Now is the moment for dramatic U-turns. New management can come off as decisive men of action if they make their strategic volte-faces quickly. Leave it too long though and you risk looking as though you arrived in the job green and witless with precious little notion of how to address the task at hand.
So Citi, after repeatedly pledging that it would not be consolidating its SIVs, even as other large dabblers in these now-defunct structures admitted defeat, has done just that.
Barely 24 hours into the job, Citi’s new chief executive Vikram Pandit made the call: “After considering a full range of funding options, this commitment is the best outcome for Citi and the SIVs.”
The bank has done a decent job of pruning the burden to which it is now exposing itself. The seven SIVs have been slashed from $87bn back in August to $49bn. Felix Salmon at the Market Movers blog notes that $17bn of that reduction seems to have been made in the past few days.
The bank said it expects “orderly asset reductions” to be sufficient to meet the vehicles’ funding requirements through to the end of next year, about $35bn. So they don’t expect, or so they claim, the support facility they’re putting behind the SIVs to be needed. The move is necessitated by the threat of downgrades of the SIVs senior debt by the rating agencies. The Citi SIVs have arguably only survived this long because they had covenants built around ratings triggers, rather than NAV-based ones - but a downgrade of the SIVs senior debt would trigger mandatory liquidation and ensuing asset firesales.
So with Citi, whose seven vehicles once constituted about one quarter of the SIV world, admitting defeat, and HSBC, the second largest SIV creator, already having brought its SIVs on board the balance sheet, the demise of this financial bete noire is well advanced.
The M-LEC or super-SIV, the formation of which Citi on Thursday said it continued to support, looks increasingly an anachronism. The concept has been overtaken by events.
And thanks be to Abu Dhabi. With their $7.5bn in the back pocket, the bank expects to be back to its target 7.5 per cent Tier 1 capital ratio by the second quarter of the year. The ratio had fallen to 7.3 per cent at the end of September and the move to consolidate the SIVs would have shaved another 16bp from that figure.
Will that Middle Eastern cash be enough, though? Or could Pandit’s next step to stamp his authority on the bank, and to win some precious room for manoeuvre, be dividend-related?
