Citibank & Malaysia - The Good, the Bad and The Ugly

The Good

Firstly i have friends who work in Citibank in both Malaysia and Singapore. Last Friday, it became clear that without the US govt intervention Citibank would have actually faced bankruptcy. The repercussions of that would be endless. And, the impact to Malaysia severe. More to that later. On Monday, plans were announced to assist Citibank. I will not bore you with details but it was a huge package and rightly so Citibank shares rebounded an amazing 50% in one day. The future of the firm is more secure.

But are the jobs at citibank safe? Will Citibank be lending in Malaysia? Unfortunately, the answers are no for both.

The Bad

Let's start with the most obvious. Job cuts.

• You are an employee of Citibank and you are made redundant. You receive 6 months of compensation. Will you be spending? NO - Bad for Malaysia. Will you be selling assets? YES if you cant afford to pay your mortgage or car loans. This depresses the asset markets and is BAD for the economy as it speeds up the drop in asset prices. Will you accept a lower wage in the next job? Again, depending on how much you have saved, you might do so. This leads to declining wages as employers face slower growth they look to hire less and for the same money they get experienced labour. New graduates will find it harder to find jobs. This is direct contraction in spending with possibilities of forced selling of assets. This is just one person....but what happens with his friends and colleagues.
  

• Both will also immediately stop spending. This leads to further contraction in spending and investments. Savings, spending and investments are all engines of growth and if people fear for their jobs, they react defensively (a truly understandable reaction). The irony here is that this contracts the overall economy as people stop buying cars, houses. They stop travelling, eating out. Hence the natural individual reaction to be defensive actually accelerates the drop in economic activity. Malaysia (unlike Singapore) has yet to feel this contraction. I hope i am wrong but i sense it is coming and unfortunately i think very few are ready for this.
  

The Ugly

Now if you are thinking that my job is far removed from what is going on Citibank, you fail to realise that everything is connected. Again, it is not my intention to be extremely negative (nor do i claim to be an expert on Citi's business) but more to show how bad things can get with the sincere wish and hope that i am wrong.

• Citibank has been a lender to many major corporates and also to the SMI (small medium industries) sector. Now Citi NY (the parent and HQ) has just taken capital from the US govt in the form of preference shares. These shares rank ahead of normal shares. So if you own shares, you wont see a penny till the US govt is repaid (pref shares redeemed). The US govt now restricts dividend payments (no payment to shareholders) until the pref shares are redeemed. On top of that the management of Citi is restricted on the amount they can pay themselves ie bonuses and pay packages will be subject to govt overview. So shareholders get nothing and management works with big brother watching. No one is happy. The first goal of the management (and wholly supported by the shareholders) is to repay the US Govt. To do this, they need first to cut costs (job losses, defer capital spending) and to reduce their balance sheets (leverage) to more sustainable levels. Unfortunately, because the US Govt's goal is not only to save the US financial system but also to revive the ailing US economy, Citibank will be restricted from contracting business in US. They will contract business globally. In Malaysia, this means they will not be growing their balance sheet (lending) and they will use any excess capital or profits to send it back to the HQ.

• so now they stop lending to major corporations and to SMIs who need cash. These companies scramble to get funds from other banks. These other banks initially love the new clients and soon reach their maximum lending limits. BUT since acquiring these new clients, they have lent less to their old clients. These older clients need the cash even more urgently. They start paying more and more for their loans and loans become more expensive. BUT, at some point if that credit dries up and their own cash is not sufficient, they face bankruptcy. This leads to even more pain with greater job losses and a spiral forms contracting the economy even further. Malaysia is lucky as we seem to be doing ok but in Korea, Indonesia, China and India - this is happening fast.
  

• imagine you are a lawyer working for a law firm where 50% of your income comes from legal work generated from Citibank. Within the next few months, you are going to see your income stream dry up. As a partner of the firm you start to worry and push your staff to generate business elsewhere. At some point your margins will erode and soon you will be pushed into negative. You have no choice but to layoff staff.
  

• you own a restaurant frequented largely by bankers and lawyers who stop coming in regularly. You recently spend a huge amount on renovations and your business drops 30%. Unfortunately, you will cut staff or go bankrupt.

• you own a car dealership and now you find citibank is not granting your clients access to credit and other banks are following as well. Your business falls 50%. You lay off staff.
  

• and the domino's keep falling

I paint a bleak picture and somehow feel i must constantly apologise for this but like i said - my goal is to show the really worst case scenario. I pray i am wrong.

Apologies (AGAIN) for throwing advice but i cannot stress enough the importance of building your cash reserves now....defer spending until you know you have resources that carry you through 2009. Once you have that, spend/invest knowing you are ready for the downturn. If i am wrong, you just deferred your spending for a few months. If i am right you would have saved yourself and your family a great deal of pain.

peace
ved