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Martin T. Sosnoff Headshot

My S&M Relationship With Citi and Morgan

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Finally, I understand why loan volume at major banks remains stillborn. Bankers only want to write loans on their own draconian terms. Years after flooding the market with toxic securitized sub prime mortgage paper (in the trillions) that nearly plunged the country into Great Depression Part II, reserve city institutions got religion.

Morris Shapiro (go back 50 years) was the dean of bank stock trading who chaired his eponymous OTC brokerage house. Shapiro was the primary market maker in banks that traded over-the-counter then, and nothing escaped Morris's notice.

In the mid-sixties, I attended the opening party for Edmond Safra's Republic National Bank. Morris whispered in my ear, "You know there are more banks than bankers in this world." I never forgot those words.

Morris, then demanded an escort into Republic's sub-basement to inspect their vault. Naturally, he faulted its construct, a detail beyond my competence as a young securities analyst covering financials.

Fast forward some 20 years. In the mid-eighties I had amassed a reportable position in Caesar's World. Unable to convince its headman, Henry Gluck, to take Caesar's private, I launched an unsolicited bid, backed by a billion dollar line of credit from a consortium of banks. It took them exactly one hour to pass on my credibility and credit worthiness. After all, the standby fee, 50 basis points, made them salivate.

Mike Milken was Caesar's banker then and tried to dissuade me, but it didn't stop Mike from asking for a corporate governance clause that if Caesar's was acquired, Drexel Burnham would be entitled to a $10 million fee. "Those were the days my friends...."

For decades, JP Morgan was my personal banker until I asked for a mortgage (1992) on my purchase of an historic manor house on the Hudson River. My banker felt I had asked for the un-askable and un-doable.

ME: I just bought a manor house on the Hudson with river frontage of half a mile. I'd like a 50 percent mortgage

MY BANKER: We can't do that transaction.

ME: Why not?

MY DUMB BUNNY BANKER: We don't lend on one-of-a-kind properties.

ME: But, you've got my updated net worth statement. There's sufficient coverage for the Empire State Building.

THE BUNNY: I understand that, but this is bank policy. No exceptions.

ME: This is the end of a 30-year relationship and I hung up.

Over the past 18 years my property appreciated threefold. Morgan went on to lose tens of billions in commercial real estate deals, second mortgages, home improvement loans and sub prime mortgage backed derivatives. The bill for the industry's sub prime mortgage paper caper tots up to $1 trillion, worldwide.

Early in 2009, Citigroup needed a $50 billion transfusion, and was forced by the US Treasury to raise equity capital that diluted shareholders unmercifully. Share count ballooned to over 29 billion from its 5 billion share base in 2007. Book Value diminished from $22.71 to $5.61 currently.

I own Citi today. It trades under $5, probably overcapitalized, down from the mid-fifties late in 2006, pre-subprime blow-up. Citi won't see $55 again, even if it executes impeccably for the next 25 years.

Citi holds my one of a kind house mortgage only because Sandy Weill and I grew up in the business together. All Sandy asked for was an auxiliary water supply in case of a fire. I dredged my pond and put in an all-weather hydrant.

My latest encounter with Citi relates to my son, Jason, purchasing a townhouse in the Williamsburg section of Brooklyn. I was now dealing for his mortgage on this property, but faced a chastened banker whose burnt fingers had not fully healed.

Like all good bankers he pressed to over-collateralize the loan. Yes Citi would do an 80 percent mortgage but they checked the location and no transactions at my son's purchase price were even close. The banker, of course, couldn't visualize the interior, in mint condition, redone by a Google executive with exquisite taste. Citi needed an additional $500,000 in collateral.

I sent them a tranch of debentures on Continental Airlines that in its darker days traded in the fifties, now at $104, 10 months from maturity. The bank disregarded the maturity date, looked at the CCC credit rating and offered me 30 cents on the dollar.

Rather than argue with gross stupidity I sent them BBB paper, rated at 80 percent of face value. I gently reminded them that they had inventoried toxic waste in BBB rated subprime mortgage tranches that proved worthless within 12 months of issuance. Continental wasn't going under in 10 months even with oil futures spiking.

If Jason's daddy was a schlepper with no collateral to hypothecate this mortgage wouldn't get done today. Is it any wonder that mortgage writing and housing remain in dishabille?

Meanwhile, the banking industry licks its chops, waiting for Fannie and Freddie's dismantlement by the Congress. They were considered unfair competitors because these quasi government giants could raise capital on the cheap under the umbrella of the U.S. Treasury's implicit guarantee.

Fannie and Freddie in turn guaranteed trillions in so-called prime mortgage paper but in the blowup needed federal assistance into the hundreds of billions. Where was the regulatory oversight? Largely in the hands of Congress. At least the U.S. Treasury made back its $50 billion plus on Citi's care package. We the taxpayers will drop over $200 billion on Fannie and Freddie, and this is non-retrievable.

Having said all this, I need to dig a hole and whisper that I own banks. Not only JP Morgan, and Citigroup, but Wells Fargo and Bank of America. The concept is simplistic. I bought them near the bottom of the market in 2009 as wannabe survivors. Today, the rationale is they could reach normalized earning power within 2 years and sell above net tangible assets per share.

As a sidelight, the straight preferred stock of Bank of America quadrupled while the common merely doubled since the darkest before dawn days. Bank of America's preferred paper, in the twenties, yields 6.6 percent, the common stock nada por nada.

One more thing: Citi wouldn't write Jason a straight 30-year mortgage. He got a 30-year contract but the rate is adjustable after 5 years, tied to LIBOR and doesn't max out until 8.5 percent. This is a great way for Citi to arbitrage low money market rates today and protect themselves from rising interest rates 5 years out. The sub prime mortgage wipe-out was triggered by the expiring two-year teaser rates on loans with inflated appraisals. Such grandiose greed bordered on poetry.

It's worth repeating: "There are more banks than bankers in the country."