Citi was only one of several banks to receive a major downgrade from Moody’s rating agency this week, but they were certainly the most vocal protestors of the downgrade, calling Moody’s analysis “arbitrary and completely unwarranted.”
Fifteen financial institutions, including big banks like Goldman Sachs, Morgan Stanley, JPMorgan, Bank of America and yes – Citi – were taken down a few notches by Moody’s, who claimed that all of them “have significant exposure to the volatility and risk of outsized losses inherent to capital markets activities.” Those are the words of Moody’s Global Banking Managing Director Greg Bauer in the statement released along with the ratings cut.
Citing “more fragile funding conditions, wider credit spreads, increased regulatory burdens and more difficult operating conditions,” Moody’s put the 15 downgraded banks into three groups, rating them from strongest to weakest, and stuck Citi into the bottom-ranked group along with Bank of America, Morgan Stanley, and Royal Bank of Scotland. This leaves Citi and Bank of America only two notches from junk status.
To justify the move, Moody’s offered the explanation that Citi was more volatile than other banks and had poor risk management in comparison with their peers.
In return for this rock-bottom ranking, Citi issued a statement blasting Moody’s, calling them “backward-looking” and saying that they “fail to recognize Citi’s transformation over the past several years, the strength and diversity of Citi’s franchise, and the substantial improvements in Citi’s risk management, capital levels and liquidity.”
The statement went on to say that “Citi has greatly improved its safety and soundness since the financial crisis. At the end of the first quarter of 2012, Citi had over $420 billion of surplus liquidity held generally in cash and government securities,” and asserted that they have been “consistently profitable,” holding assets of $209 billion.
Despite the barrage of angry and indignant statements, Citi says they do not believe the poor rating will have a material effect on their business. Citing an increasingly sophisticated consumer culture, they said they believe “investors and clients have become much more sophisticated in their credit analysis over the past few years, and that few rely on ratings alone – particularly from a single agency – to make their credit decisions.”
This may be true, as an increasingly savvy population turns to Google, Yelp, Wikipedia, and other online sources when searching for information, rather than ratings agencies that have been around since long before the Internet was invented (before Al Gore) and may be viewed as dinosaurs of the financial world.
Airing Grievances Online
In fact, just last week another ratings tool came online that might help push agencies like Moody’s, Standard & Poor’s, and Fitch into the pages of history. Last Tuesday, the Consumer Financial Protection Bureau (CFPB) introduced the Consumer Complaint Database, which can be found at www.consumerfinance.gov. This gives credit card holders a forum to air complaints about unfair practices by banks, customer service issues that are unresolved, and other grievances.
As of late last week, for a period from June 1st to June 13th, there were 308 complaints filed in the new database, which is still in beta test mode, and Citibank had received 58 complaints. This exclusive Credit-Land.com chart shows which companies have logged the most gripes so far:
The American people might prove to be a much more powerful ratings agency than Moody’s, Standard & Poor’s and Fitch put together, if the CFPB database takes off. Whether or not they are reliable is another matter, and one that will only be revealed in time.