Let me come right out and say it: There is no place in a long-term investor's portfolio for Citigroup (NYSE:C). I struggle to envision a likely scenario in the foreseeable future that could make that change.
Analysts and commentators can argue all day long about its valuation, new management, and global diversification, but the fact remains that Citigroup's culture of inept risk management has led it time and again to the brink of failure over the past 100-plus years.
The most recent crisis offers a textbook example. Thanks to its multibillion-dollar portfolio of toxic derivatives tied to the subprime mortgage market, the New York-based bank had to be propped up with $45 billion in funds from the government.
But while U.S. taxpayers ultimately came out ahead to the tune of $16 billion, Citigroup's shareholders fared considerably worse:
The counterargument is that all of this is in the past and is thus irrelevant. "Past performance doesn't guarantee future results," the saying goes. But while there's truth to this -- at least in theory -- the volume of actual evidence that imprudence is ingrained in Citigroup's culture is overwhelming.
Just this year, Citigroup was the only U.S. bank other than Utah-based Zions Bancorporation to have its capital plan rejected by the Federal Reserve. As the central bank explained:
While Citigroup has made considerable progress in improving its general risk-management and control practices over the past several years, its 2014 capital plan reflected a number of deficiencies in its capital planning practices. ... Taken in isolation, each of the deficiencies would not have been deemed critical enough to warrant an objection, but, when viewed together, they raise sufficient concerns regarding the overall reliability of Citigroup's capital planning process.
The rejection came in the wake of a scandal involving Citigroup's Mexican banking unit. "The $400 million fraud forced Citigroup to adjust its earnings and," according to Dealbook's Michael Corkery and Jessica Silver-Greenberg, "raised questions about whether the bank had consistent risk controls across its many global business lines."
Now, compare that with what former Treasury Secretary Timothy Geithner had to say about Citigroup in his memoir, "Stress Test: Reflections on Financial Crises":
We never thought of Citigroup as a model of caution. It had been at the center of the Latin American debt crisis of the 1980s. The New York Fed had cracked down on it for shenanigans related to the Enron scandal shortly before I arrived, and we hit it with the subprime lending fine that pleased Paul Volcker shortly after I arrived. In 2005, after Citi was forced to shut down its private banking operations in Japan because of illegal activity, we banned the company from major acquisitions until it fixed its internal controls and other overseas governance issues. The British banker Deryck Maughan, whom I knew from his days running Salomon Brothers in Japan, came to see me after he was forced out of his job as chairman of Citigroup's international operations. His message was that Citi was out of control.
And the examples like these go on and on. As I wrote at the end of last month:
In the early 1920s, sugar loans to Cuba "threatened to wipe out the total capital of the bank." Later that decade, its securities affiliate was caught unloading toxic securities onto the bank's unwitting depositors. In the early 1930s, it underwrote more than $100 million in loans and bonds for the Swedish "match king," Ivar Kreuger, who turned out to be running a Ponzi scheme.
The point here is simple. Despite the current narrative about Citigroup that's circulating among analysts and commentators, the nation's third-biggest bank by assets isn't a turnaround story. It's a bad bank. It always has been. And prudent investors would be wise to assume that it always will be.