Why Citigroup's Epic Failure Is Particularly Disturbing

There are few bank stocks I like less than Citigroup (NYSE: C  ) , but that doesn't mean investors should sell it because the Federal Reserve rejected the New York-based bank's request to increase its quarterly dividend and share buybacks on Wednesday.

"Needless to say, we are deeply disappointed by the Fed's decision regarding the additional capital actions we requested," said CEO Michael Corbat after learning the news. "The additional capital actions represented a modest level of capital return and still allowed Citi to exceed the required threshold on a quantitative basis."

To be clear, the issue here isn't so much about the dividends and proposed buybacks per se. Indeed, Citigroup asked only to increase its quarterly distribution to $0.05 per share and repurchase a reasonable $6.4 billion in common stock.

While these figures amount to large relative improvements, as the bank currently distributes a mere $0.01 per share each quarter and is operating pursuant to a $1.2 billion repurchase program, they would hardly register on an absolute basis. At $0.20 a share, for instance, its proposed annual dividend yield would remain far south of 1%.

The issue also isn't about Citigroup's capital levels. The results of this year's stress tests, released last week, showed that Citigroup has more than enough high-quality capital to operate in even the harshest economic scenario. This is why the Fed made a point to note yesterday that Citigroup's issues were qualitative, as opposed to quantitative in nature.

So, what is the issue? The issue, at least in my opinion, is what the denial says about Citigroup's operations and the quality of its decision-making at the top. Namely, Corbat and his team were well aware of the reputational damage that would ensue if its capital plan was rejected, but they nevertheless proposed one without being completely certain of the outcome.

To make matters worse, the bank found itself in an identical situation two years ago. Many analysts and commentators even believe the 2012 denial was a precipitating factor behind former-CEO Vikram Pandit's ouster later that same year. It's hard to say for sure whether these events were in fact related, but there's certainly an air of association, to say the least.

With this in mind, one has to wonder why Corbat wouldn't have acted with greater caution and prudence. Sure, hindsight is 20/20, I get that, but Corbat himself had been urging discretion all along. And it's not like he's some random guy writing about bank stocks (i.e., me); he's the CEO of a multibillion-dollar global banking behemoth with all of the resources and brain power that one could possibly need to make a decision like this.

The only conclusion I can draw is that his team felt comfortable taking a risk. Like the long line of Corbat's predecessors, its current executives chose to gamble with the reputation and prestige of the company as opposed to playing it safe. And this, in turn, is the problem. As Citigroup should know by now, a banker's job isn't to take risks, it's to minimize them.

The biggest change you never saw coming
Do you hate your bank? If you're like most Americans, chances are good that you answered yes to that question. While that's not great news for consumers, it certainly creates opportunity for savvy investors. That's because there's a brand-new company that's revolutionizing banking, and is poised to kill the hated traditional brick-and-mortar banking model. And amazingly, despite its rapid growth, this company is still flying under the radar of Wall Street. To learn about about this company, click here to access our new special free report.

Read/Post Comments (2) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 28, 2014, at 9:50 AM, b17lover wrote:

    What I don't get is why the other 2 banks were given the opportunity to take a mulligan. Without any other data is appears that Citigroup was blindsided and Goldman Sachs was given preferential treatment. Unless Citigroup's were not listening? I wish someone in the press would ask!

  • Report this Comment On March 28, 2014, at 11:39 AM, TEBuddy wrote:

    This is what happens when the Government gets involved, they play sides and manipulate the market. This whole idea that the company has to get Federal approval to repurchase its own shares is ludicrous. That should show strength in the company. Why in the world do they have a binary decision for yes or no. If the Government doesn't think Citi's plan is good they should just negotiate something they THINK is reasonable. This was a completely subjective call by the Government, one in which moves markets.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2892276, ~/Articles/ArticleHandler.aspx, 9/1/2015 8:47:32 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

John Maxfield

John is The Motley Fool's senior banking specialist. If you're interested in banking and/or finance, you should follow him on Twitter.

Today's Market

updated Moments ago Sponsored by:
DOW 16,058.35 -469.68 -2.84%
S&P 500 1,913.85 -58.33 -2.96%
NASD 4,636.11 -140.40 -2.94%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/1/2015 4:00 PM
C $50.94 Down -2.54 -4.75%
Citigroup Inc CAPS Rating: ***