I started the day bright and early at Fox Business News' studio, discussing Citigroup's earnings and its ramifications for the market. Around the same time as Citigroup's release Merrill reported, missing consensus by a mile. And then we had the news of Citadel's troubles. If I had more time on the show I could have blathered on for hours, but seeing as how I had about 60 seconds there is a whole lot more I wanted to say. Here are a few themes:
Citigroup's earnings - who knows, who cares?
Can anybody tell me - Bueller, Bueller? - what their numbers really mean? In the absence of transparency around their illiquid asset portfolios, both on- and off-balance sheet liabilities and contingent commitments (bank revolvers, liqudity backstops, LBO debt, etc.), how can we really know? This was one thing I did get to say on FBN this morning. To this day I am mystified by the arguments over mark-to-market accounting in light of the current crisis. While can have a long, theoretical discussion about what should be (though I've argued quite strenuously that the treatment of asset values should be related to a firm's liability structure - if you can hold an asset for the long-term, hold it at cost less permanent impairment, otherwise, mark it to market), a meaningful contributor to the stock and credit markets' swoon is an utter lack of trust. Banks don't trust each other. Consumers don't trust banks. Banks don't trust the Government. This is a problem, people. Why would any rational investor buy Citigroup knowing what we know about their financial position, which isn't that much given the extent and complexity of their enterprise-wide exposures?
Bottom line, the sequencing of the bank-related elements of the rescue plan is all wrong. Here is a five-step plan for getting investors interested in and excited about investing in banks once again:
- Tighten, don't loosen, accounting rules for financial institutions, making them mark-to-market financial asset portfolios that specifically cannot be held on a long-term basis. Also clarify rules around consolidation of off-balance sheet vehicles, forcing all but the most clearly dissociated entities to be recorded as on-balance sheet obligations.
- Have banks mark-to-market illiquid assets that it cannot fund with term liabilities (core deposits, subordinated and senior unsecured debt, etc.).
