Citizen Economists » Citigroup

Deposits (C), Software (IBM), and Toys (HAS) — All Profitable in Q1

Eldon Mast — Wed, 21 Apr 2010 16:56:42 +0000

Deposits, software and toys all proved profitable according to the bellwethers in each industry on Monday… and a very positive earnings season surged forward.

CitiGroup(C) posted a profit that more than doubled. With earnings of $4.4 billion, C posted its best showing in over a year. Top executives said that the bank that everyone has loved to hate through the credit crisis has now “turned a corner” is on track to return to consistent profits.

Elsewhere net income for the world’s No. 2 toymaker Hasbro (HAS) tripled compared with earnings a year ago. It was the fifth straight quarter the firm has topped Wall Street’s per-share profit target. According to the company consumers are spending more money on toys than they did at this time a year ago — even when a year ago retailers slashed post-holiday-season toy prices in an attempt to clear out excess inventories following their 2008 holiday slump.

And finally, IBM Corp. said Monday that its first-quarter profit jumped 13%. The firm offered additional evidence that corporate technology spending is now rebounding after the recession.
The profit improvement came not just from cost cutting, which IBM relied on much of last year to raise profits, but also from very strong increases in net income from its software division. The software business unit also increased its revenue 11% from a year ago. But beyond software, IBM reaffirmed that the pickup in IT spending is across its entire business, is significant, and broad-based.

The results point to continued strong growth for all three sectors well into 2010 and likely beyond.

Taxpayers About to Benefit Handsomely from Citigroup Bailout

Eldon Mast — Mon, 29 Mar 2010 18:23:58 +0000

You may remember that last year Citigroup (C) got a $25B bailout that was much bigger than the rest of the big banks. Now — about a year later — the company is about to pay dearly for the taxpayer provided lifeline.

In today’s market, the TARP’s 27% take in Citi has grown in value to $33B. And as the bank contemplates it’s payback, the ultimate size of the deal may be the largest in Wall street history… and may net U.S. taxpayers another cool $8B for their trouble. (Federal taxpayers received a 23% annualized return on their investment in Goldman Sachs when that wall street firm paid back it’s bailout.)

Leading financial firms, including J.P. Morgan Chase and Morgan Stanley, are vying to be chosen as the deal’s underwriters to gain the prestige of managing a historic stock sale as well as the fees from investors who buy the shares. To improve their chances, some big banks, such as Goldman Sachs, are offering their services to the Treasury Department at almost no cost.

The windfall expected from the stock sale would amount to a validation of the rescue plan adopted by government officials during the height of the financial panic, when the banking system neared the brink of collapse. A year ago, Citigroup’s stock hovered around a dollar a share, and the bank’s future seemed in doubt. On Friday, the stock closed at $4.31.

If the sale proceeds as planned, Citigroup would be able to cut nearly all of its ties to TARP and the Obama administration can continue to highlight the profit generated from the rescue of big banks.

“It’s unprecedented to do [a stock sale] of this size right after the financial industry has been so battered,” said one industry official on Friday. “It’s just a very bullish sign.”

Citigroup was among nine major banks that were the first to take bailout funds in October 2008, and all have returned their federal loans. In addition to these repayments, the Treasury has received interest, dividends and about $3.5 billion from the sale of warrants, which are contracts allowing a holder to buy a company’s stock in the future.

To many it is now clear that rescuing large the Wall Street firms has come at a much lower cost to taxpayers than many had expected. In fact, so far the investment program has produced all net positive results for the U.S. Treasury.

Citi Field Chicanery

Thersites — Thu, 12 Mar 2009 16:39:28 +0000

First let me state a few qualifiers when it comes to the Mets’ now infamous Citi Field. Citi Field is gorgeous. The team that will inhabit it is not as gorgeous. It is outrageous that the taxpayers are backstopping the bank which made the naming deal with the team. It is embarrassing to an organization that has already suffered epic collapses the last two seasons to be going into a new stadium dealing with this kind of headache. With this in mind, let me proceed to the broader controversy regarding the naming deal.

Today in the New York Times, representative Dennis Kucinich argues regarding naming deals that “Treasury has the power under TARP to make broad changes, They have to. It’s not whether they can or should; they have to. The legal issues are very easy to maneuver.” According to Kucinich, Citi Field represents “an egregious example. But we have a list of other banks we’re working our way through. We’ll hold hearings.” I do agree with Kucinich that naming deals such as Citi’s with the Mets represent extravagent, and probably poor expenditures. I don’t know how Citi projected that it would recoup their $400 million investment in the naming rights to the stadium, but investment banks made all sorts of investments far more ridiculous over the last decade to be sure.

Further, given that taxpayers are the ones who are responsible for propping up the company responsible for this deal, it should anger all of us. But what Congress (Mr. Kucinich excluded given his populist rhetoric against the bank bailouts) fails to realize is that were it not for the government’s decision to bail out these institutions, these types of issues would not exist. As Citi unwound its assets during its bankruptcy, the naming rights deal could be nixed and purchased by another company. Where were Kucinich’s angry colleagues when it came to bailing out Citi in the first place?

The outrage amongst politicians when it comes to naming deals not only masks their lack of appreciation that this would not be an issue were it not for propping up failing ventures, but also masks the greater implications of their intervention. Since we all are now shareholders in these institutions, the government will tinker with their management. This begins with caps on executive pay, but who is to say that it will end there?

As poorly as some of these institutions were managed, and granting that a lot of their poor management was due to incentives created by government intervention, I would guarantee that government control of the banks will be even worse. Do you think that Nancy Pelosi knows how to create a DCF model in Excel? Does Barney Frank know how the market for CDO^2’s works, let alone what a CDO^2 is?

Much as I think that President Obama could give a hell of a pitch to investors on the virtues of a closed-end real estate fund, there is no way that the government can ever run these businesses properly. Command economies have always failed. The government lacks the profit motive and the knowledge to successfully manage these companies. Putting the firms under the purview of government represents the greatest moral hazard of them all.

Remember, these are only the direct effects of strict government regulation of the banking sector. There would also be a great effect on the markets. If the government is to have say over the operating activities of the major banks, what kind of implications will this have for retail and institutional investors? Will money flood out to less-regulated private equity and hedge funds? Will those shops then become as regulated as the (remaining) big banks? What kind of confidence will exist in the markets when the biggest broker-dealers are being managed by politicians? Will people not recall what happened to all of the other GSE’s?

There are a plethora of problems with these institutions being managed by the government. The Citi Field naming rights deal is very small relative to the big picture, but it exemplifies the direction the government is going. I am just as angry as everyone else that we are responsible for keeping the Citi naming deal alive, but we must remember that it was because of government intervention that we got ourselves into this mess in the first place. As if it wasn’t bad enough that the Mets aren’t going to pursue Manny Ramirez, now us tortured fans have to deal with this pathetic situation.