Friday, January 18, 2013


Many years ago, don't worry how many, I found myself with members of the Philippine military on the island of Cebu, don't ask why, driving into Cebu city.  It had been a hard 48 hours with little rest and I was sleeping in the back of a farmer's truck, don't ask why again.  We hut a large rut and I awoke with a start.  The first thing I saw was a sign that read, First National City Bank.  My reaction was, I'm home.

It was not until a few years later when working for another New York City bank that I fully realized the import of that sign: if the buggers are in Cebu City, they're everywhere.  They still are.

Citi (I'm going to use that as a generic referring to the entire organization) reported yesterday and on the face of it the results were stinko--far below what the Street had predicted.  Indeed, one of the questions that one might ask is how could the Street get it so wrong but that is a side issue.  The numbers were bad, the returns were bad and the shocker was an expense for legal fees that was off the charts of damn near a billion dollars.  Catastrophe.

Then again, there were some fairly clear signals as to what was happening at what was once the premiere financial institution in the U.S. if not the world: they appear to have decided on the road to be taken--or less taken, perhaps, in the context of banking in the United States.  The positioning and strategy appears to be one reflective of a global commercial bank, much more similar to a Hong Kong Shanghai than a Wells Fargo or a Goldman Sachs, with the emphasis very much on Latin America and Asia/Middle East with Europe playing a far lesser role by the day.  Indeed, I suspect that the vision I had from the back of that truck will probably be the vision of the future Citi than that of the one held by Sandy Weill a scant 15 years ago.  It is a vision that will set Citi apart from all but a few and if successfully carried out will also create a risk diversification which in my mind not yet fully apparent.  Let me explain.

The globalization of markets while creating uncountable opportunities for all types of institutions does also create new risks.  No one in the capital markets is really alone, insulated from the follies of others.  To engage and to trade involves a level of trust and integration such as we have never seen.  No one is free of collateral damage.  No one is fully "the master of one's fate" in a true sense.  Everyone who engages in the markets runs the risk of the "unknown idiot" as I used to say that through inattention or stupidity can bring the whole house down and you with it, keeping in mind that with today's technology he can do so in a nanosecond.  "Give me," said one of those Swiss bankers of whom I spoke yesterday, "a good loan that earns interest every day...even on Sunday!"  Which of course means that not all of them are dumb and if one adds in the risk diversification of geography, meaning that things can still go completely wrong everywhere but within a far broader time frame, a strategy such as this may not be all bad.

Of course this is not a limitation on business lines, merely (perhaps) an emphasis on serviceability of the same.  Will they be globally competitive or focused on serving clients in regional markets?  Will the products be locally adaptive or globally inclusive...or both.  Does such a strategy demand a more robust build-out of existing platforms such as GTS; a rhetorical question to be sure.  And can you, in the end, manage on a global basis elements that will surely become more independent as time marches on...provided that they find success first?  Daunting issues indeed, but I get the sense that that is upon what they have decided and that is what to look for in the future, foretold by shrinkage of local product lines, a mere attempt at the holding of a U.S. business share and profile, capital accumulation as witnessed by the untouched  loan loss reserve in the quarter and the recognition as occurred in this quarter that nothing was to be gained from a partial airing; one might as well clean out, to the greatest extent possible, all the dirty linen and whatever else is in the back of the closets.  I wouldn't be surprised if this continues for the next few quarters as well until the institution is allowed to finally return something to the shareholders as it lays the foundation for the Return to the Future.  Do I own the stock? Yes I do but believe me, it's not even a rounding error.

What does all this mean?  Well, I think it means people are taking some pretty big bets as to the right strategy for the financial sector of the future and as to where that future is.  In Citi's case their bet is that the growth will be not here but in the other markets where, as opposed to non-local presence they are dominant.  Of course one could say it is because they have no other choice and that may be true, but if I am correct it is a bold strategy nonetheless.  It will be fun to watch.

Note to Carter:  You said it brother, not me!
Note to Dr. Ed:  The Germans could care less whether you lose or they win as long as the result is in their favor.

Have a great weekend.


  1. The problem with the gold-backed Yuan thesis is that the US and Germany still own most of the gold.

    China is low, low low.

  2. Couple problems with the gold-backed Yuan thesis:

    First, China needs a lot more gold to come close to the US or even Germany.

    Second, it would mean agreeing with Evans-Pritchard, something I'm loathe to do: