Feeling subprimal at Citi…
By now, you’d have to be in a deep trance not to have heard the news about Chuck Prince walking the plank, or as he so eloquently put it,”the only honorable course for me to take as chief executive officer is to step down” and Citigroup’s (C) plans to write off $8 billion to $11 billion as a result of Subprimania. If one more top executive is forced out — we can start taking bets on who that might be — it’s officially a trend story, based on the old rules I learned as a journalist.
With all of this other stuff going on, it seems interesting that Citi chose today to file its latest Q which used the word sub-prime 53 separate times in the 100-plus page filing. Compare that to 10-Q that Citi filed back in August, which only mentioned the S-word twice. Was it really not a problem worth much discussion only three months ago?
Of course, that wasn’t the only interesting thing in Citi’s filing. There was also the part about increasing its reserves for bad credit card debt — a story that seems to have gotten lost in Suprimania — by a more than six-fold increase to $1.3 billion which Citi explained like this:
The increase in credit costs primarily reflected a weakening of leading credit indicators, including increased delinquencies in first and second mortgages and unsecured personal loans, as well as trends in the U.S. macro-economic environment, portfolio growth, and a change in estimate of loan losses inherent in the portfolio but not yet visible in delinquencies.
It’s that last bit of the sentence, which I added emphasis to, that makes you wonder if the subprime crisis is really only part of the story at Citi: they’re seeing problems, but they’re not quite showing up in ways that are really quantifiable. At least not yet.
Of course, given that gloom and doom, what does Citi do? Why offer up reloaded stock options, of course. The exhibit was buried at the end of today’s Q. Unfortunately, it’s not clear from the filing exactly who will benefit from the reload options. There’s a quick primer on reload options here. As this story pointed out earlier this year, Prince has benefited from reloaded options before. Whether he’ll get more reloaded options before officially leaving the auditorium remains to be seen.
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November 5th, 2007 at 12:49 pm
That’s nice digging, Michelle. On reloads, I thought expensing (FAS 123R) killed them off in practice; since the reload grants are expensed, it’s a safe bet that’s an limited (executive) feature. On the bad debt reserves, my read on that it is, since it is a discretionary account (not cash), it is like “big bath accounting:” they already have large write offs, so they throw this under the rug also, where it makes little difference. So they have more room in the future, and if they overestimated the reserve, this is a clever (sneaky) way of inflating future earnings. But very interesting nuggets that don’t seem to elsewhere be reported!
November 5th, 2007 at 2:24 pm
[...] Michelle Leder of Footnoted: …With all of this other stuff going on, it seems interesting that Citi chose today to file its latest Q which used the word sub-prime 53 separate times in the 100-plus page filing. Compare that to 10-Q that Citi filed back in August, which only mentioned the S-word twice. Was it really not a problem worth much discussion only three months ago? [...]
November 5th, 2007 at 4:32 pm
I don’t think 123 killed off reloads, at least based on a quick search I did in the filings: there’s quite a few companies offering reloads, including Goodyear Tire (GT) and Alcoa (AA). But I defer to some of the accounting experts who read footnoted.
As for the “big bath”, that’s definitely something to keep an eye on.
November 5th, 2007 at 4:58 pm
I didn’t quite mean entirely as your digging reveals re: Citi. But FAS 123 took the wind out of them - already not liked by ISS etc, each add’l reload is accounted for separately. Fred Cook who pretty much invented them, just reported that NONE of his “top 250″ employ them. So, not dead, but rare it seems
November 6th, 2007 at 1:30 am
Thanks, David. Fred actually lives up the road from me — less than a mile as the crow flies!
November 6th, 2007 at 11:09 am
That’s interesting about Fred Cook, David. Do you have a link to that you can post for footnoted readers?
November 6th, 2007 at 12:41 pm
Sure Michelle. The fred cook site is resourceful in providing compensation-related FASB/ISS interpretations (and I think the top 250 comp report is free). Fred is retired but George Paulin leads them now and he’s very good. Unlike a lot of comp consultants whose job description consists of justifying higher pay, they do a good job and try to link pay to performance (I competed with them)
Fred Cook @ http://www.fwcook.com/
Also, you probably already know about ISS/RiskMetrics:
http://blog.riskmetrics.com/
ISS is a very important resource because they advise on proxy votes for a lot of institutional assets, so their views matter immensely. For example, their SVT metric for ten years has set the benchmark in regard to what stock option plans are advisable (for shareholder approval).
Although I prefer the methods of the smaller competitor (they were doing really great until the ill-advised transaction; no matter, glass lewis is the leading edge in regard to governance, IMO)
http://www.glasslewis.com/
Hope that’s helpful!