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Citigroup Doesn’t Make the Grade

A couple of weeks ago, the Federal Reserve released the results of their annual bank stress tests. The tests, mandated under Dodd-Frank, test banks to make sure they have enough capital to withstand an economic shock that brings with it a 50% drop in the markets, 13% unemployment and a 20% drop in housing. Banks had to submit plans in January that proved their balance sheets could handle the scenario. We could be cynical and say that the Fed took the middle ground, and made sure to fail a few banks to lend credibility to the process.

Of the 19 banks tested, 4 failed. Citigroup is the third largest bank in the US…but it was the biggest loser of the stress tests. The bank’s proposed plan would have left it with Tier 1 capital of 4.9%, below the 5% minimum required.

But, according to Citigroup, the bank didn’t “fail”… at least not in the traditional sense of the word. The Fed simply ‘objected’ to their capital plan. Maybe it can be argued that objection isn’t the same as failure, but it’s also not the same as approval.

Then the Fed threw Citigroup a rope by issuing a correction and saying that they made an error that overstated a measure of losses on mortgages. But that correction didn’t change the capital ratios that posed a problem. So even with that rope, Citigroup still didn’t do as well as others.

No question, the economic scenario created by the stress test was extreme. Maybe the tests overstated risk…but that’s probably the point of a ‘stress test’. And maybe Citigroup didn’t fail…but it didn’t pass either.

Pass or fail, Citigroup is up 41% year-to-date.

That’s great, until we are reminded that it’s down 92% over the past 5 years. So while the stock signaled a technical buy last week, I can’t justify jumping in.


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