On Friday, the regulator of Citigroup Japan ordered the bank to suspend sales activities for one month. Its retail business division cannot conduct any activity from July 15 to August 14, 2009 because it claimed that Citigroup is not doing its part in curbing money laundering. This is not the first time the banking giant encountered problems in Japan. Prior problems are mostly related to Citi’s incapability to monitor money laundering activity.
One significant event occurred in 2004 when former Chief Executive Charles Prince had bowed for seven seconds in contrition for the bank’s failures. Citigroup has also experienced legislative backlash for its high interest rates. In 2006, lawmakers passed a legislative change that caps the amount of interest rates banks can charge. From almost 30%, the amount of interest that can be charged is now capped at 18%.
It was triggered to some extent, by the number of suicides that occurred in the country because of debt problems. The same legislation permitted consumers to get refund claims from financing institutions. Citigroup shrank its CitiFinancial operations which included unsecured loans and auto loans.
Profits from Japan have always been volatile. During the first quarter of 2009, Citi’s consumer finance unit suffered from a $36 million loss though this is actually an improvement from the $86 million in losses it generated the previous year. Overall revenue fell to $162 million. In Asia including Japan, Citigroup’s earnings totaled $1.6 billion during the first quarter.
The suspension that will be imposed on Citibank might only last one month, but the occurrence of legal problems again and again is hurting the bank. Citigroup Inc. is still trying to recover from the US financial crisis that forced it to accept government bailout. The company is still stressing that its competitive advantage lies in its global presence. Asia is still promising to the banking giant despite its current troubles. Other US banks have minimal presence in the area.
So, how does the Japan market relate to the US market? In some ways, Japan provides a glimpse of what Citigroup wants itself to become. Ridding non-core business operations such as consumer finance and brokerage; instead becoming more like a traditional banking institution.
During the past year, the government has taken drastic steps to repair the financial system. It has injective billions of taxpayer money and created a new regulatory structure to ensure that the financing problems facing the nation’s biggest banks today will not reoccur in the future. In addition, a “stress test” was also conducted and it was revealed that big banks need to raise an additional $75 billion in capital to prop up their balance sheets.
While bank shares remain low, most banks are now recovering from the crisis. It is only a question whether depositors and investors will still trust banks with their money. There are many factors to consider today with regards to choosing the bank you trust your money with. Of particular note is the emerging gap between the healthier and weaker financial institutions. So the question is, which banks should you leave your money with? And does being a “healthier” bank a guarantee to the public that their deposits are safe? Below are some blogs that dealt with the question this week:
Marcus @ Huffington Post filed an entry titled “Five Banks Seized, Raising US Tally This Year to 45”. Essentially, this short post merely stated facts about how bad it is for the financial industry. There are indications that the economy might rebound during the later part of this year or the first part of next year. For now though, the recession is still driving up foreclosures and unemployment.
Peter Cohan @ Daily Finance wrote an interesting blog post “Can We Make Safe Banks?” The entry started out by detailing why the planned 50% increase in executive compensation in Citibank is a bad idea. If the company is struggling and dealing with losses, then the people who are running them should not be rewarded. In addition, the article further explained why client deposits should be invested in the safest possible medium.
Dave @ The Wall Street Journal gave an in-depth analysis about how safe your money really is on the bank. His article “Is Your Money Safe in a Bank?” dealt with the issues most consumers are concerned with. Everything from the ups and downs of the industry to diversifying exposure is explained in this entry.
While consumers are thinking how lucky the nation’s largest banks are for being rescued by the government using taxpayer’s money, the banks themselves are regretting their action. Some bank executives certainly aren’t grateful to the government for the “help”. This is because when Hank Paulson and Tim Geithner worked on the $700 billion bailout plan, bankers initially thought that this was designed to jumpstart the economy.
Neither the banks nor the government might have expected the severe public backlash as well as lawmaker’s posturing attitudes that resulted from it. The Troubled Asset Relief Program (TARP) might have made its way through Congress but it came at a very high price. At the meeting where the TARP funds were allocated to the financial institutions, the bankers found out that the Obama administration as changed the plan’s original design. The government will now own a significant share of their banks.
It came as no surprise that some bank representatives balked at the offer. However, Paulson wasn’t taking no for an answer. He believed that leaving the country’s biggest banks at that point in time would leave them exposed. And more failures in the financial sector are bound to spook investors and the public. So certain banks were left with bailout money they don’t want.
Before you think that the TARP money is a bad idea both for the taxpayer and the banks themselves though, it is important to remember that the program did help some institutions greatly. Everyone knows that Citigroup Inc. will no longer exist in its existing structure were it not for the bail-out funds. But some banks are starting to resent having ever receiving the TARP money in the first place.
Around four months after they agreed to the offer, the CEOs of the big banks were asked to go before a House committee where they were called “captains of the universe” to their face by a certain lawmaker. In addition, another one told them that no one trusts them anymore. But the friction between the government and the banks really came to a head during the public outcry regarding AIG’s $165 million in retention bonuses.
Capitol Hill sought to ease public tension by passing a 90% tax on bonuses. With this, the initial good intension of the TARP fund became steeped in bad sentiment. A mere eight months after the TARP was implemented, the banks have already returned $68 billion in total and they are scrambling to pay everything back.
Having invested $1 trillion into the economy, Chairman Ben Bernanke now faces the daunting task of convincing investors that the Federal Reserve can make up this amount. Bernanke and his colleagues are set to agree, on June 23-24, that the government needs to continue its strategy of buying assets in order to maintain low interest rates. Though this is geared to revive growth, the rising Treasury bond yield are indications that investors are concerned that sustaining such a strategy will lead to a long-term inflationary pressure.
According to Lyle Gramley, an economic adviser from Soleil Securities, “markets don’t understand the Fed’s exit strategy” and this is a cause for concern. This confusion contributed to the higher rates in long-term investments. The risk in having higher rates lies in the fact that it will hinder economic growth by lifting the cost of borrowing for home buyers.
Mounting Mortgage Rates
Earlier this month, the average mortgage rate for a 30-year loan actually rose to 5.59 percent which is the highest since November of last year. Because of this, the number of mortgage applications dropped to 16 percent in the week ending June 12. The Mortgage Bankers Association also revealed that the increase in rates had discouraged refinancing.
How the Fed Plans to Contain the Cost
Fed officials are looking at many options to contain borrowing costs in the market. Right now, it seems that they want to use policy statement to stop speculations that they’re prepared to boost the interest rates this year. According to a the chief economists at the Bank of Tokyo-Mitsubishi UFJ Ltd. located in New York, everyone is thinking of the exit strategy because they are “worried about the future”.
If policy makers intend to restrain rates, they need to explain how they can prevent inflation from growing at an uncontrollable pace. It is not only the US that has to deal with this problem though because there are also talks in the European Central Bank on how they can reverse their stimulus.
Unless the Fed provides clarity on its exit strategy, investors, analysts, and even the public will conclude that the back-up in interest rates will create problems in refinancing and housing in the future. And there is a high chance that it will.