Levine on Wall Street: Citi Bailout Ends
Citigroup's bailout is over.
Stephen Gandel at Fortune noticed that the Federal Deposit Insurance Corporation still owned about $2.4 billion of Citigroup bonds, and yesterday it announced that it's selling them. Here is the prospectus; it is conceivable that the FDIC hadn't sold these bonds earlier because it forgot it had them. In any case the sale will end the government's investment in Citi, at a total profit of $15.5 billion, which is pretty good. (I once estimated the government's internal rate of return on Citi at 17.5 percent, and I didn't even know about these bonds!) One lesson is that banking is a cyclical business and if you have unlimited dollars and the political will to invest in them at the low point, you can make a lot of money doing so. And the more cyclical banking is -- the higher the highs and the lower the lows -- the more money you can make. The government's interests as an investor are almost opposite its interests as, y'know, a government.
Banks are still risky.
Speaking of which! Bloomberg News has a good roundup of all the things that regulators thought about doing to make banks safer in the five years since the financial crisis, and then ended up doing halfheartedly or not at all. A theme here is that financial markets are complicated, regulators need help in figuring them out, and, as Penn law professor David Skeel says, that "the big banks … were seen much more as partners than as problems." But those partners have short memories. The article gives the last word to John Reed, the former Citigroup CEO who sort of invented universal banking, who notes that the banks feel no urgency for changes: "The world looks pretty benign right now. But it always does until it doesn't." Then it doesn't until it does!
To pay for its $130 billion buyout of Verizon Wireless from Vodafone, Verizon is offering "$20 billion or more" of new bonds in what could be the largest bond sale ever. The idea is to get the deal done while rates are still low because the Fed is still removing bonds from the market: As the Journal says, "since the Federal Reserve indicated in May it might taper its bond-buying program, sentiment has shifted and yields have risen, spurring companies contemplating large purchases to pull the trigger." That timing benefit is offset by the sheer size of Verizon's deal, though: at $20 billion, it's as big as the (monthly) taper. And so Verizon is not only expected to pay a new-issue concession of something like 75 basis points above where its existing bonds are trading, but Verizon's, and other telecom companies', existing bonds are repricing at wider levels to reflect the much greater supply of bonds in the market. It's like a do-it-yourself taper for corporate bonds.
JPMorgan is getting sued a lot.
JPMorgan chief financial officer Marianne Lake told investors yesterday that the bank is adding more than $1.5 billion to its litigation reserves this quarter to cover various actual and potential lawsuits in what you'd have to say is a bad quarter for JPMorgan getting sued. (Also yesterday JPMorgan settled a lawsuit for $300 million and it's, like, not even one you've heard about; the supply is inexhaustible.) Litigation reserves are based on pretty subjective estimates of likely losses and are subject to some fudging. A fun thing would be if regulators inquired into JPMorgan's litigation reserving practices, found some flaws, and sued over that.