Citigroup is the poster child for all that went wrong in the financial meltdown. Once the worlds largest financial institution its stock fell from $50 to $1 in 2008 as it narrowly avoided a bankruptcy that would have brought down the entire financial system. Yesterday - its former CEO, John Reed, apologized to all.
Where did it all go wrong? No surprise here:
Lawmakers were wrong to repeal the Depression-era Glass- Steagall Act in 1999, Reed said. At the time, he supported overturn of the law, which required the separation of institutions that engaged in traditional customer banking services from those involved in capital markets.
http://www.bloomberg.com/...
Citigroup lobbied for a bill that helped bring about its own demise. Today, Citi is 34% owned by the Treasury. With a market cap of about $100 billion Treasury is still below breakeven in its $45 billion TARP investment.
But without TARP Citi would surely have failed in late 2008/09 and thus brought down the entire banking system. The FDIC was woefully unprepared to back up Citi's $2 trillion in assets. Citi has $500 billion in overseas deposits that the FDIC could not cover. Its counterparties would have all closed shop. Lehman was small potatoes compared to Citi.
Citigroup pioneered the production of collateralized debt obligations, bundles of loans whose cash flows were sold to investors. When subprime mortgage borrowers began defaulting on payments in 2007, the CDOs lost value and became part of Citigroup’s $118 billion in writedowns and credit losses.
What does Reed see as the remedy for our financial system going forward?
Congress’ overhaul of U.S. financial regulations should include ordering banks to hold more capital, ensuring executives’ compensation is aligned with long-term profitability and banning firms that take deposits from also engaging in equities and fixed-income trading, Reed said.
It really is that simple.
Commercial banks should have strict capital ratios - $100 million in deposits and they loan no more than 10x that out for a 10-1 leverage ratio. Some banks got to 80-1 in 2007. When home values fell 20-25% some institutions were effectively insolvent.
Restrict executive compensation - for ALL commercial banks with access to the Fed window. No more looting the shareholders AND the taxpayers by 2-4 year executives who ride booms and bubbles.
And ban firms from using deposits as investment vehicles - no more derivative purchases or fixed income trading. Small banks could only buy preferred stock in GSE's for years - not even the common. Big Banks were acting as speculative traders on heroin.
Will the banks allow this to happen?
Not a chance.