Dear Vikram Pandit,
FT Alphaville was a little bemused by your testimony to the Congressional Oversight Panel on Thursday, in which you blamed your bank’s near collapse on the nefarious activities of short-sellers.
To wit, Mr Pandit, you said:
This was not a fundamental situation. It was not about the capital we had, not about the funding we had at that time. But with the stock price where it was — and, by the way, a lot of that was driven by short sellers. And short sellers started selling stock, the stock started going down. And when that gets to that point, perceptions become reality.
And:
there are ways in which fear overtakes it, and particularly that’s the tool that short sellers need to make money. And so, that was a very dominant activity. And there were no real circuit breakers to stop the short selling. And that’s one of the things that took our stock down.
To which we must respond, Mr Pandit, with just one word: Wot?
Let us elaborate.
Lehman Brothers collapsed in September 2008. On the Friday before the bank filed for bankruptcy, Citi’s shares closed at $17.96. But even in the immediate aftermath of the Lehman collapse, through to the end of October, Citi’s shares held up. On October 31, they closed at $13.65.
But what happened after that, Mr Pandit? Why did your shares dip below $1 in March 2009?
You might imagine that the evil short sellers were out in force, trading on all the fear and uncertainty in the market. But perhaps those selling out of Citi were actually concerned by the $18bn in writedowns you reported for the fourth quarter of 2008?
And does this sound familiar?
Our financial results this quarter are clearly unacceptable. Our poor performance was driven primarily by two factors – significant write-downs and losses on our sub-prime direct exposures in fixed income markets, and a large increase in credit costs in our U.S. consumer loan portfolio.
Why weren’t you calling out the shorts then? Evil market operators didn’t bring about more than $120bn in credit losses and writedowns at Citi.
But don’t take our word for it, Mr Pandit. We’ll let Data Explorers — specialists in tracking short interest — paint you a picture:
dataexplorers chart of Citi short interest v Price
That chart would suggest that when your share price was collapsing, the short interest in Citi was very low – less than 5 per cent of your market cap, in fact.
And as Data Explorers’ Will Duff Gordon noted:
short selling rocketed in Feb 09 due to a “free money” arbitrage that opened up due to Citi’s conversion of pref shares into ords. It had nothing to do with a bear raid or negative view of the company just an old fashioned arb between two instruments.
Maybe it would have been more accurate if you had told the Congressional Oversight Panel that the real reason you needed a whopping bailout was that your executives and risk managers stood idly by as your bankers and traders piled into subprime, recklessly handed out credit cards and fell hard for CDOs?
You know the shorts had nothing to do with it, Mr Pandit. Do fess up.
With love,
FT Alphaville & Tom Braithwaite
Related links:
Censorious Citi – FT Alphaville
BofA and Citi warned over credit ratings - FT
UBS, Citi and other ‘below average’ banks – FT Alphaville