Thursday, 18 October 2012

Give me something for a penny that's worth a buck and I'll give you thirty five cents and be a hero . . .

What are we to make of the news of Vikram Pandit's departure from Citigroup? His successor Mike Corbat seems like one of those faceless men that appear in the background of old photos of the Soviet leadership perched above Lenin's tomb watching tanks and missiles parade through Red Square. Ostensibly the story goes that Mr Corbat thinks he can wring more efficiencies from the operations than Pandit did. I can't believe a bank with so many asset problems is worried about certain operating efficiencies? If I were to speculate it seems to me more likely that the disagreements surround the "bad assets" space.

You see in a bank it's often politically a very good position to be in if you inherit assets that have been written down or forgotten because any value you are able to derive from them is seen as new profit rather than claw-back. It's a subtle difference and goes very much to the psyche of investment banks in general. The other major benefit you have in such a position is that you know where all the skeletons are buried. The leverage is unbelieveable, I've seen it in action . . . you sit in a high level meeting with people many times your senior and you're able to say . . . "well it's a bit like when you let [insert bankers name] buy those bonds ... and we know what happened there . . ." Usually the senior manager's face turns white because what you're actually saying is that you know how much money that guy lost and he better look after you or you'll go around him. The quid pro quo of course is that you get some of the value back so he's able to say in the next board meeting that the bank can report significant write-backs and asset sales above current book value. For this you'll get a bonus and be seen as some kind of wonder trader, when in fact you were just the lucky person who got in at the bottom.

I wonder what the truth is at Citigroup? One thing is for certain and that's Mr Corbat had the key's to the mausoleum and therefore was in a position to leverage. The only other person with an equivalent amount of knowledge would probably be the bank's Chief Risk Officer . . . Brian Leach. Mr Leach I bet gets a promotion and a big bonus for staying around . . . . as if he was ever really going to leave?

Citigroup is probably a buy right now because Mr Corbat wouldn't have pulled the challenge trigger unless he had more profits up his sleeve.

QE3 might not help everyone, but it is helping Bank of America. Though they reported a huge drop in revenues of $20.7bn compared with $28.7bn a year earlier they were able to report improvement from the increased valuation of mortgage-backed securities held by them thanks to the Fed’s buying MBS's as part of QE3. Look, as I've said before this is all about solvency, not liquidity with these assets, buying these ultimately does nothing but transfer the problem to the tax payer. What's more has anyone looked at whether they are paying a fair price? I suspect that the banks are dribbling this stuff out now and happily booking profits that seemed unlikely 3 years ago when the write-downs were happening.

I guess today's blog has a slight conspiratorial tone to it, given this lets go with the theme and consider the ability of China to magically construct a 7.4% growth number so as to keep on the full year revised target of 7.5%. Anyone who thought they wouldn't hit the target they set is crazy. This is a country with almost zero transparency, what Premier Wen Jiabao says goes. Wen Jiabao now says that the worst was probably over. Fair enough, but most economists and observers said the bottom would have been reached back in the 1H12, not 3Q12. I think I'm entitled to show apropriate skepticism now.

Anyhow I managed to go for a ride with a mate today and enjoy the Sydney spring weather. a quick 30k's on the Pinarello around the beaches and more salubrious suburbs of Sydney left a smile on my face.

And for those wondering about the stem issue on the Cannondale I can report that a new FSA OS99 CSI 110mm has arrived and if I get time I'll be having it put on later today.


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