Citigroup: pick your battles

Never bring a knife to a gunfight. A group of Citigroup shareholders, who want their bank to take on the mighty US Department of Justice, have suggested just that. The question for Citi's management is whether it should be the one fighting the industry's battle.

It is easy to see why the shareholders are so upset. The DoJ wants Citi to pay as much as $10bn to settle allegations that the bank mis-sold mortgage-backed securities between 2005 and 2008. But the size of the proposed deal looks disproportionate. In a similar case, JPMorgan paid (only) about 2 per cent of its total loan portfolio. Citi could end up paying a tenth of its MBS portfolio. The size of bank misconduct fines in the US has been steadily rising for years, so shareholders might well be keen for one of the banks to make a stand.

But to do so would be madness. The DoJ's powers go beyond the ability to simply levy fines. Lawyers who have advised global banks in other thorny cases with the DoJ say that it also has the power to revoke banking licences. It can also go after individual bankers. And given that these prosecutors have won the US government billions in bank fines, they now have the financial resources for a long fight. Citi could end up permanently damaged.

Citi could give it a try. Investors at other banks would love to watch the fight, albeit from the sidelines (it would certainly make great TV). And a victory could limit the DoJ's appetite for further fights. But a settlement is preferable for the bank and its investors. Citi has the cash to ride it out. If it shows some goodwill the DoJ could lower the penalty - say to a more reasonable $6bn as modelled by JPMorgan. A fine of that magnitude would cut Citi's capital ratio by only 50bp to 10 per cent, which is higher than many of its rivals. Better to leave the risky gunfights to somebody else.

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