Though Citi has its own business reasons for pulling out of the underwriting and market-making of municipals, it is probably a good time for all the banks to re-assess their exposure to this formerly quiet little backwater. More after the jump.
From Bloomberg, December 14:
- Bank has plummeted in muni-bond underwriting rankings
- Decision comes as Fraser reshapes firm to meet profit goals
Citigroup Inc. will shutter its municipal business, one of the most dramatic moves yet by Chief Executive Officer Jane Fraser as she seeks to squeeze better returns out of the Wall Street giant.
The bank decided the business, which has tumbled in the rankings for underwriting state and local debt, is “no longer viable given our commitment to increase the firm’s overall returns,” according to a memo to staff seen by Bloomberg News. Citigroup intends to complete the wind down by the end of the first quarter, which will mean most of the company’s municipal sales, trading and banking staffers will be departing the bank in the coming months.
“We have made the difficult decision to wind down our municipal underwriting and market-making activities,” the memo said.
The move affects about 100 employees, according to a person familiar with the matter.
Reports that Citigroup was deciding whether to exit a business it once dominated shocked the municipal market earlier this year. For decades, the bank was a powerhouse in the $4 trillion market for US state and local debt, helping on landmark projects including the rebuilding of the World Trade Center site and the installation of 65,000 streetlights around the city of Detroit.
But the unit’s fortunes have turned in recent years, and the division didn’t fit with Fraser’s broader goal of making Citigroup the premier bank for large, multinational corporations. Texas politicians added another blow when they froze the bank out of a number of deals there because of its firearms policies. Texas is the No. 1 market for muni sales this year, so the moves crimped the unit’s revenue and overall profitability.
The decision comes after months of intense deliberations inside Citigroup, according to people familiar with the matter, who asked not to be identified discussing private information....*****.....On one side were top trading executives, including Andy Morton and Mickey Bhatia. They were keen to get out of the business because it was hurting the unit’s broader efforts to improve profitability.On the other side was Ed Skyler, a key lieutenant of Fraser and head of the firm’s enterprise services and public-affairs division. To Skyler, it was important for Citigroup to keep working on financings that lead to the building of bridges, roads, schools and hospitals across America. Not only did they help the bank make inroads with lawmakers, they gave Citigroup a tangible connection to the American public.
Citigroup has spent years trying to convince Texas officials that its policies don’t violate state law, which punishes banks if they discriminate against the firearms industry. In August, Fraser and Skyler even traveled there to meet with Governor Greg Abbott about the bank’s continued commitment to the state, where the bank has 8,500 employees.
Ultimately, though, Fraser’s aspiration to reach Citigroup’s new financial targets — whatever the cost — won out. The firm has repeatedly abandoned or missed targets over the years, and Fraser is determined to restore investor confidence in the bank’s ability to set and meet guidance. The decision to shutter the municipal business comes after she already decided to exit more than a dozen retail bank operations in overseas markets.
Historic Roots
Banks often point to their work raising money for cities and states when facing scrutiny from local and federal politicians, and Citigroup was no exception.At the New York-based bank’s annual shareholder meeting in 2018, which it held in Chicago, then-CEO Michael Corbat touted the fact that his bank had been a key underwriter on bond deals for the city’s O’Hare International Airport for decades....
....MUCH MORE
Can you imagine personally buying a 20-year City of Chicago general obligation bond?
Airports are a bit different because the airport authority is taxing transients who don't vote.
But they are dependent on people wanting to travel to or through that airport so the city's general economy is a factor. The city on the other hand....
Here's Mr, Buffett in the 2008 Berkshire Hathaway annual report, wrapped by a February 2019 post:
Mr. Buffett, through his insurance companies, guarantees a few of the
country's municipal bonds. Muni holders are often in conflict with
public employee unions and/or public employee pension overseers,
especially in the event of a municipal bankruptcy.
These guarantees usually take the form of credit default swaps.
In addition Berkshire Hathaway carries a small amount of munis as an asset on the consolidated balance sheet.
...The rationale behind very low premium rates for insuring tax-exempts has been that defaults have historically been few. But that record largely reflects the experience of entities that issued uninsured bonds. Insurance of tax-exempt bonds didn’t exist before 1971, and even after that most bonds remained uninsured.
A universe of tax-exempts fully covered by insurance would be certain to have a somewhat different loss experience from a group of uninsured, but otherwise similar bonds, the only question being how different.To understand why, let’s go back to 1975 when New York City was on the edge of bankruptcy. At the time its bonds – virtually all uninsured – were heavily held by the city’s wealthier residents as well as by New York banks and other institutions. These local bondholders deeply desired to solve the city’s fiscal problems. So before long, concessions and cooperation from a host of involved constituencies produced a solution. Without one, it was apparent to all that New York’s citizens and businesses would have experienced widespread and severe financial losses from their bond holdings.
Now, imagine that all of the city’s bonds had instead been insured by Berkshire. Would similar belt-tightening, tax increases, labor concessions, etc. have been forthcoming? Of course not. At a minimum, Berkshire would have been asked to “share” in the required sacrifices. And, considering our deep pockets, the required contribution would most certainly have been substantial.
Local governments are going to face far tougher fiscal problems in the future than they have to date.The pension liabilities I talked about in last year’s report will be a huge contributor to these woes. Many cities and states were surely horrified when they inspected the status of their funding at year end 2008.
The gap between assets and a realistic actuarial valuation of present liabilities is simply staggering.When faced with large revenue shortfalls, communities that have all of their bonds insured will be more prone to develop “solutions” less favorable to bondholders than those communities that have uninsured bonds held by local banks and residents. Losses in the tax-exempt arena, when they come, are also likely to be highly correlated among issuers.
If a few communities stiff their creditors and get away with it, the chance that others will follow in their footsteps will grow. What mayor or city council is going to choose pain to local citizens in the form of major tax increases over pain to a far-away bond insurer?
Insuring tax-exempts, therefore, has the look today of a dangerous business – one with similarities, in fact, to the insuring of natural catastrophes. In both cases, a string of loss-free years can be followed by a devastating experience that more than wipes out all earlier profits. We will try, therefore, to proceed carefully in this business, eschewing many classes of bonds that other monolines regularly embrace.
The type of fallacy involved in projecting loss experience from a universe of non-insured bonds onto a deceptively-similar universe in which many bonds are insured pops up in other areas of finance. “Back-tested” models of many kinds are susceptible to this sort of error. Nevertheless, they are frequently touted in financial markets as guides to future action. (If merely looking up past financial data would tell you what the future holds, the Forbes 400 would consist of librarians.)...MUCH MORE
Indeed, the stupefying losses in mortgage-related securities came in large part because of flawed, history-based models used by salesmen, rating agencies and investors. These parties looked at loss experience over periods when home prices rose only moderately and speculation in houses was negligible. They then made this experience a yardstick for evaluating future losses. They blissfully ignored the fact that house prices had recently skyrocketed, loan practices had deteriorated and many buyers had opted for houses they couldn’t afford. In short, universe “past” and universe “current” had very different characteristics. But lenders, government and media largely failed to recognize this all-important fact.
Investors should be skeptical of history-based models. Constructed by a nerdy-sounding priesthood using esoteric terms such as beta, gamma, sigma and the like, these models tend to look impressive. Too often, though, investors forget to examine the assumptions behind the symbols. Our advice: Beware of geeks bearing formulas.
....The rest of the country has to begin planning now, immediately, how they will fight being forced to pay for Chicago's political and criminal corruption. Because you know, as sure as this old world keeps spinning around, that the Chicago politicians and their corrupt buddies in Congress, from many states but in particular New York and California, that they are already planning how to shake down the people who didn't cause this mess.
Chicago has had 90 years to get things just the way they wanted them. This is what they created.
And the Chicago mob and their ilk will run the shakedown through any or all of the institutions they can corrupt or control, the House of Representatives that holds the power of the purse, the Presidency and its powers of executive orders and the bureaucrats in its administrative state, including but not limited to the U.S. Treasury, and finally the Federal Reserve which seems to have some funny ideas about buying muni. paper.....*****Mr. Buffett's thinking on dealing with these swine can be boiled down to two words: Do NOT.Do not do business with them unless you have good collateral, in hand. Do not acquiesce to their pleading, cajoling, threats of force or retribution. Do not "be nice" and entertain, or in any way agree with, their mental illness and social depravity.
Do not be a cuckold to those corrupt bastards in Cook County.
