Citigroup jumps the gun, announces capital intentions


In a reasonable request, the Federal Reserve Board asked banks to hold off on announcing capital return plans until after the board rules "yea" or "nay" on specific plans. One might think that banks would be more than willing to honor this request in light of the humiliation some suffered when they suggested publicly that dividend hikes were on the way, only to see the Fed rebuff their plans, leaving them with lots of egg on the face.

Bank of America and Citigroup have both suffered in this ignominy in recent years. In the case of Citigroup last year, the bank flew way too close to the sun and failed to get approval for a plan to hike dividends, which tarnished the credibility of then-CEO Vikram Pandit and may have played a role in his eventual ouster.

While lots of banks pondered announcing their intentions quickly, only Citigroup has gone out on a limb. Despite the Fed's request, the bank has announced that it will seek permission to buyback $1.2 billion in stock, aiming to offset the effects of compensation plans, while leaving the current dividend intact. The bank made the announcement just minutes after the preliminary results of the stress tests, which do not offer any pass/fail pronouncements on specific capital plan requests, were released by the Fed.

You have to wonder if the bank is setting itself up for another humiliation by so boldly declaring its intentions. The upside of such a move is that it signals confidence perhaps and allows current CEO Michael Corbat to come across as aggressive and in charge. The bank can also serve to tamp down market rumors by definitively declaring its intentions.

The downside of course is that you alienate the Fed. And that you exacerbate the humiliation that would ensure if plans were not approved. Bloomberg quoted one analyst who said that, "Corbat would lose all credibility if he fails to get the capital plan approved."

My guess is that this will work out all right for the bank. It's fared very well in the initial round of the tests, which showed that its hypothetical capital ratio under the adverse conditions would come at a lofty 8.3 percent, tops among the largest U.S. banks.

While that has no doubt inspired confidence among Citigroup directors, it doesn't necessarily guarantee that the capital return plans will be approved. The fed just might find an issue to raise.

All in all, the bank might have been better off by waiting, though in the end, it likely will not matter. -Jim