Lehman Brothers and Citigroup

In the Saturday November 22nd weekend edition of the Financial Times, Francesco Guerrerra and Greg Farrell report:

Mr Pandit reiterated his backing for Citi's "universal banking" business model, combining wholesale, retail and investment banking. "This is a fantastic model," he told staff.

Mr Pandit and Mr Crittenden urged employees to get in touch with clients and remind them that the group's financial position was sound. Citi executives are worried about a flight of capital from the bank but say they have seen no unusual movement in retail or corporate deposits.

Mr Pandit, who took over in December, blamed the share price slump on misinformation and scaremongering from investors, short-sellers and rivals, saying the company was in much better shape now than a few months ago. He said the bank was working with regulators on a number of issues, a reference to the lobbying by Citi and other banks to reinstate a ban on short-selling.

In the conference call, Mr Pandit insisted that the bank's underlying business was strong, generating $100bn in annual revenues. Those revenues, along with plans to reduce Citi's annual expenses from their current $62bn level to $52bn in 2009, would give the bank an added cushion to defend itself in an economic downturn, Mr Pandit said.

Hmm... isn't this similar to what Lehman Brothers said about 2 months ago? Here is an excerpt by Henny Sender, Francesco Guerrera, Peter Thal Larsen and Gary Silverman from the September 16th issue of the Financial Times:

In public, Mr Fuld embarked on a crusade to stop what he regarded as a concerted campaign to sink Lehman by a small group of short-sellers. He called on the Securities and Exchange Commission to take action, drawing up a voluminous dossier of “evidence”. The SEC eventually tightened rules outlawing abusive short-selling for Lehman and several other financial groups. But Mr Fuld went further, phoning some Wall Street counterparts to say that he had heard their traders were spreading false rumours about his bank.

But such behind-the-scenes actions only served to confirm the anxieties of Mr Fuld’s critics. In late June and early July, he began discussing the possibility of a management buyout and initiated talks with half a dozen private equity firms, with the idea that each would put up about $2bn. Those talks also went nowhere. By August, analysts were anticipating red ink, with JPMorgan predicting a possible $4bn loss. The share price drop accelerated.

Within the bank, the atmosphere became siege-like. “It was like Fort Apache, The Bronx,” said one senior insider, with reference to a hard-nosed film centred on a beleaguered New York police station.

During the first week of August, Lehman hosted top executives of Korea Development Bank and China’s Citic Securities at its New York headquarters for talks on the purchase of a major stake in the bank. Mr Fuld greeted his guests with a show of strength, people familiar with the talks said. Even when he was not in the room, he directed the negotiations, according to one adviser to KDB, and gave out virtually no information about Lehman’s holdings. “The Koreans were very receptive,” says this person. “But then he [Mr Fuld] tried to change the terms. The deal went away.” Lehman has declined to comment on Mr Fuld’s role in the talks.

Lehman’s insiders argue that KDB never tabled a formal offer and that the prolonged discussions prevented them from seeking other suitors. In their view, Lehman’s downfall was so fast that Mr Fuld had little time to look for alternatives.

What these two banks have in common is that the CEOs were blinded by their pride. When things went sour at their banks, they started to blame everything else... the economy, misinformation, short-sellers, and numerous other reasons to why their bank's share price kept going down. The last person that they would ever blame because of their company's downfall are themselves. It also doesn't make sense that while the short-selling ban was in effect the market continued lower and punished Lehman and Citigroup even lower. This only proves that investors know the true value of a company's stock price... and not company management. The reason why most people sell a stock is because it is unlogical to hold a company who may very well be worthless. In the case of Lehman and Citigroup, they were right. There is no market manipulation from short-selling here... people sold Citigroup and Lehman because they realized that they were owners of an insolvent company.