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Congressional oversight

SIGTARP's January 2011 report

What SIGTARP Found

In November 2008, worried that Citigroup would fail absent a strong statement of support from the U.S. Government, and that such failure could cause catastrophic damage to the economy, federal officials decided to rescue one of the largest financial institutions in the world. Late on November 23, 2008, following a frantic few days dubbed “Citi Weekend,” Citigroup agreed to a Government proposal that would provide Citigroup asset guarantees and a $20 billion capital infusion in exchange for preferred shares of Citigroup stock.

The essential purpose of the deal, as then-Treasury Secretary Henry Paulson and then-Federal Reserve Bank of New York President Timothy F. Geithner later confirmed to SIGTARP, was to assure the world that the Government was not going to let Citigroup fail.

SIGTARP found that the Government constructed a plan that not only achieved the primary goal of restoring market confidence in Citigroup, but also carefully controlled the risk of Government loss on the asset guarantee.

The Government summarily rejected Citigroup’s initial proposal and made a take-it-or-leave-it offer that Citigroup only reluctantly accepted, against the advice of Citigroup insiders who considered the Government’s terms too expensive in light of the assistance provided.

In the end, Citigroup accepted the deal chiefly because of its expected impact on the market’s perception of Citigroup’s viability. After the deal was announced, that impact was immediate: Citigroup’s stock price stabilized, its access to credit improved, and the cost of insuring its debt declined.

And while the transactions hardly solved all of Citigroup’s problems – just months later the Government was compelled to significantly restructure its ownership interest in a manner that left it as Citigroup’s single largest common stockholder – the Government incurred no losses, and even profited on its overall investment in Citigroup by more than $12 billion.

Nevertheless, two aspects of the Citigroup rescue bear noting.

First, the conclusion of the various Government actors that Citigroup had to be saved was strikingly ad hoc. While there was consensus that Citigroup was too systemically significant to be allowed to fail, that consensus appeared to be based as much on gut instinct and fear of the unknown as on objective criteria. Given the urgent nature of the crisis surrounding Citigroup, the ad hoc character of the systemic risk determination is not surprising, and SIGTARP found no evidence that the determination was incorrect.

Nevertheless, the absence of objective criteria for reaching such a conclusion raised concerns about whether systemic risk determinations were being made fairly and with consistent criteria. Such concerns could be addressed at least in part by the development, in advance of the next crisis, of clear, objective criteria and a detailed road map as to how those criteria should be applied.

Treasury Secretary Timothy F. Geithner told SIGTARP that he believed creating effective, purely objective criteria for evaluating systemic risk is not possible, saying “it depends too much on the state of the world at the time. 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” the economy is undergoing. He also said that whatever objective criteria were developed in advance, markets and institutions would adjust and “migrate around them.”

The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) charged the Financial Stability Oversight Council (“FSOC”) with responsibility for developing the specific criteria and analytical framework for assessing systemic significance. That process is under way

Citi reduces exposure to products it is selling

A top Citigroup official testified Wednesday that the firm was reducing its risk to subprime mortgage products as early as 2006, fully expecting housing prices to decline. Yet a review of industry figures shows that in 2007 Citi was still underwriting billions in subprime mortgage securities and was the nation's top lender of subprime mortgages.

It also purchased insurance on those holdings in 2007 in the form of credit default swaps in case they soured, regulatory filings show.

"We were negative on subprime, as a matter," Thomas Maheras, the bank's former trading chief, who served as co-CEO of Citi Markets and Banking, told the panel created by Congress to investigate the roots of the financial crisis. "We were, from the very earliest part of '07 and the end of '06, we were in most of our business areas reducing our risk around subprime."

Yet despite the firm's efforts to mitigate those risks as early as 2006, Citigroup, which is about 27 percent owned by taxpayers in the wake of the 2008 bailout, still proceeded to originate an estimated $19.7 billion in subprime mortgages, according to Inside Mortgage Finance, a leading trade publication whose data is used extensively by the federal government. Citigroup was the nation's top subprime mortgage lender that year, according to Guy Cecala, CEO and publisher of Inside Mortgage Finance.

Citigroup also underwrote $13.4 billion in subprime mortgage securities that year, according to Cecala's data. All told, the firm generated more than $33 billion in subprime mortgage products that year.

But the firm knew that the housing market was deteriorating, Maheras told the Financial Crisis Inquiry Commission.

"We weren't sitting there twiddling our thumbs and assuming that housing could never go down," said Maheras, now a partner at Tegean Capital Management, LLC, and a director at Discover Financial Services. "We had in our base case that housing was going down during '07 and would likely continue."

Financial Crisis Inquiry Commission holds hearing

"On Thursday, two of the biggest — and among the most tarnished — names on Wall Street will testify in front of the Financial Crisis Inquiry Commission in Washington: Charles O. Prince III, the former chairman and chief executive of Citigroup, and Robert E. Rubin, a former top adviser and director of the bank. On the watch of these men, Citigroup lost more money than almost any company in history, requiring an extraordinary government bailout..."

Kucinich panel to investigate Citigroup tax ruling

A House subcommittee said Thursday that it will investigate the Treasury Department's decision to change a long-standing law so that Citigroup could keep billions of dollars in tax breaks.

Rep. Dennis J. Kucinich (D-Ohio) called Treasury's action a "farce" and an "outrage" during a hearing Thursday of the domestic policy subcommittee of the House Committee on Oversight and Government Reform. Kucinich, the subcommittee chairman, said that he would demand an explanation from Treasury officials.

"This committee is not going to rest until we've examined this last deal threadbare, until we have spoken to every individual associated with it, examined every communication related to it, with every person that may have had an interest in it, or who may have had some kind of a channel of influence," Kucinich said.

The Internal Revenue Service, an arm of Treasury, ruled last Friday that Citigroup could keep $38 billion in tax breaks that otherwise would decline in value as the government sells its stake in the company. Federal law lets companies shelter profits from taxes in good years based on the amount of losses in previous bad years. But the law restricts the use of past losses if a company changes hands, to discourage profitable companies from buying unprofitable firms to avoid paying taxes.

Treasury's plan to sell its $25 billion stake in Citigroup would have qualified as a change of ownership under the law. The sale was postponed Wednesday after Citigroup's stock plunged in value, but Treasury officials said they still planned to sell the government's shares over the next year.

Treasury officials said the government needed to grant the tax break in order to sell its shares in Citigroup because the company could not afford the loss. Officials also said that preserving the tax break would help the government sell its shares at a higher price. And they said the law was never intended to apply to deals involving the government.

Kucinich tore into that logic Thursday, questioning why the government needed to sell its shares immediately. He said that the government was inherently conflicted by its roles as a tax collector and as a shareholder in the company. He said it appeared that the shareholders had gotten the upper hand.

"This does a disservice to the taxpayers, it does not help the taxpayers recover the value of their investment and it raises troubling questions about how the administration is negotiating its role," Kucinich said in an interview Thursday.

Kucinich also said that he planned to investigate whether the IRS had the legal authority to issue the ruling that benefited Citigroup.

Oversight panel holds hearing on Citigroup

Oversight panel sees taxpayers carrying cost of guarantees

Congressional Oversight Panel November report

"U.S. taxpayers may have to share in the losses on $301 billion of Citigroup Inc. loans and securities covered by federal guarantees after unemployment reached a 26-year high, according to the Congressional panel overseeing bank-bailout programs.

The Federal Reserve Bank of New York projected a year ago that the Treasury Department might have to pay $3.96 billion on the guarantees if unemployment hit 9.5 percent, the panel said in a Nov. 6 report. The jobless rate rose to 10.2 percent in October, the Labor Department said last week.

The government hashed out the guarantees over a weekend in November 2008 to help shore up confidence in New York-based Citigroup and head off a run on the bank’s deposits. The New York Fed analysis, which wasn’t previously disclosed, raises questions about whether the Treasury Department and regulators were tough enough in the negotiations, said Joshua Rosner, an analyst at investment research firm Graham Fisher & Co.

“It looks like Citigroup got the better end of that deal,” Rosner said.

The panel overseeing the government’s Troubled Asset Relief Program, led by Harvard Law School Professor Elizabeth Warren, included the analysis in a report last week and criticized the Treasury for being too secretive about the loss projections. Neither Citigroup nor any government agency previously had published estimates of the government’s potential losses.

Under the terms of Citigroup’s asset guarantees, the Treasury and U.S. Federal Deposit Insurance Corp. must absorb a combined 90 percent of any losses beyond Citigroup’s $39.5 billion deductible, up to $16.7 billion. The Federal Reserve would absorb 90 percent of any further losses.

Effect of Unemployment

The New York Fed estimated that losses on the assets would reach $34.6 billion under a “moderately adverse” economic scenario with unemployment at 8.2 percent in the fourth quarter of 2009, the oversight panel said in its report.

Under the “severely adverse scenario” of 9.5 percent, the losses would rise to $43.9 billion as more people became unable to pay the mortgages, auto loans and other obligations included in the guaranteed pool, the reserve bank projected. At that point, Citi would have exhausted its deductible, forcing taxpayers to begin paying out.

“The unemployment assumptions used in both scenarios have in fact already been exceeded,” the oversight panel said.

Citigroup said in a filing last week that the guaranteed assets lost $2.8 billion in the third quarter, bringing the total losses in the pool to $8.1 billion as of Sept. 30. The value of the covered assets has shrunk to $250.4 billion from the original $301 billion because of asset sales, loan payoffs and the losses, the bank said.

Second Audit

Citigroup paid for the guarantees by issuing $7.06 billion of preferred stock to the Treasury Department and FDIC. The Treasury has not detailed how the price or deductible was determined, as it was supposed to under the Emergency Economic Stabilization Act of 2008, the panel said.

Neil Barofsky, inspector general of the Treasury Department’s $700 billion TARP bailout, began a separate audit of the guarantees in July.

In a Sept. 23 report, bank analystDavid Trone of Fox-Pitt Kelton Cochran Caronia Waller wrote that total losses on the assets were “unlikely to exceed” the $39.5 billion that is solely Citi’s obligation.

Citigroup Chief Executive Officer Vikram Pandit has raised capital to help the bank withstand its losses. In September, Citigroup converted about $58 billion of preferred shares into common stock, diluting existing shareholders by 76 percent. The Treasury got a 34 percent stake in the bank, after converting $25 billion out of $45 billion in bailout funds.

Removing Risk

“The government actions took the risk of insolvency off the table for Citigroup,” said Jeffery Harte, an analyst at Sandler O’Neill & Partners who rates Citigroup “buy.”

The bank’s employees are benefiting from the rescue. Citigroup plans to give 19 top executives annual salaries of about $500,000 along with more than $100 million in stock awards, according to an Oct. 22 report by the Treasury Department’s special paymaster, Kenneth Feinberg.

On Oct. 29, the bank gave more than a hundred million stock options to about 75,000 other Citigroup employees, people familiar with the matter said last week. The options, which don’t fully vest for three years, carry a strike price of $4.08, meaning the options collectively would be worth at least $100 million for every dollar the bank’s share price climbs.

“These options vest over time and only have value if Citi’s stock price goes up,” bank spokeswoman Shannon Bell said in an e-mailed statement. The stock has tumbled 93 percent since the end of 2006, and closed last week at $4.06.

Potential Profit

Because of the Treasury’s stake, taxpayers also stand to gain from Citigroup’s performance, Harte said. Based on the current market value of the Treasury’s 7.7 billion shares, the government has a $6 billion paper profit. “I’m not so sure the government’s going to lose money,” he said.

The pool of Citigroup assets included $154.1 billion of mortgages, $16.2 billion of auto loans, $21.3 billion of “other consumer loans,” $12.4 billion of commercial-real-estate loans and $13.4 billion of corporate loans, Pandit said in a Jan. 27 presentation. The assets also included $31.9 billion of distressed securities and $51.5 billion of off-balance-sheet lending commitments.

Citigroup’s guarantees to be audited by TARP

Source: Citigroup’s Asset Guarantees to Be Audited by TARP Bloomberg, August 19, 2009

Citigroup Inc.’s $301 billion of federal asset guarantees, extended by the U.S. last year to help save the bank from collapse, will be audited to calculate losses and determine whether taxpayers got a fair deal.

Neil Barofsky, inspector general of the U.S. Treasury Department’s $700 billion Troubled Asset Relief Program, agreed in an Aug. 3 letter to audit the program after a request by U.S. Representative Alan Grayson. Barofsky will examine why the guarantees were given, how they were structured and whether the bank’s risk controls are adequate to prevent government losses.

The Treasury, Federal Deposit Insurance Corp. and Federal Reserve provided the guarantees last November, when a plunge in Citigroup’s stock below $5 sparked concern that a run on the bank might rock global markets and impede an economic recovery. New York-based Citigroup paid the government $7.3 billion in preferred stock in return for the guarantees.

“What kind of toxic assets did the Federal Reserve guarantee, and what off-balance-sheet liabilities have been pinned on us?” Grayson, a Florida Democrat who sits on the House Financial Services Committee, wrote yesterday in an e- mailed response to questions on the audit. “How much money have the taxpayers already lost? We need to know.”

Citigroup’s guarantees are among $23.7 trillion of total potential government support stemming from programs set up since 2007 to ease the financial crisis, according to a report last month by Barofsky’s office. The “total downside risk” from Citigroup’s asset guarantees is about $230 billion to the Federal Reserve alone, Grayson said in a June 24 letter to Barofsky requesting the audit.

TARP Money

Citigroup’s guarantees came on top of $45 billion of bailout funds obtained last year through the TARP program. Bank of America Corp., which also got $45 billion of TARP funds, initially agreed to take guarantees on $118 billion and later decided not to sign the accord.

The pool of Citigroup assets included $154.1 billion of mortgages, $16.2 billion of auto loans, $21.3 billion of “other consumer loans,” $12.4 billion of commercial-real-estate loans and $13.4 billion of corporate loans, Citigroup Chief Executive Officer Vikram Pandit said in a Jan. 27 presentation. The assets also included $31.9 billion of distressed securities and $51.5 billion of off-balance-sheet lending commitments.

Under the terms of the guarantees, Citigroup must absorb the first $39.5 billion of losses on the assets, plus 10 percent of the remaining losses. Through June 30, losses on the pool totaled $5.3 billion, Citigroup said in its second-quarter earnings report.

Citigroup’s Cooperation

“We are working closely with the government on the implementation of the loss-sharing agreement, and of course, we will cooperate with the special inspector general for TARP in any review,” Citigroup spokesman Stephen Cohen said.

The bank’s share price fell 1 cent to $4.13 as of 4 p.m. in New York Stock Exchange composite trading. At that price, the shares are almost 10 percent above the $3.77 level they reached last November, when the guarantees were announced.

One question is whether Citigroup’s loans and securities were adequately written down before being put into the covered pool, Joseph Stiglitz, a Columbia University economist who won the Nobel Prize in 2001, said in an interview today.

“If they picked a high price, the losses could be a major exposure for the taxpayer,” Stiglitz said.

In his letter, Barofsky said he “will begin to assemble a team to audit the Citigroup guarantees.”

“We anticipate finalizing the audit plan and issuing a formal audit announcement shortly,” he wrote.

Selecting Loans

The audit will address “the basis on which the decision was made” as well as the “process for selecting loans to be guaranteed,” according to Barofsky’s letter. The inspector general also will assess “the risk-management and internal controls and related oversight processes and procedures to mitigate risks to the government.”

The audit will take several months and a deadline hasn’t been set, said Kris Belisle, a spokeswoman for Barofsky.

The Treasury, FDIC and Fed said in a joint statement on Nov. 23 that they agreed to the plan to support “financial market stability, which is a prerequisite to restoring vigorous economic growth.” They promised to “exercise prudent stewardship of taxpayer resources.”

The following month, the Federal Reserve Bank of New York hired New York-based money manager BlackRock Inc. under a $12 million contract to spend two months providing an independent valuation of Citigroup’s guaranteed assets. The New York Fed paid another $5 million to $10 million to PricewaterhouseCoopers LLP to assess Citigroup’s own methods of valuing the assets, according to a copy of the contract posted on the Federal Reserve Bank’s Web site.

Citigroup TARP progress report for Q2-09

Source: Citigroup Releases TARP Progress Report for Second Quarter Alston and Bird, August 13, 2009

Citigroup, which recently announced the successful completion of its share exchanges with public and private shareholders and the U.S. government, announced the release of its TARP Progress Report for the second quarter of 2009.

The report details Citigroup’s $50.8 billion in TARP initiatives as of the second quarter.

New initiatives supported by TARP capital include $4 billion for Citigroup’s Municipal Securities Division to provide municipal letters of credit and $2 billion for Citigroup’s Global Securitized Markets group to “provide financing to loan originators via ‘warehouse’ lending facilities.” Citigroup also said that it extended $129.7 billion in new credit to U.S. consumers and businesses during the second quarter.

Representative Grayson's request to audit

SIGTARP letter to Representative Grayson August 3, 2009

Details of requested audit information about the bailout:

  1. How was the deal negotiated by Citigroup, the Federal Reserve, and the Treasury? How does this loss-sharing arrangement benefit taxpayers?
  2. What are current mark-to-market losses to the Federal Reserve in this loss-sharing arrangement?
  3. What is the current cash flow from these assets? Are these asset performing?
  4. Who should be held accountable for the reckless acquisition of a third of a trillion dollars in assets that ended up requiring a government guarantee? [emphasis mine]
  5. Which vendors are pricing these assets, and are there conflicts of interest present in these vending arrangements?
  6. Is the Federal Reserve guaranteeing assets generated from lender-induced mortgage fraud and predatory lending practices?

COP, FSA and ringfencing Citi assets

Buried in the Congressional Oversight Panel’s 127-page November report, examining the ‘moral hazard’ involved in the US Government’s guarantees for financial institutions, is this tidbit:

(Footnote 193) Treasury conversations with Panel staff (Oct. 19, 2009); Federal Deposit Insurance Corporation, Responses to Panel Questions About the AGP (Oct. 30, 2009) (in its responses, the FDIC noted that “[o]n Friday, November 21, 2008, market acceptance of the firm’s liabilities diminished, as the company’s stock plunged to a 16- year low, credit default swap spreads widened by 75 basis points to 512.5 basis points, multiple counterparties advised that they would require greater collateralization on any transactions with the firm, and the UK FSA imposed a $6.4 billion cash lockup requirement to protect the interests of the UK broker dealer….”)

That would have been a blow for the beleaguered bank. At the end of October 2008, Citi had something like $63bn of cash (and “due from banks”) on its books. But presumably the FSA would have been trying to prevent a repeat of the Lehman collapse, when the London office of the investment bank suddenly found itself without cash — the New York office having transferred $8bn back to the States on the day the firm declared bankruptcy.

And yet according to the report, Citi wasn’t necessarily fearing for its existence in the last weeks of November, when Lehman’s fall was still rocking financial institutions and Citi’s shares had dropped a precipitous 72 per cent over the course of the month. Instead the bank was worried about what the market thought of its prospects for survival:

(Footnote 192) Citigroup conversations with Panel staff (Oct. 26, 2009). It is interesting to note that in discussions with Panel staff, Citigroup personnel, perhaps naturally, emphasized external elements such as market perception and share price, while government officials focused on whether Citigroup could open its doors the following Monday.

In any case, the government did eventually step in — announcing a $20bn Tarp injection for the bank, plus an Asset Guarantee Program, which saw the Treasury, FDIC and the Federal Reserve agreeing to share losses on $306bn of Citi’s assets.

And those concerned that Citi simply shoved its most toxic assets into the guarantee programme — thus transferring the burden of the losses to the US taxpayer — needn’t worry.

According to Citi’s comments to the COP staff, it only shoved what the market thought were its riskiest assets:

Citigroup stated during a conversation with Panel staff that in determining the assets to be guaranteed, it included mainly “high headline exposure” categories of assets, not necessarily the technically riskiest, but the types of assets that the markets were most worried about and the guarantee of which would attract the most market attention. Citigroup also stated that it included in its initial proposal all of the assets in each of these categories in an effort to demonstrate it was not “cherry-picking” assets and to reflect moral hazard concerns. Citigroup conversations with Panel staff, October 26, 2009.

We’re sensing a Cartesian theme here.

Much more — including detail on Bank of America’s almost-participation in the AGP, plus the money market funds’ guarantee — in the full report.

Federal funds in Citigroup

NY Fed has weak oversight of Citigroup prior to collapse

"...Two months after Geithner’s confirmation, the Government Accountability Office weighed in on the Fed’s handling of Citigroup and other large banking companies. The GAO said the Fed, having uncovered deficiencies in risk-management practices at the largest banking firms in 2006, “did not take forceful action” to correct them “until the crisis occurred.”

The Fed brought no formal enforcement actions against any large institution for substandard risk-management practices before the crisis erupted in the second half of 2007. Nor did it use its confidential process during that period to downgrade any large bank company’s risk rating, according to two people familiar with the process, a step that could have triggered costly consequences for the firms.

The Citigroup bailout required $45 billion in capital and $7 billion in guarantees. Now, whether to give the Fed more power to regulate large financial institutions like Citigroup is a key issue for Congress as it debates legislation to reform the regulatory system."

Moody’s: Citigroup still ‘too big to fail’

Even though the Obama administration is trying to sell idea that the era of “too big to fail” is over, some in the market still aren’t buying it.

Case in point: Citigroup Inc.

Moody’s on Monday said in its “Weekly Credit Outlook” that the Treasury Department’s planned sale of its 7.7 billion shares of Citigroup this year doesn’t mean the government would remove its implicit support of the company if Citigroup were to fall into trouble again.

“The likelihood of government support remains very high because of Citigroup’s systemic importance to the U.S. and global financial system as a major counterparty, payments and clearing agent, deposit taker, and provider of credit,” Moody’s said. This is important, because Moody’s said it doesn’t see any “”rating implications from the disposition of the government’s 27% stake in the company.” In other words, Citigroup can still continue issuing debt at levels that assume a type of government support.

“Permanent government ownership of shares can be an important factor to consider when evaluating the probability of government support for a bank,” Moody’s said. “However, in our analysis we never assumed that the U.S. government’s stake in Citigroup was permanent. Instead, as noted above, our support assumptions are very high because of Citigroup’s interconnectedness in the global financial system and its systemic importance.”

Moody’s goes on to say that the “greatest threat” to “continued government support for Citigroup and other major U.S. banks is from pending legislative proposals that would allow the government to resolve failing but systemically important financial institutions in a way that imposed losses on bondholders while still minimizing systemic risk.”

This is the bill passed the House of Representatives in December and could soon advance to the Senate floor.

US Treasury completes sale of 1.1bn Citigroup shares

The US Treasury has announced the completion of the sale of a further 1.1 billion Citigroup shares.

According to the government, the move is part of a second trading plan following the sale of 1.5 billion shares in the investment bank in May.

The previous sale accounted for nearly 20 per cent of the total Citigroup shares owned by the authorities and raised $6.2 million.

In a statement, the Treasury said it “received 7.7 billion shares of Citigroup common stock last summer as part of the exchange offers conducted by Citigroup to strengthen its capital base".

“Treasury exchanged the $25 billion in preferred stock it received in connection with Citigroup's participation in the Capital Purchase Program for common shares at a price of $3.25 per common share.”

The government has sold a total of 2.6 billion Citigroup shares and received $10.5 billion in gross proceeds.

Following the blackout quarter on selling set by Citigroup, the Treasury is expecting to continue with its sale of the 5.1 billion shares it still owns.

Meanwhile, Vikram Pandit, Citi chief executive officer, recently voiced his support for the reforms agreed on by the US government.

He stated: “I have fully supported ending the phenomenon of ‘too big to fail'; and I believe we must have a level playing field– the same rules for everybody and real transparency into financial transactions.”

Treasury announces offering of Citigroup Trups

The U.S. Department of the Treasury announced today that it will sell trust preferred securities (TRUPS®) received from Citigroup pursuant to the Asset Guarantee Program (AGP). Any proceeds received from the sale will represent a net gain or profit to the taxpayer. Treasury intends to sell the TRUPS® for not less than par value plus any accumulated and unpaid distributions.

These securities were received in consideration for Treasury's agreement in January 2009 to share potential losses on a pool of $301 billion of assets held by Citigroup. The loss-sharing arrangement, essentially a form of insurance, also involved the Federal Deposit Insurance Company (FDIC) and the Federal Reserve.

Citigroup paid the Treasury and the FDIC a premium in the form of securities for their willingness to share potential losses over a five to ten year period. In December 2009, the loss-sharing arrangement was terminated at the request of Citigroup. Treasury kept $2.2 billion of the premium (which was originally $4 billion in securities). Because Treasury was never required to make any payment under the arrangement and has no further obligation to do so, all proceeds from the sale will constitute a net gain to the taxpayer under the program.

Treasury announces plan to sell Citigroup shares in 2010

The U.S. Department of the Treasury today announced its intention to fully dispose of its approximately 7.7 billion shares of Citigroup, Inc. common stock over the course of 2010 subject to market conditions. Treasury received these shares of common stock pursuant to the June 2009 Exchange Agreement between Treasury and Citigroup, which provided for the exchange into common shares of the preferred stock that Treasury purchased in connection with Citigroup's participation in the Capital Purchase Program. Treasury has engaged Morgan Stanley as its capital markets advisor in connection with its Citigroup position.

Treasury intends to sell its Citigroup common shares into the market through various means in an orderly and measured fashion. Treasury intends to initiate its disposition of the common shares pursuant to a pre-arranged written trading plan. The manner, amount and timing of the sales under the plan is dependent upon a number of factors.

This disposition does not affect Treasury's holdings of Citigroup trust preferred securities or warrants for its common stock.

CJR: Was the Citi bailout really a good deal?

Dean Baker pointed out a myopic Washington Post story on Saturday reporting that the Treasury will make a several-billion-dollar profit on its Citigroup bailout. It’s worth pushing back on this meme, especially since The Wall Street Journal rewrites the Post’s story today.

Yes, it’s true that if the government sells its Citi shares for $32 or $33 billion it will make a $7-$8 billion profit on its $25 billion “investment.” Pretty impressive if you leave it devoid of context, as the Post and Journal both do. As Baker points out, this gain pales in comparison to what the government handed to investors and executives (emphasis mine):

On November 23, 2008, the government bought $20 billion in preferred shares in Citigroup. It also received another $7 billion in preferred shares in exchange for guarantees on $300 billion in bad assets. At the time, the combined value of the investment in preferred shares and the guarantee on bad assets exceeded the full market value of Citigroup stock on November 21st, the last trading day prior to the deal. In other words, for the same financial commitment that the government made on that day, it could have owned Citigroup outright.

The government subsequently held onto to its preferred shares until Citigroup’s stock had nearly tripled in value. In September of last year it traded its preferred shares for common shares that were priced at a level that only give the government a 27 percent stake in Citigroup.

Baker calculates that this government generosity left some $90 billion on the table at today’s Citi market capitalization.

So, while the Post asserts that the government’s Citi sale would be “a validation of the rescue plan adopted by government officials during the height of the financial panic,” it actually does no such thing. Instead, it shows yet again how government deployed its resources to benefit banks and bankers over taxpayers. That money could (not to mention should) have recapitalized Citi while giving taxpayers the bulk of the company’s shares. Instead it recapitalized Citi in exchange for a sliver of them.

Geithner says TARP repayments don’t hurt bank lending ability

Treasury Secretary Timothy Geithner said U.S. banks aren’t hurting their ability to lend as they repay the Troubled Asset Relief Program and back away from government assistance.

“By replacing the Treasury investments with private capital, banks have stronger capital positions, and will be in a better position to expand lending as the economy expands,” Geithner said yesterday in Washington.

His comments come as the biggest U.S. banks are stepping up their efforts to escape TARP and its restrictions on executive compensation. Bank of America Corp., Wells Fargo & Co. and Citigroup Inc. all took steps this month to sever ties with the bank rescue effort, raising questions about whether regulators should slow the escape process.

Geithner said the Obama administration would like to see banks relying on private investors as soon as possible. While he didn’t say banks should make TARP repayment a priority, he said the Treasury welcomes their efforts to raise funds they can use to leave the program.

“Repayments will not come at the expense of lending capacity, they will improve it,” Geithner said. “We ran a strategy from the beginning designed to recapitalize the banking system with private capital.”

Banks Have Obligation

After blasting Wall Street “fat-cat bankers” on Dec. 14, President Barack Obama said banks have an obligation to help the recovery. That’s not translating into more lending by the country’s biggest financial firms, according to Treasury surveys of the 22 largest companies that received capital from the TARP.

“I don’t see how exhortation works with bankers,” said James Galbraith, an economics professor at the University of Texas and former executive director of the Joint Economic Committee. “Lending to the private sector requires that the private sector want to borrow and have the collateral -- not true at present.”

Meanwhile, Wells Fargo & Co. and Citigroup Inc. both launched plans this past week to exit the TARP and raise capital to repay the government. Bank of America paid back its $45 billion in TARP funds and Wells Fargo is in the process of returning all $25 billion it received.

Complicated Separation

Citigroup faces a more complicated separation. Its public offering hit a snag when the bank was forced to price it lower than expected, prompting the Treasury to delay sales of government-owned common stock. The company raised $17 billion in an offering that was priced 10 cents a share lower than what the government paid in September.

The Treasury’s investments in Citigroup include $25 billion in preferred shares that were converted to common stock, along with a $20 billion preferred equity stake and further preferred shares granted in connection with an asset- guarantee agreement. The Treasury has said it still intends to sell its common shares over the next six to 12 months, after a 90-day waiting period, and the department has valued its common-stock holdings at $26.5 billion based on recent market prices.

U.S. delays sale of Citigroup stake as shares sell at discount

"Citigroup Inc., the last of the four largest U.S. banks to seek funds to exit a taxpayer bailout, raised $17 billion by selling stock for a price so low that the U.S. delayed plans to shrink its one-third stake in the lender.

Citigroup sold 5.4 billion shares at $3.15 apiece, less than the $3.25 the government paid when it acquired its stake in September. The New York-based bank said the Treasury won’t sell any of its shares for at least 90 days.

Investors demanded a bigger discount from Citigroup than Bank of America Corp. or Wells Fargo & Co., which together raised more than $31 billion this month to exit the Troubled Asset Relief Program. Wells Fargo, which trumped Citigroup’s bid to buy Wachovia Corp. last year, leapfrogged its rival by completing a $12.25 billion share sale Dec. 15. JPMorgan Chase & Co. repaid $25 billion in June.

“The market cast its vote and they’re low down on the ballot,” said Douglas Ciocca, a managing director at Renaissance Financial Corp. in Leawood, Kansas. “Citigroup needs to show steps to reinstall the quality of the brand.”

With the sale, Citigroup’s common shares outstanding increased to 28.3 billion. That’s up from 22.9 billion as of Sept. 30 and 5 billion at the end of 2007.

“More shares outstanding means less value per share,” said Edward Najarian, an analyst at International Strategy and Investment Group in New York, who has a “hold” rating on the shares. “The whole structure of their deal to pay back TARP wasn’t very good for common shareholders and that is being reflected in the pricing.”

Abu Dhabi

The lender’s shares fell 24 cents, or 7.2 percent, to $3.21 in trading after U.S. markets closed. The $3.15 price is a 20 percent discount from the closing price on Dec. 11, before Citigroup announced the plan to repay TARP.

The government decided not to participate in the equity offering based on the pricing of the shares, according to a Treasury official. The U.S. expects to divest its ownership stake in Citigroup shares during the next 12 months, the official said.

The bank said it also raised $3.5 billion by selling “tangible equity units,” securities that make quarterly payments of 7.5 percent a year and include a requirement to buy Citigroup shares in 2012. The total of $20.5 billion was the largest public equity offering in the history of U.S. capital markets, according to Citigroup.

Citigroup’s Dec. 15 announcement that Abu Dhabi Investment Authority was trying to abort an accord to buy $7.5 billion of Citigroup stock may also have hurt confidence in the bank’s secondary stock offering, said Blake Howells, an analyst at Becker Capital Management in Portland, Oregon.

Abu Dhabi “certainly couldn’t help,” Howells said.

Treasury Stake

Citigroup said earlier this week that it would sell at least $20.5 billion of equity and debt to exit TARP. After that announcement, the Treasury said it would sell as much as $5 billion of its stake, in conjunction with the bank’s secondary offering, with the rest to be sold over the next year.

The Treasury holds $25 billion in common stock in Citigroup, along with a $20 billion preferred equity stake and further preferred shares granted in connection with an asset- guarantee agreement. At the offering price of $3.15, the 7.7 billion shares are valued about $770 million less than the Treasury’s cost.

Bank of America, the largest U.S. lender, raised its funds on Dec. 3. The Charlotte, North Carolina-based bank, which yesterday named Brian Moynihan as its new chief executive officer, sold 1.286 billion so-called common equivalent securities at $15 each, a 4.8 percent discount to its closing price that day. Wells Fargo, whose largest shareholder is billionaire investor Warren Buffett’s Berkshire Hathaway Inc., completed its sale at a 1.9 percent discount.

“Hitting all of the shares at the market at the same time is a bad idea,” said Michael Johnson, chief market strategist at M.S. Howells & Co., a Scottsdale, Arizona-based broker- dealer.

Citigroup gains massive tax break in deal with IRS

The federal government quietly agreed to forgo billions of dollars in potential tax payments from Citigroup as part of the deal announced this week to wean the company from the massive taxpayer bailout that helped it survive the financial crisis.

The Internal Revenue Service on Friday issued an exception to longstanding tax rules for the benefit of Citigroup and the few other companies partially owned by the government. As a result, Citigroup will be allowed to retain $38 billion in tax breaks that otherwise would decline in value when the government sells its stake to private investors.

While the Obama administration has said taxpayers likely will profit from the sale of the Citigroup shares, accounting experts said the lost tax revenue could easily outstrip those profits.

The IRS, an arm of the Treasury Department, has changed a number of rules during the financial crisis to reduce the tax burden on financial firms. The rule changed Friday also was altered last fall by the Bush administration to encourage mergers, letting Wells Fargo cut billions from its tax bill by buying the ailing bank Wachovia.

"The government is consciously forfeiting future tax revenues. It's another form of assistance, maybe not as obvious as direct assistance but certainly another form," said Robert Willens, an expert on tax accounting who runs a firm of the same name. "I've been doing taxes for almost 40 years and I've never seen anything like this where the IRS and Treasury acted unilaterally on so many fronts."

Treasury officials said the most recent change was part of a broader decision initially made last year to shelter companies that accepted federal aid under the Troubled Assets Relief Program from the normal consequences of such an investment. Officials also said that the ruling benefited taxpayers because it made shares in Citigroup more valuable and asserted that without the ruling, Citigroup could not have repaid the government at this time.

"This guidance is the part of the administration's orderly exit from TARP," said Treasury spokeswoman Nayyera Haq. "The guidance prevents the devaluing of common stock Treasury holds in TARP recipients. As a result, Treasury can receive a higher price for this stock, which will benefit the financial system and taxpayers."

Congress, concerned that the Treasury was rewriting tax laws, passed legislation earlier this year reversing the ruling that benefited Wells Fargo and restricting the ability of the IRS to make further changes. A Democratic aide to the Senate Finance Committee, which oversees federal tax policy, said the Obama administration had the legal authority to issue the new exception, but Republican aides to the committee said they were reviewing the issue.

A senior Republican staffer also questioned the government's rationale. "You're manipulating tax rules so that the market value of the stock is higher than it would be under current law," said the aide, speaking on condition of anonymity. "It inflates the returns that they're showing from TARP and that looks good for them."

The administration and some of the nation's largest banks have hastened to part company in recent weeks. Bank of America followed by Citigroup and Wells Fargo struck deals to repay federal aid. While the healthiest banks escaped earlier this year, the new round of departures involves banks still facing serious financial problems.

The banks say the strings attached to the bailout, including limits on executive compensation, have restricted their ability to compete and return to health. Executives also have chafed under the stigma of living on the federal dole. President Obama chided bankers at the White House Monday for not trying hard enough to make small business loans.

The Obama administration also is eager to wind down a program that has become one of its largest political liabilities. Officials defend the program as necessary and effective, but the president has acknowledged that the bailout is "wildly unpopular" and officials have been at pains to say they do not enjoy helping banks.

Federal regulators initially told Citigroup and other troubled banks that they would be required to hold on to the money provided as federal aid for some time as they returned to health. But in recent months the government switched to pushing the companies to repay the money as soon as possible. All nine firms that took federal money last October now have approved plans to pay it back.

This urgency has come despite the lingering concerns of many financial experts about the companies' health. These analysts say they worry the firms could face rising losses next year as high unemployment and economic weakness continue to drive borrowers into default.

"They are rolling the dice big time," said Christopher Whalen, a financial analyst with Institutional Risk Analytics. "My fear is that the banks will definitely have to raise a lot more capital next year. The question is from whom and on what terms."

The Citigroup deal required significant sacrifices by both sides, underscoring the mutual determination to get it done. Citigroup was required to replace its federal aid with an equal amount of money from private investors, more than any other bank. The government concluded that Citigroup needed the IRS ruling because a reduction in the value of its tax breaks would have eroded its capital, forcing the company to raise more money, officials said.

Federal tax law lets companies reduce taxable income in a good year by the amount of losses in bad years. But the law limits the transfer of those benefits to new ownership as a way of preventing profitable companies from buying losers to avoid taxes. Under the law, the government's sale of its 34 percent stake in Citigroup, combined with the company's recent sales of stock to raise money, qualified as a change in ownership.

The IRS notice issued Friday saves Citigroup from the consequences by stipulating that the government's share sale does not count toward the definition of an ownership change. The company, which pushed for the ruling, did not return calls for comment.

At the end of the third quarter, Citigroup said that the value of its past losses was about $38 billion, allowing it to avoid taxes on its next $38 billion in profits. Under normal IRS rules, a change in control would sharply reduce the amount of profits that Citigroup could shelter from taxes in any given year, making it much more difficult for Citigroup to realize the entire benefit before the tax breaks expired.

The precise value of the IRS ruling depends on Citigroup's future profitability and other factors, but two accounting experts said it was fair to estimate that Citigroup would save at least several billion dollars as a result.

Treasury acknowledged that the tax break was significant, but a senior official said that the benefit was unavoidable. Either the government changed the rules and parted ways with Citigroup, or else the company kept the government as a shareholder and kept the tax break anyway.

"The choice is whether Treasury sells or doesn't sell," the official said.

Obama's Citigroup connections

"...But come November 5th, both were banished from Obama's inner circle — and replaced with a group of Wall Street bankers. Leading the search for the president's new economic team was his close friend and Harvard Law classmate Michael Froman, a high-ranking executive at Citigroup. During the campaign, Froman had emerged as one of Obama's biggest fundraisers, bundling $200,000 in contributions and introducing the candidate to a host of heavy hitters — chief among them his mentor Bob Rubin, the former co-chairman of Goldman Sachs who served as Treasury secretary under Bill Clinton. Froman had served as chief of staff to Rubin at Treasury, and had followed his boss when Rubin left the Clinton administration to serve as a senior counselor to Citigroup (a massive new financial conglomerate created by deregulatory moves pushed through by Rubin himself).

Incredibly, Froman did not resign from the bank when he went to work for Obama: He remained in the employ of Citigroup for two more months, even as he helped appoint the very people who would shape the future of his own firm. And to help him pick Obama's economic team, Froman brought in none other than Jamie Rubin, a former Clinton diplomat who happens to be Bob Rubin's son. At the time, Jamie's dad was still earning roughly $15 million a year working for Citigroup, which was in the midst of a collapse brought on in part because Rubin had pushed the bank to invest heavily in mortgage-backed CDOs and other risky instruments.

Now here's where it gets really interesting. It's three weeks after the election. You have a lame-duck president in George W. Bush — still nominally in charge, but in reality already halfway to the golf-and-O'Doul's portion of his career and more than happy to vacate the scene. Left to deal with the still-reeling economy are lame-duck Treasury Secretary Henry Paulson, a former head of Goldman Sachs, and New York Fed chief Timothy Geithner, who served under Bob Rubin in the Clinton White House. Running Obama's economic team are a still-employed Citigroup executive and the son of another Citigroup executive, who himself joined Obama's transition team that same month.

So on November 23rd, 2008, a deal is announced in which the government will bail out Rubin's messes at Citigroup with a massive buffet of taxpayer-funded cash and guarantees. It is a terrible deal for the government, almost universally panned by all serious economists, an outrage to anyone who pays taxes. Under the deal, the bank gets $20 billion in cash, on top of the $25 billion it had already received just weeks before as part of the Troubled Asset Relief Program. But that's just the appetizer. The government also agrees to charge taxpayers for up to $277 billion in losses on troubled Citi assets, many of them those toxic CDOs that Rubin had pushed Citi to invest in. No Citi executives are replaced, and few restrictions are placed on their compensation. It's the sweetheart deal of the century, putting generations of working-stiff taxpayers on the hook to pay off Bob Rubin's fuck-up-rich tenure at Citi. "If you had any doubts at all about the primacy of Wall Street over Main Street," former labor secretary Robert Reich declares when the bailout is announced, "your doubts should be laid to rest."

It is bad enough that one of Bob Rubin's former protégés from the Clinton years, the New York Fed chief Geithner, is intimately involved in the negotiations, which unsurprisingly leave the Federal Reserve massively exposed to future Citi losses. But the real stunner comes only hours after the bailout deal is struck, when the Obama transition team makes a cheerful announcement: Timothy Geithner is going to be Barack Obama's Treasury secretary!

Geithner, in other words, is hired to head the U.S. Treasury by an executive from Citigroup — Michael Froman — before the ink is even dry on a massive government giveaway to Citigroup that Geithner himself was instrumental in delivering. In the annals of brazen political swindles, this one has to go in the all-time Fuck-the-Optics Hall of Fame.

Wall Street loved the Citi bailout and the Geithner nomination so much that the Dow immediately posted its biggest two-day jump since 1987, rising 11.8 percent. Citi shares jumped 58 percent in a single day, and JP Morgan Chase, Merrill Lynch and Morgan Stanley soared more than 20 percent, as Wall Street embraced the news that the government's bailout generosity would not die with George W. Bush and Hank Paulson. "Geithner assures a smooth transition between the Bush administration and that of Obama, because he's already co-managing what's happening now," observed Stephen Leeb, president of Leeb Capital Management.

Left unnoticed, however, was the fact that Geithner had been hired by a sitting Citigroup executive who still had a big bonus coming despite his proximity to Obama. In January 2009, just over a month after the bailout, Citigroup paid Froman a year-end bonus of $2.25 million. But as outrageous as it was, that payoff would prove to be chump change for the banker crowd, who were about to get everything they wanted — and more — from the new president.

The irony of Bob Rubin: He's an unapologetic arch-capitalist demagogue whose very career is proof that a free-market meritocracy is a myth. Much like Alan Greenspan, a staggeringly incompetent economic forecaster who was worshipped by four decades of politicians because he once dated Barbara Walters, Rubin has been held in awe by the American political elite for nearly 20 years despite having fucked up virtually every project he ever got his hands on. He went from running Goldman Sachs (1990-1992) to the Clinton White House (1993-1999) to Citigroup (1999-2009), leaving behind a trail of historic gaffes that somehow boosted his stature every step of the way.

As Treasury secretary under Clinton, Rubin was the driving force behind two monstrous deregulatory actions that would be primary causes of last year's financial crisis: the repeal of the Glass-Steagall Act (passed specifically to legalize the Citigroup megamerger) and the deregulation of the derivatives market. Having set that time bomb, Rubin left government to join Citi, which promptly expressed its gratitude by giving him $126 million in compensation over the next eight years (they don't call it bribery in this country when they give you the money post factum). After urging management to amp up its risky investments in toxic vehicles, a strategy that very nearly destroyed the company, Rubin blamed Citi's board for his screw-ups and complained that he had been underpaid to boot. "I bet there's not a single year where I couldn't have gone somewhere else and made more," he said.

Despite being perhaps more responsible for last year's crash than any other single living person — his colossally stupid decisions at both the highest levels of government and the management of a private financial superpower make him unique — Rubin was the man Barack Obama chose to build his White House around."

Citigroup to repay $20B of government bailout

"Citigroup Inc. fell the most in 2 ½ months in New York after the bank announced a deal with regulators to repay $20 billion to taxpayers by selling equity and debt.

Citigroup dropped 25 cents, or 6.3 percent, to $3.70 in composite trading on the New York Stock Exchange at 4 p.m., the biggest decline since Oct. 1. Volume of 822.8 million shares was almost three times the three-month average.

The bank, the only major U.S. lender still dependent on what the government calls “exceptional financial assistance,” said it will sell at least $20.5 billion of equity and debt to exit the Troubled Asset Relief Program. The U.S. Treasury Department also plans to sell as much as $5 billion of common stock it holds in the company, and will unload the rest of its stake during the next six to 12 months.

“They are taking on a significant amount of additional dilution in common shares outstanding in order to further exit TARP,” said Edward Najarian, an analyst at International Strategy and Investment Group in New York who rates Citigroup “hold.” “We think the stock will be under pressure today.”

The New York-based company also plans to substitute “substantial common stock” for cash compensation, Citigroup said in a statement today.

Chief Executive Officer Vikram Pandit has pressed for an exit from TARP out of concern that pay constraints imposed by the program make Citigroup vulnerable to employee poaching by Wall Street rivals. Bank of America Corp., the biggest U.S. bank, exited the program last week after paying back $45 billion of rescue funds.

‘Expensive’ Plan

“It’s important for Citi to exit these extraordinary agreements with the U.S. Treasury and the government as quickly as possible,” Gary Townsend, chief executive officer of Hill- Townsend Capital LLC, an investment firm in Chevy Chase, Maryland, said in a Bloomberg Television interview. “It’s expensive perhaps, but I think it had to be done.”

The bank will sell $17 billion of common stock, with a so- called over-allotment option of $2.55 billion, and $3.5 billion of “tangible equity units.”

An additional $1.7 billion of common stock equivalent will be issued next month to employees in lieu of cash they would have otherwise received as pay.

“So much is wrapped up into intellectual capital retention,” said Douglas Ciocca, a managing director at Renaissance Financial Corp. in Leawood, Kansas. “It’s such a big part of these banks at this point. They don’t want to be at a disadvantage as it relates to contract renegotiations coming into year-end.”

Loss Sharing

The TARP payments will result in a roughly $5.1 billion loss. Citigroup will also terminate its loss-sharing agreement with the government on $301 billion of its riskiest assets. Canceling about $1.8 billion of trust preferred securities linked to the program will result in a $1.3 billion loss, the company said.

Citigroup owes “taxpayers and the government a debt of gratitude for their extraordinary assistance,” Pandit said today in a memo to employees obtained by Bloomberg News. “These actions bring us closer to ending a very difficult period for our company.”

The U.S. earned a net profit of at least $13 billion from its investment in Citigroup, a Treasury official said today. The estimate includes about $3 billion in dividends and gains on the common-equity stake, roughly $5.8 billion based on the Dec. 11 share price.

Prince Alwaleed

Kingdom Holding Co. Chairman Prince Alwaleed bin Talal, once Citigroup’s largest individual shareholder, said after the announcement that he has no plans to sell shares in the bank.

In October, Pandit said he was “focused on repaying TARP as soon as possible” in cooperation with regulators. He pushed to accelerate the talks after Bank of America’s plan was announced, people familiar with the matter said last week.

Citigroup, which took $45 billion of TARP funds last year, converted about $25 billion in September into common stock, equivalent to a 34 percent stake.

The government is winding down the bailout programs it arranged as financial markets convulsed late last year. Treasury Secretary Timothy Geithner said in a Dec. 4 interview that most taxpayer money injected into banks through TARP will eventually be recovered.

JPMorgan Chase & Co., Goldman Sachs Group Inc. and Morgan Stanley, all based in New York, repaid bailout funds in June. San Francisco-based Wells Fargo & Co., with $25 billion of TARP money, isn’t subject to pay limits because it never needed a second helping of bailout funds.

Companies still dependent on the Treasury’s exceptional assistance program include American International Group Inc. and General Motors Co.

"Citigroup Inc. reached an accord with the Treasury Department and regulators to repay $20 billion of the bailout it received from U.S. taxpayers.

The lender will sell $20.5 billion of capital and debt, the New York-based bank said in a statement today. The bank will sell $17 billion of common stock, with an over-allotment option of $2.55 billion, and $3.5 billion of tangible equity units. The U.S. Treasury will concurrently sell as much as $5 billion of common stock it holds. The bank said it will also substitute “substantial common stock” for cash compensation.

Chief Executive Officer Vikram Pandit has pressed for an exit from the Troubled Asset Relief Program to avoid being the only large bank left on “exceptional assistance,” a Treasury designation reserved for companies including American International Group Inc. and General Motors Corp. that are surviving on taxpayer aid. Bank of America Corp. exited last week after paying back $45 billion of bailout funds.

“We planned to exit TARP only when we were convinced that it was prudent to do so,’’ Pandit said in today’s statement. “By any measure of financial strength, Citi is among the strongest banks in the industry.”

Citigroup fell to $3.88 in European trading today, down 1.8 percent from its $3.95 close in New York on Dec. 11. The stock has tumbled 41 percent this year, valuing the lender at about $90 billion.

Citigroup in talks for equity offering

Citigroup is in advanced talks with regulators over plans to raise more than $15bn in an equity offering, in an effort to repay $20bn in bail-out funds as early as Thursday.

People close to the situation said that Citi was also planning to raise around $2bn of mandatory convertible securities – a new form of security that converts into equity when a bank’s capital ratio falls below a predetermined level.

The talks were at a delicate stage and could collapse without a deal as some among Citi’s regulators were concerned that the bank might not be strong enough to repay the funds from the troubled asset relief programme, these people said.

The government is also likely to announce its intention to sell its 34 per cent stake in Citi over a period of a year or so. The future of an insurance policy provided by the Federal Deposit Insurance Corporation over some $300bn of Citi’s toxic assets , was also under discussion, insiders said. Citi declined to comment.

In an interview with CNBC on Wednesday, Mr Parsons said: “We believe Citigroup is in a position to repay the Tarp money.”

He added that there needed to be “active” discussions with regulators, who were seeking assurance that Citi would not need additional assistance after paying back the bail-out funds.

Citi’s regulators, including the Federal Reserve and the FDIC, are believed to have encouraged the bank to raise capital but have taken a tough stance on how much it should raise.

“Discussions are ongoing and constructive,” a Treasury official said.

Tarp repayment blow for Citi

"US authorities are split over how much capital Citigroup should raise before it repays $20bn bail-out funds – a disagreement that is hampering the bank’s efforts to free itself from the government’s grip.

People close to the situation said the Federal Reserve, Citi’s main regulator, and the Federal Deposit Insurance Corporation, another banking watchdog that is insuring $301bn of Citi’s toxic assets, had taken a harder line than the US Treasury.

The dispute – which follows similar disagreements on the strength of Citi’s management team and board – highlights the different priorities of US banking authorities and politicians after the financial crisis.

The Fed and the FDIC, which insures savers’ deposits, are concerned about Citi’s stability and the effects that further problems would have on the financial system. The Treasury, on the other hand, has been under political pressure to get back the billions of dollars in taxpayers’ money it injected into banks during the crisis.

Sheila Bair, the FDIC chairman, recently warned that the government should be careful about letting big financial companies pay back bailout funds because such help would not be available in the future, noting that the Fed had so far been measured in its approach.

Citi, which is 34 per cent owned by the government, wants to return the funds from the troubled asset relief programme to extricate itself from the scheme’s restrictions on pay and operations.

Last week, Bank of America announced it would repay Tarp funds – leaving Citi and Wells Fargo as the only two big lenders still in the programme.

The difference in opinion threatens to scupper Citi’s plans for a swift exit from Tarp. Insiders and analysts believe the bank has about a week to launch an equity offering before its year-end financial process forces it to delay any capital raising until after its results in mid-January.

The Fed and the FDIC have argued that Citi must raise substantial levels of capital before it is allowed to repay Tarp, insiders said. At one point, a regulator told Citi it might have to raise up to $20bn in equity before paying back Tarp – a level that would make it virtually impossible for the bank to leave the programme in the short term.

The Treasury, by contrast, is believed to have taken a softer stance and has been more responsive to Citi’s arguments that it has ample cash reserves to repay Tarp without raising too much capital.

BofA agreed to raise $18.8bn to repay $45bn in Tarp funds – well below the one-to-one ratio being mooted for Citi.

Repayments from the banks have given a political boost to the Obama administration, which White House and Treasury officials are looking to exploit as they go back to Congress to ask lawmakers to finance new stimulative programmes that target jobs, infrastructure and energy projects.

Citi, the Treasury and the regulators declined to comment.

Citigroup pushes for bailout-payback agreement

"Citigroup Inc. Chief Executive Officer Vikram Pandit is pressing the U.S. Treasury Department and regulators to agree as soon as this week on a plan to pay back $20 billion remaining from a government bailout, people familiar with the matter said.

Pandit, 52, wants an agreement in place this week or next, the people said, speaking on condition of anonymity because the discussions are private. He accelerated efforts after last week’s announcement by Bank of America Corp. that it had won approval to pay back $45 billion of taxpayer funds and exit the Troubled Asset Relief Program, they said.

Citigroup is trying to avoid being the only large U.S. bank left on “exceptional assistance,” a Treasury designation reserved for companies including American International Group Inc. and General Motors Co. that are surviving on taxpayer aid. Such companies are subject to government-imposed pay limits that may make Citigroup vulnerable to employee-poaching by unfettered Wall Street rivals.

“We do not comment on individual institutions but it’s fair to say that since Bank of America announced its intention to repay the government, others are pursuing discussions to understand what needs to be done to move ahead with repayment,” Treasury spokesman Andrew Williams said. “We continue to believe that banks and our financial system are better off with private capital instead of government capital.” Jon Diat, a spokesman for New York-based Citigroup, declined to comment.

‘As Soon as Possible’

In October, Pandit said he was “focused on repaying TARP as soon as possible.” He said, “We’re going to do so in consultation with the government and our regulators.”

Citigroup, which took $45 billion of TARP funds last year, in September converted about $25 billion of that into common stock, equivalent to a 34 percent stake. The Treasury Department, which is free to sell the stock at any time, is holding off on a sale until a plan can be reached with regulators for a payback of all remaining obligations from the bailout, a person close to the Treasury said last week.

Citigroup still has $20 billion in bailout funds along with guarantees from the Treasury, FDIC and Federal Reserve on $301 billion of devalued securities, mortgages, auto loans, commercial real estate and other assets. Citigroup paid $7 billion in advance for the guarantees, which last five to 10 years, depending on the type of underlying assets.

The lender’s exit plan may be more complicated than Bank of America’s because the government must decide how to handle the Treasury’s common stake and what to do about the asset guarantees, the person close to the department said..."

Treasury said to link Citigroup sale to TARP payback

"The U.S. Treasury Department aims to hold off on selling its 34 percent stake in Citigroup Inc. until the bank and regulators agree on a broader plan to repay all obligations remaining from last year’s $45 billion government bailout, a person close to the department said.

Treasury officials are concerned that a sale now of its 7.7 billion shares in the New York-based bank may weaken investor demand should Citigroup subsequently be required to raise capital as a condition of exiting the bailout program, said the person, who declined to be identified because the government hasn’t publicly discussed the plans.

Citigroup executives have pressed Treasury for at least three months to sell the stake as a first step toward leaving the bailout program, according to people familiar with the matter. They want to escape government-imposed pay limits that may make the company vulnerable to employee-poaching by unfettered rivals. Bank of America Corp., the only other large U.S. bank under pay limits, last week announced a plan to exit the program.

“This should be well thought-out for the benefit of all constituencies, and in this case that includes shareholders, the government and the taxpayers,” said Dennis Santiago, chief executive officer of analysis firm Institutional Risk Analytics in Torrance, California. “Just because Bank of America goes doesn’t mean you have to rush Citigroup.”

Kuwaiti Sale

The Kuwait Investment Authority, the Gulf nation’s sovereign-wealth fund, said yesterday it sold its stake in Citigroup for $4.1 billion, earning a $1.1 billion profit.

Citigroup shares fell to $4.00 in European trading today, down 1.5 percent from their $4.06 close in New York trading on Dec. 4. The shares have tumbled 47 percent this year, paring Citigroup’s market value to about $92 billion.

The government is trying to wind down bailout programs extended as financial markets convulsed late last year. Treasury Secretary Timothy Geithner said in a Dec. 4 interview that most taxpayer money injected into banks through the Troubled Asset Relief Program will eventually be recovered.

While holding off on a sale of its Citigroup stake, the Treasury has pushed regulators behind the scenes to accelerate discussions with all large banks about their plans to exit TARP, the person close to the department said.

Commercial Property

Mounting defaults on commercial property may keep regional lenders from repaying bailout funds until at least 2011. Unpaid loans on malls, hotels, apartments and home developments stood at a 16-year high of 3.4 percent in the third quarter and may reach 5.3 percent in two years, according to Real Estate Econometrics LLC, a property research firm in New York.

That’s a bigger threat to regional banks, which are almost four times more concentrated in commercial property loans than the nation’s biggest lenders, according to data compiled by Bloomberg on bailout recipients. The concentration makes regulators less likely to let regional lenders like Synovus Financial Corp. and Zions Bancorporation leave the Troubled Asset Relief Program, analysts said.

In November, the Federal Reserve asked nine of the biggest U.S. banks to submit plans to repay the government’s capital injections. In testimony last week before the Senate Banking Committee in Washington, Federal Reserve Chairman Ben S. Bernanke said Bank of America got approval to exit TARP only after regulators “felt it was safe and reasonable and appropriate.”

Charlotte, North Carolina-based Bank of America, the biggest U.S. lender, agreed to raise at least $18.8 billion of capital, according to a Dec. 2 press release. It said later that it had raised $19.3 billion.

Free to Sell

JPMorgan Chase & Co., Goldman Sachs Group Inc. and Morgan Stanley, all based in New York, repaid their bailout funds in June. San Francisco-based Wells Fargo & Co., which still has $25 billion of TARP money, isn’t subject to pay limits because it never needed a second helping of bailout funds, as Citigroup and Bank of America did.

In October, Citigroup CEO Vikram Pandit, 52, said he was “focused on repaying TARP as soon as possible.” He said, “We’re going to do so in consultation with the government and our regulators.” At least twice since September, he has said the Treasury is free to sell its shares at any time.

The Treasury got the shares in September, when $25 billion of the bailout funds were converted into common stock. The shares are now worth $31.2 billion, based on the closing price on Dec. 4, giving Treasury a paper profit of more than $6 billion.

Kuwait, Singapore

The Kuwait investment fund that got about 900 million shares in a related preferred-stock conversion last year yesterday converted them before selling the stock. In September, a Singapore government fund that got about 2.1 billion shares in the conversion said it had used open-market sales to reduce the stake to less than 1.14 billion shares.

The U.S. government doesn’t want to be viewed as trying to time the market, so part of Citigroup’s TARP exit plan would include a formal process for disposing of the common stake, the person said. Even if Treasury sold now at a profit, it might be second-guessed later if the shares rose further, the person close to the department said.

“We don’t comment on individual banks but are committed to maximizing returns on bank investments and restoring stability at the least possible cost to taxpayer,” Treasury spokesman Andrew Williams said.

Citigroup spokesman Jon Diat declined to comment on the Treasury’s plans or the bank’s timeline for repaying TARP funds.

Asset Guarantees

Citigroup’s discussions with banking regulators over a TARP exit may gain momentum now that Bank of America’s plan is set and regulators focus on Citigroup, the person close to Treasury said. The bank’s regulators, which include the Federal Reserve, Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp., haven’t commented on when the bank might be allowed to exit.

Citigroup still has $20 billion in bailout funds along with guarantees from the Treasury, FDIC and Federal Reserve on $301 billion of devalued securities, mortgages, auto loans, commercial real estate and other assets. Citigroup paid $7 billion in advance for the guarantees, which last five to 10 years, depending on the type of underlying assets.

The lender’s exit plan may be more complicated than Bank of America’s because the government must decide how to handle the Treasury’s common stake and what to do about the asset guarantees, the person close to the department said.

Federal Reserve credit and liquidity in Citigroup

On November 23, 2008, the Treasury, the Federal Reserve, and the FDIC jointly announced that the U.S. government would provide support to Citigroup to contribute to financial market stability.

The terms of the arrangement are disclosed on this website. Because the Federal Reserve has not extended credit to Citigroup under this arrangement, the commitment is not reflected in the H.4.1 statistical release.

Davis Polk coordinates the government funds injection

Source: George Bason Jr., Davis Polk & Wardwell, Citigroup Bailout The American Lawyer, April 1, 2009

"By winter, according to the Wall Street Journal, former federal officials were calling Citigroup Inc. "the Death Star." But last fall, it was simply a banking giant in desperate need of a government rescue. Saving the bank, at least temporarily, became the task of George "Gar" Bason, Jr., the head of mergers and acquisitions at Davis Polk. Over a single grueling weekend last November, right after Citigroup had lost half of its value in the stock market, Bason worked out a deal involving the U.S. Department of the Treasury, the Federal Deposit Insurance Corporation, the New York Federal Reserve, and Citi, the nation's largest bank.

Though the magnitude and novelty of the bailout captured the headlines (the plan calls for the U.S. government to guarantee $306 billion in Citigroup's loans and securities, including a $20 billion direct investment in the bank), Bason says that what made the deal truly complex was that Citigroup was caught trying to serve three different government masters. "Treasury, the FDIC, and the Fed looked at the issues from different perspectives," says Bason. "There were different layers of loss to each organization." Ultimately, Citigroup agreed to be responsible for the first $29 billion of losses stemming from its portfolio of real estate loans. The bank and the federal government also agreed to split the remaining losses (Citigroup would be responsible for 10 percent, the government for the rest), with the Treasury, FDIC, and Federal Reserve kicking in different amounts to cover losses.

But Bason hardly had time to bask in the glory of that historic bailout announcement. Almost immediately, he and his team worked on the complicated details of the plan, including selling off the majority share of Citi's Smith Barney brokerage unit to Morgan Stanley, a longtime Davis Polk client."

Four US bailouts for Citi since Great Depression

"Over the past 80 years, the United States government has engineered not one, not two, not three, but at least four rescues of the institution now known as Citigroup. In previous instances, the bank came back from the crisis and prospered.

Will Citigroup rise again from its recent near-death experience?

The answer to that question concerns not only the 276,000 employees who work at what was once the world’s largest bank, but the nation’s taxpayers as well. Even as Citigroup’s stock has soared from a low of $1.02 to its current $4.09 — and the company has eked out a $101 million profit in the third quarter along the way — it’s still unclear whether it can climb out of the hole that its former leaders dug before and during the mortgage mania. If Citigroup remains stuck, taxpayers will be on the hook for outsize losses.

Citigroup remains a sprawling, complex enterprise, with 200 million customer accounts and operations in more than 100 countries. And when people talk about institutions that have grown so large and entwined in the economy that regulators have deemed them too big to be allowed to fail, Citigroup is the premier example.

As a result, the government has handed Citigroup $45 billion under the Troubled Asset Relief Program over the last year. Through the Federal Deposit Insurance Corporation, a major bank regulator, the government has also agreed to back roughly $300 billion in soured assets that sit on Citigroup’s books. Even as other troubled institutions recently curtailed their use of another F.D.I.C. program that backs new debt issued by banks, Citigroup has continued to tap the arrangement.

Citigroup is also one of only two TARP recipients so desperate for capital that they’ve swapped government-issued shares into common stock, diluting existing shareholders. (GMAC, the troubled auto lender that may receive another government infusion, is the other.)"

Early history

Founded in 1812 as the City Bank of New York by a group of New York merchants, the bank's first Samuel Osgood, who had been the United States Postmaster General. Subsequently, ownership and management of the bank was taken over by Moses Taylor, a protégé of John Jacob Astor and one of the giants of the business world in the 19th century. During Taylor's ascendancy, the bank functioned largely as a treasury and finance center for Taylor's own extensive business empire.

In 1863 the bank joined the U.S.'s new national banking system and became The National City Bank of New York. By 1868, it was considered one of the largest banks in the United States, and in 1897, it became the first major U.S. bank to establish a foreign department. In 1896, it was the first contributor to the Federal Reserve Bank of New York.

National City became the first U.S. national bank to open an overseas banking office when its branch in Buenos Aires, Argentina, was opened in 1914. Many of Citi's present international offices are older; offices in London, Shanghai, Calcutta and elsewhere were opened in 1901 and 1902 by the International Banking Corporation (IBC), a company chartered to conduct banking business outside the U.S., at that time an activity forbidden to U.S. national banks. In 1918, IBC became a wholly owned subsidiary and was subsequently merged into the bank. By 1919 the bank had become the first U.S. bank to have $ 1 billion in assets.

In 1910, National City bought a significant share of Haiti's National Bank (Banque de la Republique d'Haiti) which functioned as the country's treasury and had a monopoly on note issue. (Schmidt, Hans. United States Occupation of Haiti, 1915 - 1934, Rutgers UP, 1971)

After the American invasion of Haiti, it bought all of the capital stock of the Banque de la Republique. The bank became the target of criticism for what were considered to be monopolistic and unfair banking practices. It initially did not pay the Haitian government interest on surplus money that it deposited in the treasury, which was loaned out by City Bank in New York. After 1922, it began paying interest, but only at a rate of 2% compared to the 3.5% that it paid to similar depositors. Economist and Senator Paul Douglas estimated that this amounted to $1 million in lost interest at a time when Haiti's government revenues were less than $7 million.

Charles E. Mitchell was elected president in 1921 and in 1929 was made chairman, a position he held until 1933. Under Mitchell the bank expanded rapidly and by 1930 had 100 branches in 23 countries outside the United States. In 1933 a Senate investigated Mitchell for his part in tens of millions dollars in losses, excessive pay, and tax avoidance.

Senator Carter Glass said of him, "Mitchell more than any 50 men is responsible for this stock crash."[1]

On 24 December, 1927, its headquarters in Buenos Aires, Argentina, were blown up by the Italian anarchist Severino Di Giovanni, in the frame of the international campaign supporting Sacco and Vanzetti.

In 1952, James Stillman Rockefeller was elected president and then chairman in 1959, serving until 1967. Stillman was a direct descendant of the Rockefeller family through the William Rockefeller (the brother of John D. Rockefeller) branch; in 1960 his second cousin, David Rockefeller, became president of Chase Manhattan Bank, National City's long-time New York rival for dominance in the banking industry in America.

Liquidity buffers

"... The Basel Committee on Banking Supervision, a 35-year-old panel that sets international capital guidelines, plans to propose a “new minimum global liquidity standard” by the end of this year, according to a Sept. 15 statement from the Financial Stability Board, which is coordinating financial regulatory reform on behalf of the Group of 20 nations.

Bondholders may benefit from an explicit threshold, said Baylor Lancaster, an analyst at CreditSights Inc. in New York. “From a credit perspective, it’s a positive,” she said. The market rate to insure $10 million of Citigroup bonds for five years has tumbled to $180,000 a year, from a record $667,000 in April.

Last November, when Pandit had to seek emergency aid from the Treasury, Federal Deposit Insurance Corp. and Federal Reserve, a run on the bank’s then-$780.3 billion of deposits was only one of his worries. He also faced soaring interest costs on $29 billion of short-term commercial paper, the threat of $400.7 billion of corporate loan commitments getting tapped and the possibility that Citigroup might have to provide funding to more than $400 billion of off-balance-sheet financing vehicles.

‘Near-Death Experience’

The government’s assurance of support, along with the promise of FDIC debt guarantees and at least $1.86 trillion of federal programs set up to ease the U.S. banking industry’s funding demands, helped staved off Citigroup’s collapse.

“When you go through a near-death experience, it focuses the mind, and none of these people want to ever go through it again,” said Charles Bobrinskoy, a former Citigroup investment banker who’s now director of research at Chicago-based Ariel Investments LLC, which oversees about $4 billion.

Citigroup has increased its deposits by $52.3 billion and reduced its commercial paper outstanding to $10 billion as of Sept. 30. The bank has sold about $65 billion of FDIC-backed debt while letting its loan portfolio decline by $95 billion to $622.2 billion.

The bank has a “deliberately liquid and flexible balance sheet,” Citigroup Treasurer Eric Aboaf said on an Oct. 16 investor conference call. The bank plans to refinance only $15 billion of about $45 billion of debt coming due next year and may use some of its cash to meet the payments, he said. Citigroup spokesman Stephen Cohen declined to comment.


Pandit probably can’t use his cash to pay back the $20 billion Citigroup still owes the U.S. government since that would reduce its capital, which regulators want the bank to maintain until the financial crisis has passed, said Chris Kotowski, an analyst at Oppenheimer & Co. in New York who rates the shares “market perform.” Treasury earlier this year converted $25 billion of its bailout money into Citigroup common shares that are free to be sold.

The banks are nowhere near as liquid as they were in the mid-1940s, when cash and securities accounted for 83 percent of total assets, according to CreditSights, citing FDIC data.

The failure of about 9,000 banks during the Depression “shell-shocked” the survivors, which then bolstered their reserves to “sleep better at night,” said Richard Sylla, a financial historian and economics professor at New York University’s Stern School of Business. In the late 1930s the U.S. government doubled reserve requirements and in the ‘40s pressured banks to buy war bonds, he said.

The liquidity percentage stayed above 40 percent until the early 1970s, and above 20 percent until a few years ago, according to CreditSights.

“Gradually the banks ran down their liquidity levels and got back into the business of making loans, but it didn’t happen overnight,” Sylla said.

Survive or dismantle?

"OVER the past 80 years, the United States government has engineered not one, not two, not three, but at least four rescues of the institution now known as Citigroup. In previous instances, the bank came back from the crisis and prospered.

Will Citigroup rise again from its recent near-death experience?

The answer to that question concerns not only the 276,000 employees who work at what was once the world’s largest bank, but the nation’s taxpayers as well. Even as Citigroup’s stock has soared from a low of $1.02 to its current $4.09 — and the company has eked out a $101 million profit in the third quarter along the way — it’s still unclear whether it can climb out of the hole that its former leaders dug before and during the mortgage mania. If Citigroup remains stuck, taxpayers will be on the hook for outsize losses.

Citigroup remains a sprawling, complex enterprise, with 200 million customer accounts and operations in more than 100 countries. And when people talk about institutions that have grown so large and entwined in the economy that regulators have deemed them too big to be allowed to fail, Citigroup is the premier example.

As a result, the government has handed Citigroup $45 billion under the Troubled Asset Relief Program over the last year. Through the Federal Deposit Insurance Corporation, a major bank regulator, the government has also agreed to back roughly $300 billion in soured assets that sit on Citigroup’s books. Even as other troubled institutions recently curtailed their use of another F.D.I.C. program that backs new debt issued by banks, Citigroup has continued to tap the arrangement.

Citigroup is also one of only two TARP recipients so desperate for capital that they’ve swapped government-issued shares into common stock, diluting existing shareholders. (GMAC, the troubled auto lender that may receive another government infusion, is the other.)

"So asked the New York Times this weekend in a 3,000 word article this weekend, that eventually came to the conclusion that a debt-for-equity swap was probably, sort of, the only answer to the bank’s problems.

However, the piece has drawn a furious response from Rochdale Research voluble banking analyst Richard X. Bove, who reckons the authors, Andrew Martin and Gretchen Morgenson, have completely missed the point: which is that Citi is already dead and the body is being dismembered. What the writer does not understand is that Citigroup is already dead. It will not rise from its death experience. A small portion of what was Citigroup, called Citicorp, will arise as a very successful company. But Citicorp is not Citigroup and Citicorp is not too big to fail.

The New York Times article is typical of the backward looking pieces being written about this company. Plus, it is flawed by a lack of understanding as to what Citigroup was in the 1920s (I suggest the writers read Citibank by Harold van B. Cleveland and Thomas Huertas, or The Banker’s Life by George S. Moore, or Wriston by Philip Zweig if they really want to understand this period); a misreading of how powerful the company was (or really was not in the past decade when it was far from being number one across the board and was closer to being a minor factor in many businesses and places around the world) and what the company is now. Plus, Alan Greenspan did not save the banking industry in 1990 by cutting interest rates. This cliché is ridiculous

Now, in order to understand where Citi is going, Bove adds, it is necessary to understand why it no longer exists.

In September 2007, this company had $2.4 trillion in assets. Two years later it had $1.9 trillion or $400 billion less. However, the company has been broken into two entities and the one that is to survive, Citicorp, only has $1.0 trillion in assets. Thus, the ongoing part of this company only has approximately 40% of what the old Citigroup controlled. Citigroup has sold huge portions of its company in the past two years and has huge portions left to be sold.

Bove goes on to list these businesses, but we won’t because it is just too long. However, his point is the Citi is now an experiment on how to liquidate a company that poses (or posed) a systemic risk.

Investors need to understand what the New York Times and others do not. Citigroup failed and is being liquidated. Citicorp is not too big to fail and is actually quite attractive. Once the liquidation of Citigroup is complete, investors will be left with a very attractive banking company with powerful niche positions. It should be owned.

Hence the prolific Bove has a “buy” rating and a $6.50 target price on Citi.

Citi earns $4B in 1Q 2010

Citigroup Inc. said the company is not involved in the Securities and Exchange Commission's investigation of The Goldman Sachs Group Inc. on charges it alleged fraud in sales of mortgage securities, chief financial officer John Gerspach said today.

The banking giant, which today reported a first-quarter gain of $4.4 billion, or 15 cents a share — its best results since the second quarter of 2007 — is nevertheless “fully cooperating” with the SEC and other regulators on a “wide range of subprime issues,” Mr. Gerspach said in an earnings call with analysts. He wouldn't expand on the comment.

Citigroup's first-quarter earnings compares with profit of $1.6 billion in the first quarter of 2009, reflecting an improvement in credit losses across the banking company and strong results in fixed-income trading. The bank said its total loan loss reserve of $48.7 billion represents 6.8% of total loans — a relatively strong sign of its ability to sustain further credit losses.

The private bank reported revenue of $494 million, down 12% from $567 million in the fourth quarter, and a decrease of 2% from $504 million a year earlier. Citi Holdings, the division comprising businesses the company wants to sell, reported sales of $6.6 billion, compared with $4 billion a year earlier. Still, the businesses in the holdings division had a net loss of $887 million.

Citigroup chief executive Vikram Pandit said the quarterly results reflect progress in the bank's long road to recovery but cautioned that in the short term, improvement will be tied closely to continued recovery of the U.S. economy and job growth, an area that he said is still laden with "uncertainty."

Banking executives also cautioned that legislation also will affect revenue this year. The new credit card rules that are being phased in will likely impact revenue by between $400 million and $600 million this year, they said.

Overall, the banking company's assets rose 8% to $2 trillion, after a change in accounting rules forced some off-balance-sheet items back on to the balance sheet.

Mr. Pandit expressed appreciation to U.S. taxpayers for sustaining his company through the subprime and financial crises.

“All of us at Citi recognize that we would not be where we are without the assistance of American taxpayers,” Mr. Pandit said in a statement. “We owe taxpayers a huge debt of gratitude for assisting us at a critical time.”

Recent losses and cost cutting measures

Citi reported losing $8–11 billion several days after Merrill Lynch announced that it too has been losing billions from the subprime mortgage crisis in the US.

On April 11, 2007, the parent Citi announced the following staff cuts and relocations.[2]

On 4 November, 2007, Charles "Chuck" Prince quit as the chairman and chief executive of Citigroup, following crisis meetings with the board in New York in the wake of billions of dollars in losses related to subprime lending.

Former United States Secretary of the Treasury Robert Rubin has been asked to replace ex-CEO Charles Prince to manage the losses Citi has amassed over the years of being over-exposed to subprime lending during the 2002–2007 surge in the real estate industry.

In August 2008, after a three year investigation by California's Attorney General Citibank was ordered to repay the $14 million (close to $18 million including interest and penalties) that was removed from 53,000 customers accounts over an eleven year period from 1992-2003. The money was taken under a computerized "account sweeping program" where any positive balances from over-payments or double payments were removed without notice to the customers.[3]

On November 23, 2008, Citigroup was forced to seek federal financing to avoid a collapse, in a way similar to its colleagues Bear Stearns and AIG. The US government provided $25 billion and guarantees to risky assets to Citigroup in exchange for stock.

This was the latest bailout in a string of bailouts that began with Bear Stearns and peaked with the collapse of the GSE's, Lehman, AIG and the start of TARP.

On January 16, 2009 Citigroup announced that it was splitting into two companies.

Citicorp will continue with the traditional banking business while Citi Holdings Inc. will own the more risky investments, some of which will be sold to strengthen the balance sheet of the core business; Citicorp. The idea behind splitting into two companies is so Citigroup can dump "the dead weight" on Citicorp, allowing the prime assets of Citi to operate away from that of the toxic assets.

Citi hires Buiter as chief economist

"Citigroup Inc. hired Willem Buiter, a former Bank of England official who has criticized the Federal Reserve for being too close to Wall Street, as its chief economist.

Buiter, 60, will join the bank in January and fill the position left vacant by Lewis Alexander’s move to the U.S. Treasury eight months ago, New York-based Citigroup said in a statement today.

The appointment by the bank, which is 34 percent owned by the U.S. government, puts an academic known for his outspokenness in its most senior economics position. In 2008, Buiter told the Fed’s annual symposium in Jackson Hole, Wyoming, that it pays an “unhealthy and dangerous” amount of attention to the concerns of the biggest U.S. financial institutions.

“As one of the world’s most distinguished macroeconomists, Willem’s deep knowledge of global markets and economies, and emerging markets economies in particular, will be invaluable to our clients,” Hamid Biglari, Vice Chairman of CitiCorp, said in the statement.

Buiter, currently a professor of political economy at the London School of Economics, has been unafraid to speak his mind about former or potential future employers.

CDO Comments

“In August 2007, several CEOs of major cross-border banks admitted they didn’t know what a CDO was,” Buiter said at the European Banking Congress on Nov. 20 in a discussion on the role of collateralized debt obligations in the financial crisis. “Most members of the Bank of England’s Monetary Policy Committee didn’t either.”

Buiter was one of the founding members of the U.K. central bank’s rate-setting panel when he joined in June 1997. In March 1999, he voted for a 0.4-point interest-rate cut, the only attempt in the MPC’s history for a move that wasn’t in a quarter-point multiple.

In 2008, Buiter turned his fire on his hosts when the Fed invited him to its annual retreat in the Teton Mountains.

“The Fed listens to Wall Street and believes what it hears,” Buiter told an audience of central bank officials from the Fed and around the world. “This distortion into a partial and often highly distorted perception of reality is unhealthy and dangerous.”

Fed Governor Frederic Mishkin said at the same event that Buiter’s paper fired “a lot of unguided missiles,” and former Vice Chairman Alan Blinder “respectfully disagreed” with his analysis of the central bank’s crisis management.

Dubai Views

Buiter has been a consultant to Goldman Sachs Group Inc. since 2005, according to today’s statement. He has a bachelor’s degree from Cambridge University and a doctorate from Yale University.

Questioned on Bloomberg Television today about government- controlled Dubai World’s request for a standstill agreement with creditors, Buiter said that they shouldn’t expect a full state- backed rescue.

“This is a business that’s fallen on hard times and its creditors and bondholders simply have to take their lumps and not expect a sovereign bailout,” he said.

Buiter was chief economist for the European Bank for Reconstruction and Development from 2000 to 2005. He has been an adviser to the International Monetary Fund, the World Bank and the Inter-American Development Bank, according to the statement.

Alexander, who had worked at Citigroup since 1999, left in March to become a counselor on domestic finance issues to Treasury Secretary Timothy Geithner. He was paid $2.4 million by Citigroup in 2008 and the first months of 2009, according to his financial-disclosure form filed with the Treasury. In December 2007, he predicted the U.S. would probably avoid a recession.

Buiter is married to Anne Sibert, an economics academic who was appointed as a member of Central Bank of Iceland’s five- member Monetary Policy Committee earlier this year, according to a Web log posting on his site.

Citigroup Inc. on Monday named Willem Buiter, a London-based economics professor and author, as its new chief economist.

Currently a professor at the London School of Economics, Buiter is a widely published author and blogger. He has worked as a consultant for Goldman Sachs since 2005.

He served as chief economist for the European Bank for Reconstruction & Development between 2000 and 2005, advising governments in Central and Eastern Europe and the CIS. He has also worked with the Bank of England and other central banks, and advised the International Monetary Fund, the World Bank, the European Commission and other bodies.

Citi said Buiter will work as a senior adviser on global economic issues across all of its businesses.

Buiter will take the post in January, replacing Lewis Alexander, who left in March to become a counselor to Treasury Secretary Timothy Geithner. He had held the post since 2005.

In midday trading, Citi shares added a penny to $4.07.

Citigroup's inside Washington man

"ALL of the nation’s major banks have a raft of Washington lobbyists, and with good reason. For people accustomed to dealing with numbers on Wall Street, the nation’s capital can seem impossibly complex.

The nettle of rules and regulations, the web of agencies and regulators, and, of course, the harsh realities of politics combine to make Washington a confounding place. And with legislators looking to redraw the rules for financial institutions to prevent a repeat of the credit crisis, having an advocate in Washington is a must.

Few banks can use advice about navigating the federal government more than Citigroup, a company so hobbled by the crisis that it has essentially become a ward of the state, kept alive through multiple infusions of taxpayer funds

Still, people inside and outside the bank say they were stunned when Richard D. Parsons, Citigroup’s chairman, enlisted the services last spring of Richard F. Hohlt, a longtime Washington insider with a history of aggressive advocacy for the banking industry.

Critics say that as a top lobbyist for the savings and loan industry in the 1980s, Mr. Hohlt blocked regulation of these institutions and played a pivotal role helping to prolong dubious industry practices that cost taxpayers $150 billion to clean up...

...But two people briefed on Mr. Hohlt’s engagement with Citigroup, who requested anonymity because speaking publicly about the situation would jeopardize their jobs, say Mr. Hohlt was also hired to advise Mr. Parsons on ways to blunt the demands of the Federal Deposit Insurance Corporation, one of the bank’s primary regulators. The F.D.I.C. agreed to insure some $300 billion of Citigroup’s troubled assets in a loss-sharing arrangement last year and has been at loggerheads with the bank’s management over stewardship of the sprawling enterprise.

Mr. Hohlt said that it was a “fabrication” that he was hired to jockey with the F.D.I.C. “I’ve never contacted anybody at the F.D.I.C.,” he said.

A spokesman for the F.D.I.C. declined to comment on Mr. Hohlt’s hiring because the agency does not discuss specific institutions. “Generally speaking, we expect banks to adhere to high ethical and reputational standards,” said Andrew Gray, an agency spokesman.

Citigroup does not show up in lobbying records as a client of Hohlt & Associates, Mr. Hohlt’s Washington-based firm. And Mr. Hohlt said that he was “not really” advising Mr. Parsons on regulatory matters.

“My contract prohibits me from any kind of lobbying, and I’m fired if I do,” he said of his assignment from Mr. Parsons.

A HOOSIER by birth and a former aide to Senator Richard G. Lugar, the Indiana Republican, Mr. Hohlt parlayed his connections and experience into a lucrative lobbying business. He is also a founding member of an informal Washington salon, known as the Off-the-Record Club, where prominent Republicans, including Vin Weber and Karl Rove, gather for dinner to trade strategy. Mr. Hohlt is also a well-known background source for Washington journalists...."

Citi review said to give most good marks

"Citigroup’s board met on Tuesday to discuss the findings of a government-ordered review of the bank’s leadership, a move that could lead to yet another management shake-up at the company, according to a person briefed on the meeting.

The management review, requested by federal regulators after months of turmoil, gave Citigroup’s senior executives good marks over all and took a satisfactory view of the leadership of Vikram S. Pandit, the chief executive, said the person and others with knowledge of the situation. Still, the report took a harsher stance on some of Mr. Pandit’s top deputies.

The review is the latest step that the government has taken to force changes at Citigroup after a board shake-up this year and a similar assessment of the company’s governance and risk practices during this spring’s stress tests.

In June, federal regulators ordered the bank to compare its leaders with those at peer companies after officials at the Federal Deposit Insurance Corporation raised concerns about Mr. Pandit and some of his top lieutenants. Consultants from Egon Zehnder International, an executive recruiting and consulting firm, interviewed Citigroup directors and senior executives about their impressions of Mr. Pandit and his deputies. Executives were evaluated for their ability to develop and execute a business strategy, to work well with regulators and other executives, and to understand the bank’s business issues.

Citigroup’s directors discussed the final report during a four-hour meeting on Tuesday but were still deciding how to respond, according to a person briefed on the matter. Regulators, who received the report only recently, have also started to review the findings.

Regardless of whether federal officials push for changes, the discussions could prompt Citigroup’s board to dismiss certain executives or reshuffle management responsibilities. A Citigroup spokeswoman, Shannon Bell, declined to comment."

Citigroup fines and sanctions

Judge approves SEC/Citigroup settlement

Citigroup Inc.’s $75 million settlement over claims it failed to disclose $40 billion in subprime-related holdings was approved by a federal judge in a lawsuit brought by the U.S. Securities and Exchange Commission.

U.S. District Judge Ellen Huvelle in Washington said yesterday she would sign the settlement after both sides agreed Citigroup must continue the disclosure plan it began during the financial crisis to ensure future SEC oversight. She told the attorneys in court to submit new language for the settlement within two weeks.

The judge said that she wanted to make sure there are “procedures in place that both satisfy me and the SEC.”

Huvelle last month held off approving the settlement, saying she was dissatisfied with the proposal and wanted more information before making a decision. Both the bank and the SEC filed additional papers with the court urging acceptance of their accord.

Citigroup fined $75 million by SEC

The Securities and Exchange Commission today charged Citigroup Inc. with misleading investors about the company's exposure to subprime mortgage-related assets. The SEC also charged one current and one former executive for their roles in causing Citigroup to make the misleading statements in an SEC filing.

The SEC alleges that in response to intense investor interest on the topic, Citigroup repeatedly made misleading statements in earnings calls and public filings about the extent of its holdings of assets backed by subprime mortgages. Between July and mid-October 2007, Citigroup represented that subprime exposure in its investment banking unit was $13 billion or less, when in fact it was more than $50 billion.

Citigroup and the two executives agreed to settle the SEC's charges. Citigroup agreed to pay a $75 million penalty. Former chief financial officer Gary Crittenden agreed to pay $100,000, and former head of investor relations Arthur Tildesley, Jr., (currently the head of cross marketing at Citigroup) agreed to pay $80,000.

"Even as late as fall 2007, as the mortgage market was rapidly deteriorating, Citigroup boasted of superior risk management skills in reducing its subprime exposure to approximately $13 billion. In fact, billions more in CDO and other subprime exposure sat on its books undisclosed to investors," said Robert Khuzami, Director of the SEC's Division of Enforcement. "The rules of financial disclosure are simple — if you choose to speak, speak in full and not in half-truths."

Scott W. Friestad, Associate Director of the SEC's Division of Enforcement, added, "Citigroup's improper disclosures came at a critical time when investors were clamoring for details about Wall Street firms' exposure to subprime securities. Instead of providing clear and accurate information to the market, Citigroup dropped the ball and made a bad situation worse."

According to the SEC's complaint, filed in U.S. District Court for the District of Columbia, Citigroup represented in earnings calls and public filings from July 20 to Oct. 15, 2007, that its investment bank's subprime exposure was $13 billion or less and had declined over the course of 2007. However, the $13 billion figure reported by Citigroup omitted two categories of subprime-backed assets: "super senior" tranches of collateralized debt obligations (CDOs) and "liquidity puts." Citigroup had more than $40 billion of additional subprime exposure in these categories, which it didn't disclose until November 2007 after a decline in their value.

The SEC's complaint alleges that as early as April 2007, Citigroup's senior management began to gather information on the investment bank's subprime exposure for purposes of possible public disclosure. From the outset of these efforts, internal documents describing the investment bank's subprime exposure included the super senior CDO tranches and the liquidity puts, while noting that they bore little risk of default. Nevertheless on four occasions in 2007, Citigroup stated that its investment bank's subprime exposure was reduced to $13 billion from $24 billion at the end of 2006 — without disclosing the more than $40 billion in additional subprime exposure relating to the super senior CDO tranches and liquidity puts. These occasions included a July 20 earnings call, a July 27 Fixed Income investors call, an October 1 earnings pre-announcement, and an October 15 earnings call.

According to the SEC's order instituting administrative proceedings against Crittenden and Tildesley, they were repeatedly provided with information about the full extent of Citigroup's subprime exposure. Crittenden received a detailed briefing on valuation issues relating to the super senior tranches of CDOs in early September 2007. Tildesley received information that same month that discussed the possibility that Citigroup's disclosures could be misleading because they did not include the amounts of the super senior tranches and the liquidity puts. The SEC's order finds that both Crittenden and Tildesley helped draft and then approved the disclosures that were included in a Form 8-K filed with the SEC on Oct. 1, 2007. The SEC's order finds that, in doing so, Crittenden and Tildesley caused Citigroup's filing to be misleading to investors.

Without admitting or denying the SEC's allegations, Citigroup Inc. consented to the entry of a final judgment that permanently restrains and enjoins it from violation of Section 17(a)(2) of the Securities Act of 1933, Section 13(a) of the Securities Exchange Act of 1934, and Exchange Act Rules 12b-20 and 13a-11. Crittenden and Tildesley, without admitting or denying the SEC's findings, consented to the issuance of an administrative order requiring them to cease-and-desist from causing any violations of Section 13(a) of the Exchange Act and Exchange Act Rules 12b-20 and 13a-11.

The SEC's investigation was conducted by Andrew Feller and Thomas Silverstein in the Division of Enforcement

Citigroup fined in tax-linked stock deals

Citigroup Inc. will pay $600,000 to settle a regulator’s claims that it inadequately supervised transactions that helped international customers avoid U.S. taxes on stock dividends, according to a person familiar with the matter.

Investigators at the Financial Industry Regulatory Authority, which polices almost 4,800 U.S. firms, found Citigroup Global Markets failed to supervise the system of trades and swap contracts and inadequately monitored certain communications, the person said, declining to be identified because the matter isn’t public. The settlement may be announced as early as today, the person said.

A U.S. Senate inquiry last year found that Wall Street firms concocted derivatives and stock-loan deals to help clients including international hedge funds avoid hundreds of millions of dollars in taxes. New York-based Citigroup, aware the Internal Revenue Service might deem its transactions improper, voluntarily disclosed them and paid $24 million in taxes for 2003 through 2005, the Senate’s Permanent Subcommittee on Investigations said in a report released in September of 2008.

Under the system, an overseas client typically sold U.S. shares to Citigroup before dividends were paid, then later received an amount similar to the dividend through a derivative contract, according to the person familiar with Finra’s findings. Citigroup initially lacked written procedures to oversee the system, and after the firm adopted a policy, employees didn’t always follow it, the person said.

Citigroup spokesman Alexander Samuelson and Finra spokesman Herb Perone declined to comment. The Financial Times reported the settlement yesterday.

Citibank Belgium "tricks" clients into Lehman products

This is my translation of a Dutch-language article which appeared today in Belgian daily De Tijd. Let’s see if this news is picked up in the U.S.

Citibank Belgium never should have recommended the controversial Lehman Brothers investments to its customers. So states the writ of the Brussels public prosecutor on the case.

The collapse of Lehman Brothers lost more than 4,000 Citibank customers, 128 million euros. The public prosecutor accuses Citibank of a “conflict of interest". "The bank had apparently instructed a higher-level committee to work toward the wholesale transfer of ordinary savings account money to Lehman Brothers."

According to the bench, this is the reason Citibank used "misleading" advertising and many other “tricks” to systematically recommend customers exchange their savings for Lehman products, concealing the bank’s true risks, returns and capital guarantees. The court now demands that Citibank pay back the full 128 million euros, plus interest and fees.

Political reactions MP Hans Bonte (SP.A) is very pleased that the Brussels public prosecutor also came to the conclusion that Citibank sold investments of the now bankrupt Lehman Brothers in an "unfair and irresponsible manner.” "That is what we have charged for months and years," said the Socialist opposition figure. The most important thing for him now is that all victims be identified and if possible obtain compensation.

Better would be if Citibank itself took on its responsibility and reimbursed customers who lost their savings, Bonte said in reaction to the news.

He believes that the Government should draw lessons from the case. According to Bonte, it is clear that something wrong with the supervision of the banks by the Banking, Finance and Insurance Commission (CBFA). Immediately he called for legislation on the appeals claim, so that a lawsuit could be filed in this case for the 4,000 victims.

Commerce Minister Vincent Van Quickenborne (Open VLD) called on Citibank again to choose an efficient settlement instead of letting it come to a possibly long and damaging process. The Minister also notes that the victims who have yet to take civil action be informed of the impending trial, so they also can take part in the civil action.

He recalls that he last year he ordered the Economic Inspectorate investigate the way Lehman Brothers products were advertised and sold by Citibank . This dossier was turned over to the prosecutor in December.

Although the analysis of the Economic Inspectorate showed that there are about 4,000 potential victims, there are only 1300 who have reported to the Inspectorate or the prosecutor. At the request of the Minister, the prosecutor and Economic Inspection examined how the remaining 2700 known victims can be informed about their rights before the start of legal proceedings. They have now been notified by letter.

The trial starts in December. Van Quickenborne hopes that as many people as possible can file civil claim to be compensated for their loss. He immediately repeated his "resolute" call to Citibank to not let it go so far and to choose an efficient settlement.

Source: Parket snoeihard voor Citibank – De Tijd

Citigroup accused by Terra Firma of fraud

"Citigroup Inc. was sued over the 2007 acquisition of EMI Group Ltd. by private-equity firm Terra Firma Capital Partners Ltd., which said the bank misrepresented that another firm was bidding on the record company.

Terra Firma sued to recover “lost equity of billions of dollars” and obtain punitive damages from Citigroup, which stood to garner substantial fees from the deal as investment adviser and lender to EMI and sole financier to the private- equity company, according to a complaint filed yesterday in New York Supreme Court in Manhattan.

When other private-equity firms dropped out of the bidding for EMI in 2007, Citigroup misrepresented that Cerberus Capital Management was actively participating in the auction and that London-based Terra Firma would lose the EMI bid unless it raised its offer, according to the complaint.

Terra Firma said it paid an inflated price for EMI, also based in London, because of Citigroup’s misrepresentation. The bank also interfered with Terra Firma’s investment by rejecting efforts to restructure EMI and attempting “to soften the markets” for EMI in a bid to take control of the record company by pushing it into insolvency, according to the complaint.

“We believe this suit is without merit and we will defend ourselves vigorously,” Danielle Romero-Apsilos, a Citigroup spokeswoman, said in an e-mail.

The lawsuit is the latest development between Citigroup and Terra Firma since the 2007 purchase of EMI at the height of the leveraged-buyout boom. The purchase gave Terra Firma control of the record label of the Beatles, Coldplay and Norah Jones.

Cash Injection

Citigroup rejected Terra Firma’s request to reduce EMI’s debt by 40 percent in return for a 1 billion pound ($1.63 billion) cash injection from the private-equity group, two people familiar with the talks said last month. Citigroup turned down the offer to lower the 2.5 billion-pound debt of EMI it controls because it would be forced to write off some of what it lent, one of the people said.

Guy Hand, Terra Firma’s founder, stepped down as chief executive officer this year after the firm wrote off about half its EMI investment. The label posted a 1.39 billion-euro loss in 2008 amid a continued drop in album sales.

Buyout firms including Terra Firma typically use loans secured on the targets they acquire to finance about two-thirds of the purchase price, and cash from their own funds for the rest. The firms usually invest no more than 20 percent of their fund in one company.

The case is Terra Firma v. Citigroup, 09603737, New York State Supreme Court (Manhattan).

Citi APR = 29.99%

"I got a nasty letter from Citi Bank recently. They are raising the APR on my credit card to 29.99%.

This is a losing strategy for Citi. Larry Small, the former Citi CEO built the bank into a powerhouse by leveraging global consumers. Now they are stabbing those clients in the back.

I have been doing business with C for thirty years. I have borrowed from them and paid them back a number of times. I don’t owe them a penny and I will be closing those accounts. I don’t want to do business with people who try to put muscle on me. The end result will be that the only consumers who will do business with C are those who have no intention to pay back those loans in the first place. Talk about a bad bank.

The NYS usury law sets the top rate at 16%. I am sure that Citi’s legal guys have found an angle around this. No doubt the rules are more favorable in S. Dakota where this letter originates. I live in NY and last I saw Citi had its headquarters here. This appears to violate the spirit of the NY statute. Possibly AG Cuomo will have an answer. I will ask him.

Citi is owned by the taxpayers as a result of TARP. It is receiving billions in additional subsidies monthly in the form of zero interest rates from the Federal Reserve. One would have thought that they might have gotten the message by now that abusive lending was ‘old school’."


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