Readers may recall that during Lehman’s demise, a pitched battle was underway between some short sellers, epitomized by David Einhorn of Greenlight Capital. Einhorn raised questions about Lehman’s financial statements, specifically, inconsistencies and rosy looking valuations. The struggle became weirdly peronalized, as Lehman sought to burnish the image of charmismatic CFO Erin Callen, as contrasted with the presumed to be evil company wrecking Einhorn. Of course, if the real performance (as opposed to what the reports said) was as bad as Einhorn’s line of inquiry suggested, it was management that had done the company-wrecking, but that level of detail is often lost on CNBC.
And one of the regular features of the Lehman versus its detractors affair was leaks to the media, leaks of a sort that even if the firm had done it in a way that it had plausible deniability, were clearly intended to reach outside parties, particularly the media.
Now let us turn to Citi. Recall what transpired, per the Wall Street Journal:
Citigroup Inc. was profitable in the first two months of 2009 and is having its best quarter in a year and a half, Chief Executive Vikram Pandit said in an internal memo aimed at boosting employee and investor confidence in his struggling bank.
Yves here. This is simply stunning. The Journal says up front a supposed internal memo was in fact intended to reassure investors. In other words, Journal says the information was expected to be distributed broadly, as it was. And let’s go back to see the detail:
The bank posted revenues — excluding asset write-downs — of $19 billion in January and February, Mr. Pandit said in the memo. For the full quarter, earnings before taxes and set-asides for problem loans are $8.3 billion, assuming revenues fill in at last year’s rate and expenses are in line with the fourth quarter, the CEO said. Mr. Pandit warned, however, that market volatility in March could alter the results.
Let us further consider the context. The night before the Journal had a front page story which was none too favorable to the struggling bank:
Barely a week after the third rescue of Citigroup Inc., U.S. officials are examining what fresh steps they might need to take to stabilize the bank if its problems mount, according to people familiar with the matter.
Federal officials describe the discussions, which are wide-ranging and preliminary, as “contingency planning.” Regulators are trying to ensure that they are prepared if Citigroup takes a sudden turn for the worse, which they aren’t expecting, these people say.
So the very next day, Citi decides to tell the world they have it wrong, things are really on the mend.
Now consider: statements by public companies about their financial condition, operations, and results are not held to a mere standard of accuracy (as in narrowly true) but “not misleading”. The critical language is:
It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange….To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading
Now the beauty of this little leak is that it covered a two month period, which means it cannot be compared directly with the quarterly results. It does not include writedowns (which I would argue makes it misleading). As the Financial Times’ Lex noted:
But investors should not lose their heads. The headline-grabbing revenue number, of course, does not include costs or writedowns. Besides, Citi exceeded $20bn in adjusted revenues for eight quarters up until the end of September. Even in the nightmare final quarter of last year, revenues excluding writedowns were still a respectable $13.4bn. So Citi having a bumper top line is nothing to get excited about. That “profitable” remains unquantified gives no comfort as to what extent writedowns have eaten into that haul. That is the problem. In volatile markets, flow businesses such as foreign exchange or cash equities will always do well.
And Tyler Durden noted there could have been double counting in connection with the partial sale of Smith Barney.
Dunno about you, but this looks to me like a bald faced attempt to manipulate the stock price, and it certainly worked.
Now Citi has only resorted to Fuld-esque tactics this time, as far as we recall (we’ve seen a few stories that looked like PR plants, but those are a standard fixture in corporate America), but this is not a welcome development.
Even more puzzling is why the markets overall took such cheer, as opposed to just the now shrunken financials. Banks are enjoying fat spreads on any lending these days, thanks to super low borrowing rates and lending rates that have not fallen as much (indeed, pretty much anyone with a credit card has gotten notification of rate increases on balances). High real interest rates (and thus high bank spreads) are a typical feature of deflation (Japan was, until recently, something of an exception here. Companies were so loath to borrow that rates to borrowers have also plunged). What is good for the banks is not necessarily good for recovery.
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Show me the 8-K.
Yves, I think you mean Tyler D not Rolfe Winkler
Yves,
Welcome back. You’ve barely been gone and already awfully missed. Makes one really appreciate your special touch, the keenness of your insights and the special role you’ve been playing in this crisis.
JCF
Anon of 12:00 AM,
Correct, I had a Rolfe post open also when preparing this post, clearly I am easily distracted. Fixing now, thanks!
Nice post. What do you make of JPMorgan coming out with similar announcements?
"Even more puzzling is why the markets overall took such cheer, as opposed to just the now shrunken financials."
IMHO, the answer to this is that the memo leak was part of a far larger scheme orchestrated by Treasury. Consider. All in same day we had the Citi memo leak, Barney Frank commenting that the short sales might again be crippled soon, and even Tim Geithner himself on Charlie Rose last night as the final act.
Next, consider this. Although some media have proclaimed for weeks now that the markets have matched their November lows, the truth is, it was only the Dow that had reached its November lows, ie, the Nasdaq and S&P 500 took a little longer to reach their respective November lows. Only till recently have all 3 major US indices reached their November lows. I suggest the timing of all this was not accidental.
I have termed yesterday's rally a "PR rally," ie, a public relations event to kick off the run up to the next, big government action that's supposed to take place in a few weeks. AND, I have a strong suspicion that this PR rally's timing (at approximately the time when all 3 indices matched their Nov lows) is more than coincidence. It was meant to harness the energy of the idea that a double bottom bounce could occur. And in fact, it was successful at doing so if only for one day. I mean, give these people in Washington credit. Thay aren't total idiots. Their plans are very multi-layers. Richie in Atlanta
Re: the last paragraph.
It was merely a short-covering, bear-market rally, just like all the other sharp rallies over the past nine months. It only takes a small spark to get the shorts covering en masse. Mostly meaningless at this point.
The comparisons to Lehman are surely on point. Lehman failed, even with these types of tactics. All the up and down before the failure was just noise. No one will remember this bump for Citi after it’s wiped off the face of the planet.
In the ‘tech world the SEC would investigate the leak and slap the employees that did the leaking heavily (jail). Now Pandit didn’t leak himself (even though he addressed the investors as you point out). Good for him! Even better, he is trying to save his new and largest minority owner (us) some green. Why would anybody interfere?
The rules are the rules until it affects the powers that are. Yves, you forgot the Banana Republic tag.
Yves,
The 180 degree turnaround at Citi's public disclosures in a 24 hr period is remarkable. Last night, I went to bed thinking the false reassurances from regulators "contingency planning" was really "doomsday planning." It felt like the market was forcing the hand of regulators to figure a way how to resolve Citi as and when their balance sheet continues to deteriorate.
In another e-memo of "lies" to employees on Monday, CEO Padit alleged that the $1 stock price the current price does not reflect the company’s capital position and earnings power." It sounded, as you noted, eerily similar to what happened during the week leading up to the BK of BSC. Reading through Pandits blatant lies I said to myself, yes, we could be a week or two away from forcing a mkt resolution of Citi. And this would be an unqualified good thing, so I didn't mind the lie being told.
So, with Citi's balance sheet going to hell and a handbasket, it was a curious surprise to find CEO Pancreas (Pandit) say that "current price does not reflect the company’s capital position and earnings power."
Now, investors could interpret a non-descript statement like that as either bearish or bullish or even a third way ~ as utter Bull Shit. The market was looking for an excuse, even if a flimsy one to rally. But, at this point, flimsy make believe excuses simply won't cut it. So, I am left hoping that yes, we are very close to a mkt resolution of Citi, but not one based on Pancreatic lies about pseudo-profitability in the first two months of Q1 09.
To this hope, I can add that David Mildenberg wrote a good piece at BN here: http://www.bloomberg.com/apps/news?pid=20601087&sid=aKqHkkFlnvfM&refer=worldwide.
Midenberg's article indicates that a market resolution of Citi may indeed be forthcoming in the next few weeks, but one which would involve a haircut of Citigroup's bondholders. And the possibility of a bondholder haircut is gaining credibility even amongst lawmakers:
"U.S. Representative Brad Sherman, a California Democrat, say it’s time for bondholders to share the pain.“These banks can go into receivership, shed their shareholders, shed or reduce the amount they owe to their bondholders and come back out much stronger institutions,”
This haircut will be the next stage of the crisis, but since this step will help boost capital ratios of bad banks to a sustainable level, this will actually be major league helpful towards unclogging the financial system. With bondholders sharing the pain, a sense of fairness also comes into play that it is not all taxpayer borne pain. Along with the sense of fairness, the boost in sustainable capital levels will boost confidence in the financial system something that has been sorely lacking since August 2007.
For hard-working Americans who do not want this country to go any further down the crapper than it has to, this bit of “good news” is almost Gospel. It begins to answer prayers!
While I'm partial to the account above which sees the "Citi-surge" as part of a public relations scam to engender public support for the public/private "Geithner-loot" we have in prospect, I note also this Bloomberg story concerning executive stock purchases at Citibank:
http://www.bloomberg.com/apps/news?pid=20601087&sid=ab3VmhTulLyc&refer=home
I mean really.
I think that with the G20 coming that they had to make American banking look stabler than it is. With the trillions that We the people have thrown at them the past few months they should be able to make the market do anything they want.
It is all kibuki for the G20. The American fascists don’t want to be called on their financial engineering failing…so they have us prop it up….what a country we live in.
“Public companies are obligated to report material events that occur between reporting periods via a filing with the SEC as a form 8-K. That is the ONLY kosher way to present material information. The company can file an 8-K and make a public announcement, that’s fine, but the filing is part of the drill.”
Yves, I love ya, but this is totally, completely, 100% wrong. Look, I’m a securities lawyer, a partner at an AmLaw100 firm, who does this stuff every single day. And I am here to tell you that there is NO requirement that a public company must file an 8-K every time they disclose material information. 8-Ks are required on certain events, such as signing a material agreement. But reporting material information via 8-K other than those events is COMPLETELY OPTIONAL. (There is also Reg FD, which allows reports via 8-K, but again that is OPTIONAL – you can satisfy your Reg FD requirements via press release.)
This post should be corrected. You’re wrong, and embarrassingly so.
Of course the whole sad thing was orchestrated. The control of the prices of toxic paper (including the common shares of C) is what this all boils down to.
Most important, however, is the intuitive takeaway from the Rose interview of the tax-evading S o T.
Each and every person that I have polled came away from the “show” with a profound disquiet, a feeling that one simply cannot trust anything that comes out of the motor mouth of the man.
His repetition of the phrases “protect the taxpayers” and “protecting the taxpayers” is telling since they are always diametrically contradicted by any details which follow a sentence or two later.
He has absolutely no intention of protecting anyone save a small group of influential plutocrats.
He is a perception manager, a con man, and he should be sent away.
A.S., I worked in the general counsel’s office for a public company in the late 1970s (long since in an operating role) and we were awfully careful re financial disclosure between reporting periods, and did use 8Ks for material devleopments. I wasn’t close to the SEC work, but my impression is that this is an area where the regulatory posture has changed a good deal.
anon of 12:22,
Your theory would work, but every single index crashed through Nov lows and were in free-fall.
Interestingly enough, if your into Technical analysis, is that the S&P500 came within $1 of the 68% retracement between the low of 1982 and the high of October 2007. eery!
I told you they are all Lemon Brothers!
Even if it weren’t misleading, I’ve never understood how companies get away with price sensitive, leak-intended “internal memos” like this. You can’t disclose material price sensitive information to a subset of your shareholders, yet that’s exactly what they did.
@A.S. 1:29
So, how much moo_la, do you have riding on citi.
Skippy
AS:
I’m with you on this one. I’m a CPA who has SEC registrant clients and consult with SEC registrants and their attorneys weekly.
That said, I read Pandit’s statement. He must know the fix is in. I await Citi’s 3/31/09 10-Q. Depending upon what’s in it, Pandit’s statement might be seen to be a deceptive device. If so, he should be indicted. I won’t hold my breath. The SDNY US attorneys office is as likely to indict Pandit as pigs will fly.
A.S. wrote: “But reporting material information via 8-K other than those events is COMPLETELY OPTIONAL. (There is also Reg FD, which allows reports via 8-K, but again that is OPTIONAL – you can satisfy your Reg FD requirements via press release.)”
Yes you can – but a memo to employees is not a “press release”, and certainly facilitated insider trading prior to the public release (the prevention of which is of course the raison d^etre for Reg. FD). But this memo has been filed with the SEC on an 8-K: http://www.sec.gov/Archives/edgar/data/831001/000095012309004333/0000950123-09-004333-index.htm
The bigger problem here is the violation of Reg. G. Nowhere is there a reconciliation to GAAP of their “earnings” number. The whole release seems like a big fraud to me – but since the banks run the country, don’t worry, no Citibank executive will be touched. On the other hand, the investors (whom the SEC is supposed to protect) who buy into this sucker rally – well, they’re on their own.
Yyves writes:
“””
Dunno about you, but this looks to me like a bald faced attempt to manipulate the stock price, and it certainly worked.
“””
If even a former English major like me could see the manipulation, then the looting really is right out in the open, isn’t it?
The looting is totally “transparent,” and still there is no accountability in any form. What does it take?
It looks you like to read any piece of news in the worse possible light.
So now you say:
“Even more puzzling is why the markets overall took such cheer, as opposed to just the now shrunken financials. Banks are enjoying fat spreads on any lending these days, thanks to super low borrowing rates and lending rates that have not fallen as much (indeed, pretty much anyone with a credit card has gotten notification of rate increases on balances). High real interest rates (and thus high bank spreads) are a typical feature of deflation (Japan was, until recently, something of an exception here. Companies were so loath to borrow that rates to borrowers have also plunged). What is good for the banks is not necessarily good for recovery. “
Maybe markets are surprised because they got used to hear the Banks are zombies. Who knows maybe they start to dismiss all this end of the world crap and realize that a couple of years of income will sort bank out, and that bank have a “franchise value” that cannot be considered zero value. Except, that is, if they are forcefully nationalised.