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Citi-New York Deal: A Win-Win? (Aug. 8, 2008)

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While New York Attorney General Andrew M. Cuomo and Citibank say they are “pleased” with their recent auction rate securities, or ARS, settlement reached August 7, at least one industry veteran is appalled. As part of the deal, Citigroup is set to buy back some $7.3 billion in ARS, which Citigroup says cost it $500 million pre-tax, and pay fines of $100 million.

Financial-services analyst Richard Bove criticizes the deal on several accounts: First, it does little to improve Citi’s brand and reputation. Second, it jeopardizes New York’s already tenuous position in the global marketplace; and, third, it threatens innovation within the industry, which could further strain New York’s status as a financial hub.

For Citi, Bove’s main concern is whether or not paying fines and following related strategies is in the best long-term interest of the firm and its franchise. “It has become apparent in this decade that Citigroup does not stand behind its products or its people when the company is subjected to stress,” he says. “The company pays fines while never admitting guild. It fires people and constantly looks outside the organization for new ones.”

These measures do “not generate confidence in the company or its activities,” Bove adds. “At some point, one wonders when the company will experience an exodus of business by clients who want assurance that they are dealing with the best and the brightest, and that they are receiving the best advice on the best products that can be obtained in the financial industry.”

This type of assurance, concludes Bove, “was not given by the company Thursday [August 7].” He urges both Citi and New York to give more careful thought about how these organizations might better serve the interests of clients, the business and the state.

“New York is fighting for its financial life in a new financial world,” he explains in an August 8 report.

“If it is the intention of New York State to penalize the financial industry every time there is a product failure, the result will be clear. The innovators will leave New York and go elsewhere to financial markets that are growing faster and are more congenial to innovators. New York will be successful, more than it imagined in penalizing the firms within the state. It will drive them out.”

Citicorp’s past CEO John Reed used to discuss the possibility of moving Citi’s HQ out of New York to enhance its status as an “international player,” shares Bove. “Citigroup is now headed by two men who have no allegiance to New York. They were not even born in America. One must assume that they may share Mr. Reed’s beliefs.”

(Citi Chairman Win Bischoff was born in Germany, and CEO Vikram Pandit in India.)

On August 8, Citi shares traded mid-day near $19 a share. They closed at roughly $18.50 on August 7 on heavy volume, down about 4 percent from an opening price of roughly $19.30. At the current level, they are trading some two-thirds off their share-price level of late 2006, which was $56.

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