Citigroup's Pandit Will Ax 50,000 Jobs

The financial services sector continues to contract. On top of the 23,000 jobs cut this year, Citi is now reporting an additional cut of 50,000 jobs, or 14% of its workforce.

The financial services sector continues to contract.  On top of the 23,000 jobs cut this year, Citi is now reporting an additional cut of 50,000 jobs, or 14% of its workforce.

This comes from a town hall presentation posting on the Citi website.  I perused the presentation and found some other interesting nuggets.  Citi is working hard to reassure its employees and investors that it is getting its house in order.  Most of the presentation is dedicated to how it is restoring its Tier 1 Capital levels, maintainint liquidity, and keeping up earnings levels.  Page 9 compares Citi's Tier 1 capital ratio to several of its competitors and makes the case that its level, at 10.4% if higher than Bank of America and Wells Fargo.  The Tier 1 Capital ratio compares how much core capital the comany has on hand to its risk weighted assets.  Banks are required to have a Tier 1 ratio of 4% in the United States.

Page 12 shows that Citi has $.63 of liquidity for every $1 in assets (mostly loans).  Is that good?  Wells Fargo has the best liquidity, covering $.83 of  every $1 in assets.  UBS is on the low end, only covering $.4 for ever dollar in assets.

Page 13 is very interesting.  It makes the case that Citi has shown stable revenue, at least according to their accounting system.  On the page, they list their revenue calculation and then the GAAP revenue.  GAAP revenue is the standardized way for reporting revenue.  According to GAAP, Citi's revenue has dropped dramatically over the last four quarters.  Why the difference?  I probled a bit further and came to page 27 of Citi's Third Quarter Earnings Release.  There you can see the difference.  In the Citi calculation, they back out the losses from marking down sub-prime related exposure, auction rates securities, Alt-A mortgages, and other junk.  The GAAP calculation includes these losses.  Now, there is a lot of discussion about whether mark to market accounting is fair, but it is the way we account for things.  It doesn't seem right that Citi can count their gains on securities but not count their losses.  Someday, those securities may show a gain and then those would appear back in the revenue column.  But for now they should take the hit.

And this is the fundamental question about Citi and the other banks.  Will the banks, Citi included, have to continue to take write-downs as the recession deepends and more people lose their homes?  Citi (and ever other bank) still have hundreds of billions of loans on their balance sheets with little room for error.  How many times can the banks go to investors and the public looking for additional capital?

As we've written before, the banks are entering a new era in which capital, deposits, and profit will be harder to achieve.  The exotic financing schemes that jacked their bottom-lines are gone.  

The layoffs are a sign of banks right-sizing for a future in which they are the means to an end (financing other businesses) as opposed to being an end unto themselves. 

Sam Cass
Sam Cass: Sam Cass, MBA, JD, University of Texas at Austin. Always a fan of Leonardo Da Vinci.

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