The people who run the big Wall Street firms and banks have notoriously short memories, which is why, for all the mea culpas that came after the 2008 financial collapse and taxpayer bailouts, you know these guys are going to screw up again and screw the country again in the process.
Recently, I was reminded of just how short their memories on Wall Street are by two new stories. In the first one, Morgan Stanley thinks it’s a grand idea to throw a lavish party for its past and present partners in mid-September at a place called the “Temple of Dendur,” a swanky room in the Metropolitan Museum of Art that gets rented out to the mega-rich and big profitable corporations that want to hold special events around artifacts of ancient Egypt. The event is supposed to commemorate Morgan’s 75th anniversary as a firm even if it will be held on another important anniversary in its history: Nearly two years to the day, Morgan, along with the rest of Wall Street, received billions of dollars in bailout money from the American
OK, so throwing an expensive party on the anniversary of the bailouts may look bad, and may also require a police presence (so many former Morgan Stanley people viscerally hate the guys now in charge, and vice versa), but it isn’t potentially illegal. But the second story underscoring Wall Street’s memory loss involves something that could be.
As I reported early in the week on Fox Business Network, Citigroup, one of the most bailed-out banks in the history of bank bailouts, has the nerve to wage an increasingly vindictive war against a securities analyst named Mike Mayo for doing nothing more than telling the truth about the bank’s questionable — some would say illegal — accounting practices.
First a little primer on Mayo: For the past 10 years, he has been criticizing Citigroup and its piss-poor management, right up to the time the bank cost taxpayers hundreds of billions of dollars to survive the 2008 market implosion. For that, he’s been denied access to top managers (including CEO Vikram Pandit and CFO John Gerspach), ridiculed on analyst conferences calls and belittled by Citigroup personnel behind his back.
One Citigroup executive recently said because Mayo has no clients at his most recent firm, CLSA, he picks fights to get his name in the press. Despite the absurdity of that argument — Mayo (a) has clients and (b) he will have even fewer of them if he did nothing more than pick fights for the sake of fighting — officials at Citi continue to insist that Mayo is attacking the firm for no other reason than to see stuff written about him, even if they refuse to address in a straightforward manner the validity of his recent and maybe most damning critique of the bank.
Mayo believes Citi is likely in violation of accounting rules and securities laws by failing to adequately assess the value of something on its financial statements known as Deferred Tax Assets, or DTA — a charge the company denies. In Mayo’s view, Citigroup needs to take an immediate loss of some $10 billion on its DTAs, something that would place the marginally profitable bank, back in the red.
DTA’s are tax credits that banks can use to offset tax bills that come in the future. But there’s a catch: They can’t be used if a bank has three years worth of cumulative losses. Citigroup despite being profitable so far this year, recorded a net loss in 2009, 2008 and 2007. According to Mayo, and several accounting experts I’ve come across, that means the firm is required to give a chunk of the money back, and take a large multibillion writedown.
Let’s be clear: Citigroup isn’t the first company to blackball an analyst who has taken issue with its business plan or accounting, which is why so few analysts do anything more than hype stocks of the companies they cover. The analysts know that to tell the truth often means getting shut of meetings with key players, who are said to provide insight into the company’s operations, even if that insight is highly-spun PR babble.
But what makes what Citigroup is doing so deplorable is that this isn’t just any company; it’s one that, for all intents and purpose, is on probation. Years of mismanagement (pointed out by Mayo, I should add), not to mention the reckless risk-taking, led to its investment in toxic assets and near demise in 2008. The government stepped in with unprecedented capital injections and guarantees — Citi received more direct and indirect government aid than any other bank.
And the government isn’t done helping Citigroup just yet. Like most banks, Citi isn’t making money by lending to small business and helping the overall economy. It’s using the low-interest rates (near zero) supplied by the Federal Reserve to finance the purchase of bonds and earn so-called carried interest, or the difference between what it costs to borrow money (near zero) and what it’s earning on those bond holdings.
Meanwhile, as part of the bailout, the Treasury Department became Citi’s largest shareholder, which as I write this column, it is still trying to sell at a measly $3.65 a share. In other words, were it not for the good graces of the taxpayer, Citigroup would’ve gone the way of Bear Stearns and Lehman Brothers into Wall Street oblivion.
The history of the great financial collapse of 2008 is also the history of lost opportunities. A few brave people called into question Fannie Mae’s and Freddie Mac’s questionable accounting over the years. But they were stomped down, called every name under the sun for allegedly trying to shut down the mortgage agencies and thus preventing the poor from owning homes. That was, of course, before the good intentions of those agencies led to their demise and taxpayers shelling out hundreds of billions of dollars to bailout them out.
And now we’re supposed to believe Citigroup, a bank that got it so wrong for so long, is right when it appears to skirt accounting rules, and hides behind corporate double-speak and dopey statements to distort legitimate concerns about its bookkeeping. For the record, a Citigroup spokesman tells me: Citi is very comfortable with the recording of our Deferred Tax Assets (DTA). We have provided extensive detail on our DTA in various 10-K and 10-Q regulatory filings.”
Now isn’t that reassuring?
Charles Gasparino is the author of Bought and Paid For: The Unholy Alliance Between Barack Obama and Wall Street.