measures are among a raft of restrictions on expenses detailed in the small print of filing made by Citi on New Year's Eve with the US financial regulator, the Securities and Exchange Commission.
The filing was made to formalise restrictions on executive pay and bonuses that Citi's chief executive, Vikram Pandit, was forced to adopt in exchange for the US government bail-out, which includes guarantees on $306bn of troubled assets on top of $45bn of loans.
Thomas L. Friedman
New York Times columnist
I spent Sunday afternoon brooding over a great piece of Times reporting by Eric Dash and Julie Creswell about Citigroup. Maybe brooding isn’t the right word. The front-page article, entitled “Citigroup Pays for a Rush to Risk,” actually left me totally disgusted.
Why? Because in searing detail it exposed — using Citigroup as Exhibit A — how some of our country’s best-paid bankers were overrated dopes who had no idea what they were selling, or greedy cynics who did know and turned a blind eye. But it wasn’t only the bankers. This financial meltdown involved a broad national breakdown in personal responsibility, government regulation and financial ethics.
So many people were in on it: People who had no business buying a home, with nothing down and nothing to pay for two years; people who had no business pushing such mortgages, but made fortunes doing so; people who had no business bundling those loans into securities and selling them to third parties, as if they were AAA bonds, but made fortunes doing so; people who had no business rating those loans as AAA, but made a fortunes doing so; and people who had no business buying those bonds and putting them on their balance sheets so they could earn a little better yield, but made fortunes doing so.
Citigroup was involved in, and made money from, almost every link in that chain. And the bank’s executives, including, sad to see, the former Treasury Secretary Robert Rubin, were clueless about the reckless financial instruments they were creating, or were so ensnared by the cronyism between the bank’s risk managers and risk takers (and so bought off by their bonuses) that they had no interest in stopping it.