Citigroup Was On The Verge Of Failure, Rescue Was Based On 'Gut Instinct'

Should have let them fail!

regards,
-Lance

-------------------
The Huffington Post January 14, 2011
Shahien Nasiripour
[email protected] | HuffPost Reporting
Citigroup Was On The Verge Of Failure, New Report Finds; Rescue Was  
Based On 'Gut Instinct'

First Posted: 01-13-11 03:33 PM   |   Updated: 01-13-11 04:19 PM

Citigroup, the nation's third-largest bank by assets, was on the verge  
of being closed by regulators the week of Nov. 24, 2008 as depositors  
rapidly withdrew money and the bank's counterparties declined to  
provide it credit, according to a government report released Thursday.
The new findings shed light on the degree to which Citigroup, the  
financial services behemoth with a long history of finding itself in  
trouble and receiving government support, was actually in danger of  
failing during the fall of 2008. Until now, few were aware that Citi  
was perilously close to being shut down.

"We were on the verge of having to close this institution because it  
can't meet its liquidity Monday morning," said Sheila Bair, chairman  
of the Federal Deposit Insurance Corporation, during a meeting the  
previous Sunday night, according to the report by the Special  
Inspector General for the Troubled Asset Relief Program.

"Without substantial government intervention," said another FDIC  
official, bank regulators and Citigroup "project that Citibank will be  
unable to pay obligations or meet expected deposit outflows next  
week," according to the report.

Yet while policy makers unanimously agreed that Citigroup needed  
additional help -- this was after the megabank had already received  
$25 billion in TARP funds -- the "strikingly ad hoc" nature of the  
response was troubling, notes the inspector general, known as SIGTARP.

Citigroup's problems were well known to regulators. In May 2008 -- six  
months before the second multi-billion dollar infusion of taxpayer  
cash into the lender -- regulators at Geithner's New York Fed forced  
the bank to create a plan to strengthen its risk-monitoring practices  
so it could better judge the bank's exposures.

A month later, bank overseers at the Office of the Comptroller of the  
Currency compelled the bank to enter into another agreement, this time  
requiring upgrades to the firm's risk management. That agreement is  
still in effect today, according to SIGTARP's report.

Even so, the consensus to give Citigroup more taxpayer cash "appeared  
to be based as much on gut instinct and fear of the unknown as on  
objective criteria," according to the report. One FDIC official told  
SIGTARP that policy makers "made a judgment call" on the degree of  
Citigroup's importance to the entire fabric of the financial system.
More than three years later, such judgment calls persist. Treasury  
Secretary Timothy Geithner, who effectively oversaw Citigroup as the  
then-president of the Federal Reserve Bank of New York, told SIGTARP  
during an interview last month that it's not possible to create  
effective, objective criteria for evaluating the risk a financial firm  
poses to the system.

"It depends too much on the state of the world at the time," Geithner  
said Dec. 21. "You won't be able to make a judgment about what's  
systemic and what's not until you know the nature of the shock."

Geithner added that lenders would simply "migrate around" whatever  
objective criteria policy makers developed in advance.

Taxpayers may once again have to support failing financial firms based  
on gut instinct alone.

"In the future we may have to do exceptional things again if we face a  
shock that large," Geithner said, according to the report. "You just  
don't know what's systemic and what's not until you know the nature of  
the shock."

The 2010 law overhauling financial regulation, known as Dodd-Frank,  
gives policy makers "better tools," Geithner said, "but you have to  
know the nature of the shock."

Given the ambiguity, SIGTARP notes that taxpayers likely won't know  
the extent to which they'd be on the hook for future shocks to the  
system until the next crisis.

Despite the concerns about how regulators acted and how they might do  
so in the future, the report cautiously called the taxpayer rescue a  
success. Citigroup didn't fail, the financial system largely  
stabilized, and taxpayers turned a profit on their investment.

"We appreciate the report's conclusion that Treasury's investment in  
Citigroup was successful and that our efforts 'achieved the primary  
goal of restoring market confidence' during a time of unprecedented  
turmoil," Tim Massad, the Treasury official now overseeing the  
taxpayer bailout, said in an e-mailed statement.

As for Citigroup, despite a Feb. 22, 2009, e-mail from Bair stating  
that the bank needed management changes "at the top of the house,"  
much of its senior managers remain, including its chief executive,  
Vikram Pandit.

In addition, the internal auditor at another government agency, the  
Securities and Exchange Commission, is probing whether the SEC's top  
enforcement official, Robert Khuzami, gave preferential treatment to  
Citigroup executives in the agency's $75 million settlement with the  
firm last year over its alleged failure to adequately disclose crisis- 
era risks to investors, reports Bloomberg News.

*************************
Shahien Nasiripour is a business reporter for The Huffington Post. You  
can send him an e-mail; bookmark his page; subscribe to his RSS feed;  
follow him on Twitter; friend him on Facebook; become a fan; and/or  
get e-mail alerts when he reports the latest news. He can be reached  
at 646-274-2455.



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