Toomre Capital Markets LLC

Real-Time Capital Markets -- Analytics, Visualization, Event Processing, and Intelligence


President Obama Wants Big Bank Limitations

President Obama continues to try to curb risk taking on Wall Street. Today, one year after his inauguration, he has proposed a plan to limit the size and activities of big commercial banks. "While the financial system is far stronger today than it was a year one year ago, it is still operating under the exact same rules that led to its near collapse," said President Barack Obama at the White House. Mr Obama continued his populist rhetoric with the statement:

My resolve to reform the system is only strengthened when I see a return to old practices at some of the very firms fighting reform; and when I see record profits at some of the very firms claiming that they cannot lend more to small business, cannot keep credit card rates low, and cannot refund taxpayers for the bailout. It is exactly this kind of irresponsibility that makes clear reform is necessary.

According to congressional sources and administration officials, this proposal is designed to return — at least in spirit — to some of the curbs that were instituted with the Glass-Steagall act back during the Great Depression. This plan has been backed by former Federal Reserve Chairman Paul Volker and is designed to limit the amount of risk that customer deposit activities might be exposed to.

Apparently President Obama wants to prevent commercial banks and institutions that own banks from owning and investing in hedge funds and private-equity firms. Similarly he hopes to limit the amount and type of proprietary trading that they might do for their own accounts. As a result of these proposals, the common equity securities of the large banking institutions have sold off as investors are unsure about what type of business models these banks might pursue in the future and hence what "normalized" profits might be.

Toomre Capital Markets LLC ("TCM") wonders whether any of these populist proposals will eventually be enacted into law. As Ace Greenberg, the retired CEO of Bear Stearns, said on CNBC today about the possible return of Glass-Steagall: "The egg has been scrambled and I don't think they can put it back in the shell." However, they are sure to appease those on Main Street that are disappointed with the bank bailouts and the large Wall Street bonuses.

Citigroup Nears Deal to Return Billions in Bailout Funds

Ahead of President Barack Obama's meeting on December 14, 2009 with senior banking officials from institutions like Goldman Sachs, JPMorgan and Bank of America, The New York Times is reporting Citigroup Nears Deal to Return Billions in Bailout Funds. "Citigroup was close to a deal on Sunday night to be the last of the big Wall Street banks to exit the government’s bailout program, after trying to persuade regulators that it was sound enough to stand on its own. Negotiations between the bank’s executives and senior government officials went into the night and could still collapse."

Toomre Capital Markets LLC ("TCM") wonders how much of this drive to repay TARP funds is driven by executive compensation desires. Wall Street is still an incredibly "alpha" environment where most participants judge themselves by how well they are being compensated. With Goldman Sachs having a year very close to the earnings in its 2007 peak year, many "stars" are very much aware of the pay possibilities that exist at firms without the government imposed compensation restrictions. Surely Citigroup must be smarting from being the last major bank to have TARP funds outstanding and hence needing to limit what it can pay its investment banking, sales & trading and investment management employees.

Robert Rubin Packs It In At Citigroup

Friday January 9th 2009, former Goldman Sachs CEO and former Treasury Secretary Robert Rubin announced his resignation effectively immediately from Citigroup. After arriving in 1999 with great fanfare as one of the world's savviest and highly respected financial executives, he collected more than $115 million in pay while acting as a Citigroup director and senior counselor. Now some 70 years old, Mr. Rubin is leaving on a low note. In his resignation letter, he wrote that his "great regret is that I and so many of us who have been involved in this industry for so long did not recognize the serious possibility of the extreme circumstances that the financial system faces today."

Many have questioned just what Robert Rubin did that resulted in his being paid about fifteen million dollars per year. Mr. Rubin himself has continually emphasized that he had no operating role at Citigroup and hence should bear little of the blame for the firm's horrendous financial results that partly resulted from his strategic advice. Nonetheless, he has come under considerable fire in the last eighteen months for his strong role in pushing Citigroup back in 2003 through 2006 to increase its risk-taking as the housing and derivatives bubbles expanded.

The net result of that increased risk taking without proper risk management controls has been devastating. During the past eighteen humiliating months, Citigroup has witnessed the ouster of former CEO Sandy Weill's successor Charles Prince, taken $83 billion in write-downs, raised $36 billion in investor cash, take $40 billion in preference shares from taxpayers and gotten the federal government to backstop more than $250 billion in risky and illiquid assets on its balance sheet.

During the past decade there also has been considerable personnel tumult at Citigroup. His tenure began with the tainted-research scandal that entwined analyst Jack Grubman and Sandy Weill. Then came the missteps that led to Citi's shutting down part of its Japanese banking unit in 2004. Ousted or reassigned executives during his career included such high-profile names as Prince, Weill, Michael Carpenter, Michael Klein, Sallie Krawcheck, Todd Thomson and Tom Maheras.

The constant throughout all this tumult was Robert Rubin. He had a very prominent role in picking several top managers at Citigroup, particularly two recent CEOs including Vikram Pandit. One really has to wonder just what Robert Rubin did each year as a rainmaker that justified his considerable compensation over the past decade.

Toomre Capital Markets LLC ("TCM") is not sorry to see the Robert Rubin period of "nightmare" at Citigroup come to an end. Every time shareholders look at their portfolio statements, they are reminded of the bank's dismal record and its 90% decline in stock price. Thank you Mr. Rubin for your "service"!! Of course, you were just a bystander to this disaster and worth every cent paid to you. We really do understand and appreciate!!

United States Treasury Hopes to Stabalize Citigroup

On Monday November 24th 2008, news emerged that the United States government has taken a stake in Citigroup that will amount to about 8% dilution to current stockholders through the issuance of $27 billion in preferred stock that will initially have a coupon rate of 8.00%. The terms of the total package are still somewhat murky. However, apparently for some $300 billion in identified assets primarily tied to mortgage assets, there has been some deal on how the waterfall of losses from those assets will be allocated.

Apparently Citigroup will stand in the first loss position for about 12% of these mortgage-related assets, which apparently (according to the Citigroup CFO [via CNBC]) were picked because they generally duplicate those assets held by many other financial institutions. [If this news report from CNBC is indeed true, does not this report suggest that the direct regulators and Treasury Department expect that other institutions with similar assets will be pressing their regulators and the Treasury Department for a similar “bail-out:?]

Lehman Brothers - Fannie Mae Pairs Trade and a Cup of Coffee

Toomre Capital Markets LLC ("TCM") is an active consultancy in the areas of structured finance, risk management and financial engineering. As a result, we have many conversations with numerous people across the spectrum of clients, prospects, former associates and other industry contacts. In the past several months, many of these conversations have touched upon Lehman Brothers, especially given Lars Toomre's personal history of working there and back in the 1980's running that firm's very influential ABS and mortgage derivatives trading business(es).

Given that that specific business area in the fixed-income markets is at the heart of the current credit crunch in the Capital Markets, many have asked more privately just what Lars has been thinking about the on-going market developments. Lars has specifically made a point (until now) on refusing to comment publically about Lehman Brothers and the recent sacking of his former boss, Joe Gregory, who until recently was the President of Lehman Brothers.

On Friday July 11th 2008, yet another contact queried what Lars thought about the on-going melt-down in financial equity securities, particularly those currently in the news such as Fannie Mae, Freddie Mac, Citigroup, Washington Mutual, Wachovia, Lehman Brothers, Merrill Lynch and Morgan Stanley. We talked through the various plus and minuses of these potential investments. This contact, who runs a multi-billion dollar portfolio on a leveraged basis, then asked Lars to put on his theoretical trading hat and suggest some specific trades. Lars demurred.