Citi's troubles and the future of banking

Global banks have written down nearly $110 billion in losses related to mortgage backed securities. Are there more to come and what the write-downs mean for the future of banking? By Vivek Sharma

CitibankHere is a poser to all young Indian managers who aspire to head global corporations some day - Do you have it in you to announce a quarterly loss of nearly $10 billion, without losing your marbles? Can you tell your shareholders that you are writing down 'their' assets by more than $22 billion in a single quarter, and still keep gushing about the wonderful business opportunities your company is well positioned to exploit and extol the great team you have under you?

$22 billion is what India's defence forces, the fourth largest in the world, will spend this financial year, including purchasing equipment. With $22 billion, you can buy out TCS or Infosys. You really need very special skills to take a $22 billion knock in a single quarter and appear calm and sane.

Well, that is what Vikram Pandit, newly minted CEO of Citigroup, did last week. To be fair to him, those huge losses were not his fault. Those losses were a result of his predecessor's eagerness to 'keep dancing while the music lasted'. Citi, and many others, continued to dance and turned in amazing numbers - quarter after quarter. Unfortunately, their risk management teams were sleeping while the music was on. When the music finally stopped, all the muck surfaced and heads rolled.

Citi's quarterly loss is nothing when compared to the erosion in its market value over the last one year - more than $130 billion! You can acquire the whole of Reliance Industries with that money and still be left with enough to buy out a couple of PSU oil companies.

Citi is not an exception. Global banks have so far written down their mortgage-related assets by an astronomical $108 billion over the last couple of quarters, and it is still not over. Of this, the top five losers - Merrill Lynch, Citigroup, UBS, Morgan Stanley and HSBC - account for more than 70 per cent.

How could they let this happen?
One question that begs an answer is how did all these banks together land in such a prime mess? How did the supposedly sophisticated risk management systems fail so completely? How come no one in the senior management teams, who claim to be the best in the business, anticipated the downturn in the US housing market and take corrective steps?