As far as I can understand it from Citigroup's press release, which is not very far, here's how Oceanografia S.A. de C.V. took Citi's Mexican subsidiary, Banamex, for $400 million:
- Oceanografia is an oil services company that, until recently, performed oil services for Pemex, the Mexican state oil company.
- Oceanografia would perform some services and send Pemex a bill.
- Pemex would be like, "thanks, we'll get right on this," and then put the bill in its files somewhere.
- Meanwhile, Oceanografia would send another copy of the bill to Banamex.
- Banamex would pay Oceanografia the amount of the bill (less some discount obviously), and then wait to be paid back whenever Pemex got around to paying it.
- Oceanografia eventually realized that there was a more efficient system.
- In the more efficient system, Oceanografia wouldn't perform oil services, or send Pemex a bill.
- They'd just make up a bill, write some numbers on it, and send it to Banamex.
- Banamex would pay it and wait, in vain, to be paid back by Pemex.
This went on for years? That to me is the oddest part. Oceanografia is -- somewhat obviously -- not a public company, but a random assortment of pseudo-comps suggest that typical accounts receivable turnover in the oil-services industry averages around three months.1 One imagines that Pemex gets more breathing room than the average customer, but still, at some point, wouldn't Banamex call Oceanografia after not getting paid for a year or two? Did Oceanografia just say "yeah, I know, what jerks, they're really slow, keep trying"?2 And Banamex kept extending more credit on more fake receivables, to a total amount of $585 million? And never called Pemex?
Eventually they called Pemex, after "Oceanografia was banned on Feb. 11 by Mexico’s anti-corruption agency from bidding on government contracts for 21 months because it violated agreements with Petroleos Mexicanos," at which point:
Citi, together with Pemex, commenced detailed reviews of their credit exposure to OSA and of the accounts receivable financing program over the past several years. As a consequence of these reviews, on February 20, 2014, Pemex asserted that a significant portion of the accounts receivables recorded by Banamex in connection with the Pemex accounts receivable financing program were fraudulent and that the valid receivables were substantially less than the $585 million referenced above.
Based on Citi’s review, which included documentation provided by Pemex, Citi estimates that it is able to support the validity of approximately $185 million of the $585 million of accounts receivables owed to Banamex by Pemex as of December 31, 2013.
So Citi charged off $400 million, though that only reduced profits by $360 million pre-tax ($235 million after-tax) because of "an offset to compensation expense of approximately $40 million associated with the Banamex variable compensation plan." So Banamex executives are chipping in about 10 percent of the money they lost, which seems generous until you remember that Citi's compensation ratio is around 38 percent. You get paid 38 percent of what you make, give back 10 percent of what you lose, and you've got a good business going.
Are there broader conclusions to be drawn here?3 Earlier this week Reuters had an article containing claims that Banamex had wanted to make some risky home loans, and asked for approval from Citi executives in New York, and New York said no, but Banamex said yes anyway, because, you know, New York was so far away. A Citigroup spokesperson disagreed, in language he might possibly regret today:
Citigroup spokesman Mark Costiglio said in a statement that "the origination and management of the homebuilder loans, as with all loans in Mexico, was conducted under the oversight and framework of Citi's independent risk management function, and any suggestion to the contrary is false."
He added, "Citi has a robust and independent risk management framework that provides oversight for lending decisions that are made in every country in which we operate. This framework results in a loan portfolio that is diversified by obligor, industry and region."
Oops! When he was talking about Citi's robust oversight of lending decisions in every country, Citi was at that very moment conducting an investigation into its terrible oversight of lending decisions in the country with the lending decisions he was defending. So some suggestions to the contrary would have been true, or true-ish.
Of course, one can very humorlessly go around thinking that any failing anywhere at a global bank is a direct failing of its culture and senior management, and that a bank with failings in any far-flung part of the world is Too Big To Manage and should be broken up and everyone imprisoned and the earth salted and so forth. I am not particularly sympathetic to that view, as a general matter: A big global bank is necessarily a collection of separate business lines and regional offices, and will always fall short of the dream of constant supervision and a unified culture. You do the best you can, and the best you can means, at least if you're Citi, that every so often you have to announce a comical error, and that day is never a great day. (The stock is up today, though, so it's not so terrible either.)
And then you learn from your mistake, and from the terrible punishments meted out to those who are so foolish as to incur Mike Corbat's wrath:
“I can assure you there will be accountability for those who perpetrated this despicable crime and any employee who enabled it, either through lax supervision, circumvention of our controls, or violating our Code of Conduct. All will be held equally responsible and we will make sure that the punishment sends a crystal clear message about the consequences of such actions,” Mr. Corbat concluded.4
On the other hand? The robust-risk-management-in-Mexico-lending statement, given at the same time as the not-so-robust-risk-management-in-Mexico-lending investigation, does suggest a bit of disorganization in the head office. Also, I mean, Banamex is not really all that far-flung; Citi's emerging markets, and especially Latin American, aspirations are sort of core to its story.
Nor is this an arcane or backwater line of business: It's the core banking business of lending lots of money to corporate borrowers to run their businesses, the sort of old-fashioned "boring banking" that Citi has identified as its future.4 Which is a good reminder, as if another were needed, that boring banking can be just as risky as exciting trading. Riskier, in some ways, since it turns out that simple banking, done by simple bankers rather than sharp aggressive traders, can leave you exposed to getting ripped off by simple scams. The disadvantage of aiming for sleepy, boring banking is that you occasionally fall asleep.
Halliburton gets around 2.5 months, but they're a big boy. (Computing average collection period treating all revenues as receivables sales.) Oceaneering International -- which I think of as the best comp just because the name is so close to "Oceanografia" -- gets around 2.7 months. Transocean, also pretty oceany, gets 2.6. Weatherford and Cameron are just under 3. Delightfully named Dril-Quip gets 4.5.
2 I suppose I am exaggerating here and there's a Ponzi-ish element in which Oceanografia pays off the old bills with proceeds from new bills, but still. These bills were, according to Citi, 68 percent fraudulent. That's a lot of fake bills to build up.
BY THE WAY, if you were to tell me that in fact some of those bills were for work actually done, and Pemex is disavowing them for reasons of its own, I would not, like, laugh you out of the room. Like, this fraud makes sense if 10 percent of the invoices are fraudulent, or 100 percent. But 68 percent fraud is kind of a weird percentage of fraud. Citi says that $110 million of the non-fraud receivables are for "documented work performed that was still going through the Pemex approval process," so this is pretty recent real work that is being performed and submitted and going through regular processes, even while Oceanografia's main line of business is allegedly churning out fake bills. I don't get it.
3 Or narrower conclusions? About Oceanografia, for instance? Citi notes that, in addition to the $585 million receivables facility, it loaned $33 million to Oceanografia directly. From Citi's press release:
Based on its continuing review, Citi will determine whether all or any portion of the $33 million of direct loans made to OSA and the remaining approximately $185 million of accounts receivable due from Pemex is impaired, taking into consideration the impact to OSA and Pemex of the actions and events described herein.
Umm? I feel like there are two possibilities:
- Oceanografia is basically fine, just submitted some bad invoices to Citi, mistakes happen; in which case surely it should owe Citi the full $585 million under the receivables facility, or
- Oceanografia is not fine at all, in which case, the $33 million that it owes Citi on its own behalf is probably ... I mean, "impaired," at least, right?
4 Why ... why would all be held equally responsible? I kind of don't get this threat, though it certainly sounds good.
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