General Motors might have died and gone to bankruptcy court, but the big story is the continuing fall of Citigroup.
At least GM had a reason to be exiled from Dow Jones average; Citi was flicked and replaced by the insurance company, Travelers.
Bloomberg reported that Citi’s 45% US Government shareholding played a big part in its ousting from the Index
"Citigroup, once the world’s biggest bank by market value, was dropped from the Dow Jones Industrial Average because the stock may cease to reflect the industry once the U.S. government becomes its largest shareholder, the editor who oversees the index said," Bloomberg reported.
“We felt that Citigroup’s stock is going to more reflect the success of the restructuring rather than the trend” for the banking industry, John Prestbo, executive director of News Corp.’s Dow Jones Indexes, said in an interview yesterday. “The government influence is definitely present.”
And there was a bittersweet irony for Citi: Travelers took over Citicorp to form Citigroup under a man called Sandy Weill.
He never succeeded in merging the two companies and their cultures and forced out one highly talented executive called Jamie Dimon.
He has turned out to be the best banker of his generation in running JPMorgan Chase.
JPMorgan actually acquired the bank he was running after Citigroup to get him and some other executives and the business.
Dimon proved to be a conservative manager and didn’t allow his bank to get much exposure to dodgy products and derivatives based on subprime mortgages (they had plenty of subprime pain, plus poorly performing corporate loans, and now credit cards).
Now Citi is no longer a major money centre bank: it’s contracting and it still needs capital.
In fact it was saved by the US Government, as was Bank of America and several other leading banks and financial groups.
But bank and other financial shares have soared: the main index covering them, the KBW bank index has more than doubled this year as share prices have risen strongly.
But now the first opportunity approaches next week for JPMorgan and other banks to shake off their entanglements with the US Government
Ahead of next week’s first opportunity for banks top depart Tarp the Federal Reserve has outlined what US banks have to do to become eligible.
The 19 banking groups have to raise the Tarp money in from equity and debt markets, without any government support, have to demonstrate they can stand alone and are prudentially sound.
It won’t slow what now seems an unseemly haste to abandon the Government aid that saved all the banks from further trouble or collapse in the dying months of 2009, but it’s a welcome step from the Fed anyway.
The companies “must successfully demonstrate access to public equity markets,” the Fed statement said. They also need to sell debt without a Federal Deposit Insurance Corp. guarantee and reduce reliance on “government capital” and the FDIC’s program.
JPMorgan Chase, which is the best placed of the US banks and has been lobbying hard to exit the Tarp program, has yet to raise any capital this year, unlike Citi and Wells Fargo.
But it immediately revealed plans for a $US5 billion share issue so as to be well placed when the first opportunity to leave the Tarp arrangement pops up next week.
And, American Express, which has been moaning about its Tarp capital, revealed plans for a smaller $US500 million share issue to help get rid of its $US3.9 billion in Government aid.
Overnight Bank of America said it had so far raised $US33 billion in new capital from share sales, converting preference shares and asset sales. It needs to raise another $US900 million to have met the requirements of the stress tests last month.
Morgan Stanley raised $US2.2 billion.
The share issues won’t be any concern: the bank sector on Wall Street has more than doubled in value this year and overnight markets continued to surge higher.
JP Morgan, Goldman Sachs and Morgan Stanley have asked to repay the $US45 billion in government money they received last October-November in the wake of the collapse of Lehman brothers, AIG, a number of European banks and the forced rescues of Wachovia bank and Merrill Lynch.
Nine of the 19 largest banks that were subjected to regulators’ stress tests were found not to need extra capital, while 10 were told to get another $US74.6 billion in additional money to protect against the risk of a more severe economic downturn.
The list of 10 included Bank of America Corp., with a shortfall of $US33.9 billion, Citigroup Inc. with $US5.5 billion, and Wells Fargo & Co. with $US13.7 billion. Since then the 10 banks have raised around 40% of the needed new funds in the market or in debt issues.
The nine banks that have no capital buffer requirement have revealed plans or have or raised a combined $US23.3 billion through debt or equity sales to help fund TARP repayment.
Let’s hope there are no more mines in bank balance sheets waiting to explode and sink the ship, again.
