Pandit 'near death' cash hoard signals lower US bank profits

Citigroup Inc and JPMorgan Chase & Co are hoarding cash as if another crisis were on the way. Citigroup has almost doubled its cash to $244.2 billion in the year since Lehman Brothers Holdings Inc. filed for bankruptcy, the biggest such stockpile of any US bank.

The lender, which last year came so close to a funding shortfall it had to get a $45 billion government infusion, is under pressure from the Treasury Department and regulators to keep more money on hand for emergencies, even as markets improve.

The caution, which may help restore confidence in the financial system, offers little comfort to shareholders, who can expect to see shrinking returns as banks put money into liquid investments that yield one-twelfth the interest rates of loans.

“It’s a smart longer-term move, but it will take down the rates of returns these companies can generate,” said Eric Hovde, chief executive officer of Washington-based Hovde Capital Advisors LLC, a hedge fund with $1 billion of financial-industry and real estate investments. “If you start to see more economic stabilisation, then liquidity levels would start dropping, but they’ll never go back to the insane level they were pre- crisis.”

Regulators say banks got too aggressive in the years leading up to last year’s credit-market seizure, operating with too little equity capital and putting too much money into illiquid investments such as loans and complex, hard-to-trade securities and derivatives.