Citibank Teaches Us How To Destroy A $244 Billion Banking Institution

Only two short years ago, Citibank was worth $244 billion. Now, after its stock lost half of its value in just the past week, the bank is estimated to be worth $20.5 billion. What happened? The New York Times attempted to answer that question Saturday, and it pointed the finger at the usual suspects — conflicts of interest between those who were supposed to manage risk — and those who stood to benefit from making risky bets.

The Times says that in September of last year, Citibank held a meeting to discuss the looming mortgage crisis. Citibank’s CEO at the time, the since-canned Charles O. Prince III, asked Thomas G. Maheras, who oversaw trading at the bank, “whether everything was O.K.” Maheras assured him that it was, and kept assuring him until it was too late.

From the NYT:

For months, Mr. Maheras’s reassurances to others at Citigroup had quieted internal concerns about the bank’s vulnerabilities. But this time, a risk-management team was dispatched to more rigorously examine Citigroup’s huge mortgage-related holdings. They were too late, however: within several weeks, Citigroup would announce billions of dollars in losses.

Normally, a big bank would never allow the word of just one executive to carry so much weight. Instead, it would have its risk managers aggressively look over any shoulder and guard against trading or lending excesses.

But many Citigroup insiders say the bank’s risk managers never investigated deeply enough. Because of longstanding ties that clouded their judgment, the very people charged with overseeing deal makers eager to increase short-term earnings — and executives’ multimillion-dollar bonuses — failed to rein them in, these insiders say.

Now, of course, the losses at Citibank — over $65 billion so far — threaten to dismantle the entire bank.

The article, which is 5 pages long, goes into detail about the relationships between the executives responsible for designing the strategy that ran Citibank into the ground. They lay a large part of the responsibility at the feet of Robert E. Rubin, a top adviser at Citibank and the Secretary of the Treasury during both Clinton administrations.

When he was Treasury secretary during the Clinton administration, Mr. Rubin helped loosen Depression-era banking regulations that made the creation of Citigroup possible by allowing banks to expand far beyond their traditional role as lenders and permitting them to profit from a variety of financial activities. During the same period he helped beat back tighter oversight of exotic financial products, a development he had previously said he was helpless to prevent.

And since joining Citigroup in 1999 as a trusted adviser to the bank’s senior executives, Mr. Rubin, who is an economic adviser on the transition team of President-elect Barack Obama, has sat atop a bank that has been roiled by one financial miscue after another.

Interesting stuff.

Citigroup Saw No Red Flags Even as It Made Bolder Bets [NYT]
(Photo: cmorran123 )

Comments

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  1. GiselleBeardchen says:

    Appropriate picture. Were all taking it up the Rosebud.

  2. bsalamon says:

    my bet was that capital one bank would be the next to go. guess i was wrong. i sure hope that the 50k people they lay off get some nice severance packages

  3. 12-Inch Idongivafuck Sandwich says:

    Oh look, it’s largely to blame by someone from the Clinton era…surprise, surprise.

    Interesting article though.

    • DeborahJackal says:

      @12-Inch Idongivafuck Sandwich:
      Oh look, the Bush administration did nothing in it’s 8 years to stop it!

      We can keep playing the game of which president/party caused this mess if you want, it makes no difference in the end though.

    • OletheaEurystheus says:

      @12-Inch Idongivafuck Sandwich: First of all, people seem to forget that the Clinton era had a split government, with the Republicans controlling the house and senate. So even if Clinton didnt sign the bill in, his veto would have been overturned. But more importantly while the Clinton era loosening allowed the whole mess to happen, it was through mismanagement LONG after Clinton was out of the office that was the root cause of it.

      Loosening of regulation is good if the people you hire are not out to make extremely risky moves in a attempt to make money. What was ultimately responsible was apathy and mismanagement from the CEO’s down. They didnt care what their people where doing as long as they made yacht loads of money knowing full well if a few of them screwed up they could tank the WHOLE bank, but hoping it wasn’t on their watch it happened.

      And all of THOSE people who pulled that shit became Bush economic advisors.

      • Tightlines says:

        @OletheaEurystheus: Don’t get mad, you’re supposed to forget that the past eight years ever happened.

        Damn Clintons!

      • snowburnt says:

        @OletheaEurystheus: I agree but rather than “apathy” I would say “greed” is the more appropriate word. They knew the risks they also knew that people they were giving the money to would get screwed and then the people they got to insure the loan would get screwed. What they failed to take into account was just how screwed the insurers would get (due to their own mismanagement). Further, most of the sub-prime loans had HUGE earnings potential…on paper. I mean you have someone riding on possibly 12+ percent on 200k – 300k, they can easily write down that they expect to make a killing. What they forgot was that it was pretend money and no one, not even the people buying the house expected to be paying it.

      • jodark says:

        @OletheaEurystheus: The risky moves were forced on them by the Community Re-Investment act. Don’t forget that the first to fall were Fannie/Freddie and thats basically the only way the conducted business. Funny how Clinton era people and Obama’s friends are behind all of this.

        • Trai_Dep says:

          @jodark: Sigh. And the AM talk-radio hits keep on coming.
          For a factual counterpoint, I quote Krugman:
          “So who drove the bubble? The blue line, “asset-backed securities issuers.” Notice, by the way, that these were not depository institutions – and therefore not subject to the Community Reinvestment Act.”
          [krugman.blogs.nytimes.com]

          If you have something besides carefully parsed YouTube snippets or RedState cites, please do so.

    • dazzlezak says:

      @12-Inch Idongivafuck Sandwich:

      Hey! Rubin is also advising the incoming Administration!

  4. gnortenjones says:

    Couldn’t happen to a nice bank.

  5. kmw2 says:

    The problems at Citibank are long-standing and are hardly the blame of Robert Rubin; the bank’s been mismanaged in a shocking way for a very long time. The fact that it’s just now disintegrating really is a miracle when you consider how poorly it was managed during Chuck Prince’s reign as a whole.

  6. Veeber says:

    Probably why Rubin won’t get another chance at Treasury Secretary this time around.

  7. BeyondtheTech says:

    And I thought Rick Berman was a master at sabotaging a multibillion dollar franchise like Star Trek. Looks like Citi’s near devastation was more robust.

  8. skinsfan44 says:

    Good to see Mr. Obamas “change” includes putting all of the arseholes that are responsible for gettign us into this mess back into prominent positions. Heck, this is beginning to look like Hillary did win the race.

    It utterly amazes me that people like Dodd and Franks aren’t being prosecuted- could you imagine if it was the Republicans who were running Fannie/Freddie and the congressinal positions that were supposed to provide oversight? Throw Greenspan in jail as well.

    • Triborough says:

      @skinsfan44: I knew that Obama would do something like this, since I knew his whole “change” thing was just a marketing thing. I think we are more screwed with him that we would be otherwise.

      • campredeye says:

        @Triborough: @Triborough: I cant help but laugh out loud at the 2 aforementioned posts.

        1. Rubin is an adviser, he was not given a position.

        2. Obama isn’t even in office, why are you blaming him?

        • crabbyman6 says:

          @campredeye: Because that’s what Limbaugh and faux news are telling them to believe. They’re already calling it “Obama’s recession”.

        • jodark says:

          @campredeye: They aren’t blaming Obama, yet. They are saying his ‘change’ is bullshit, because of his actions and associations. And rightly so.

        • ELC says:

          @Trai_Dep: Don’t watch YouTube, don’t listen to the radio.

          @campredeye:
          1. Rubin was an “adviser” – came from Clinton-era policies. What do you think adviser’s do? good grief. IF he was advising, his advice was crap.

          2. Because Obama is putting people like Rubin, and the idiot from MI in positions of power. They have shown that they can’t get out of a wet paper bag, yet they are going to be given power, in what is CURRENTLY the most powerful nation on earth.

          Don’t know how long that will last though once liberals, with their proven-to-fail policies start running things.

    • papahoth says:

      @skinsfan44: Perhaps he should hire you? After all, you evidently believe the inexperienced is the way to go.

  9. Sir Winston Thriller says:

    I wish I was too big to fail…

  10. Anonymous says:

    Hey people, how about blaming the morons that were running Citibank instead of Rubin, etc?

    • OletheaEurystheus says:

      @MeSoHornsby: This is the NYTs. They are all about passing the buck to Democrats. They are already running stories blaming the last month on Obama and he isnt even in office yet.

      • skinsfan44 says:

        @OletheaEurystheus:
        Surely you jest. The NY times is a liberal rag. I thought everyone knew that.

        • mac-phisto says:

          @skinsfan44: everyone has their agenda. even if we consider NYT to be a left-leaning paper, remember that the clintons caused a mass-exodus of liberal intelligentsia from the dem party. one could certainly be left-leaning & not agree with clintonian policies (just as one could be right-leaning & not agree with bush’s policies).

        • postnocomments says:

          @skinsfan44: And somehow the liberal NYT was one of the biggest cheerleaders of the Iraq war when the Neocons were conceiving it.

  11. Mr_Human says:

    Guess it’s time to use my Thankyou Points :)

  12. terminalboredom says:

    So does this mean I’m off the hook for my car loan?

    “Hello? Collections?! Listen, you guys need to worry about paying your bills first…coming after me is pure hypocrisy!”

    (Yes, I know I’ll be hunted down like a dog if I miss a payment, while they continue to light cigars with $100 bills)

    • MPHinPgh says:

      @terminalboredom: That was my first thought, too; my mortgage is with Citi. Stupid me, though…I’m current with the payments. Clearly, I should have been missing a few here and there to get a re-structure deal.

      [sigh] I never get it right.

  13. full.tang.halo says:

    Anyone besides me starting to think they people who put these restrictions in after the 1st great depression might have, you know, known what they were doing?

    I’m launching my bid, gotta get in early, to steal the post 1930’s ideas to prevent a 3rd great great depression. I’ll look a genius…until some idiots dismantle them in 2088…

    • officedrone4 says:

      @full.tang.halo:

      this is terrifying to me. in corps class (law student) last week our professor asked if we knew what WWI was called before WW2. Sadly the person he called on didn’t know – but it was called the Great War. Then he analogized to the Great Depression. And then I think everyone said a silent prayer that event isn’t someday called Depression I.

  14. friendlynerd says:

    Sweet, does this mean I don’t have to pay my mortgage anymore?! No? Damn.

  15. segfault, registered cat offender says:

    I don’t care what they invested or didn’t invest in, Shittibank deserves to fail for their crappy customer service.

  16. ADismalScience says:

    Because of longstanding ties that clouded their judgment, the very people charged with overseeing deal makers eager to increase short-term earnings – and executives’ multimillion-dollar bonuses – failed to rein them in, these insiders say.

    Can anyone truly substantiate that claim? I understand it’s a popular theory with some merit, but conflict of interest is actually a very small part of a larger story.

    Risk managers judge the relative risk of an asset using mathematical models. The reason for their failures was not some sort of old boy network – they were simply using bad information. Risk managers misunderstood the hedging behind the credit ratings of these securities and did not accurately quantify their risk. The result was a lack of qualitative judgement re: financial firm risk.

    • Trai_Dep says:

      @ADismalScience: GIGO.
      Plus, if you read the article, you’ll find that the Citi risk managers punted to the credit reporting agencies instead of wading thru the incomprehensible layers of CDOs to estimate exposure. A decent risk manager would say, “anything too complicated for us to penetrate is too risky to assume only an upside” and say, “Pass”. Instead, the chief deal-maker and the chief risk manager, while commuting daily, concluded Citi’s direction was peachy.
      Really, read the article. It’s VERY good. Props to NYTimes on this.

  17. MrsLopsided says:

    In 1999 CIBC was Canada’s 2nd largest bank. Today they are #5. In 1999 CIBC kicked out the old retail bank guard and brought in new management from Wood Gundy and the stock broker/wall street side. They focused entirely on on next quarter’s stockholder value, chased easy Wall Street riches & pursued “premium” investment customers while the bread and butter “core customer” became a disparaging word. Today CIBC is most exposed Canadian bank to the US real estate meltdown. Meanwhile stodgy and conservative little Scotiabank has climbed to 2nd place. The tortoise and the hare.

  18. Pixelantes Anonymous says:

    Why are we failing companies that are so poorly managed that they’re bound to lose the bailout money as well?

    • GreatCaesarsGhost says:

      @Pixelantes Anonymous:
      Exactly!

      Let’s give our trillion dollars to the companies that have actually succeeded. Then we know they’ll know what to do with it. Seems like that is more likely to help the whole economy.

      Nobody is too big to fail. If people just accept that Citi’s failure is Citi’s fault and not the economy as a whole, we could let it fail without the sky falling. Give the money to well run banks and they will use it intelligently to clean up after Citi.

      • ADismalScience says:

        @GreatCaesarsGhost:

        Nobody is too big to fail.

        You know not what you say…

      • snowburnt says:

        @GreatCaesarsGhost: two reasons: 1. they don’t need the money. They can stay in business without receiving a bailout…thus if that was the goal, there would be no “bailout” and we wouldn’t have tacked on a couple of digits to the national debt.

        2. We’d risk a banking monopoly. Think things are badly run now? Wait until there’s only one bank…and then wait for it to fail.

        number 2 is not a terrible risk because it won’t happen but I think point number 1 works.

    • ADismalScience says:

      @Pixelantes Anonymous:

      A few reasons:

      Citigroup is essential to the basic function of our economy. Unlike GM, for example, its failure would badly damage utterly unrelated industries like retail. Essentially any company that borrows CP to make payroll – namely, all of them.

      It’s not that poorly managed. Its investment bank bought a whole bunch of souring debt securities, but so did every last one of its competitors.

  19. shepd says:

    Oh please, oh please, fail! Bell Canada’s entire existence rides on Citigroup until Dec 11. Bell Canada is probably the #1 most hated of all institutions in Canada. You’d probably find more people here that think Revenue Canada is lovely to deal with than those that like Bell.

    I’d give you a half dozen horror stories myself, but it’s like shooting fish in a barrel. I’d rather be dealing with the USA’s Comcast than Bell! Much rather!

  20. APFPilot says:

    This morning on the news they had a comment on the bailout from someone who has a mortgage with Citi.

    “4 months ago I contacted Citi about delaying 1 payment on my note for a month due to a financial hardship (sick kid) Citi refused saying it was my responsibility to pay on time no matter the circumstances. Now my tax money is going to bail them out after their misakes, kind of ironic.”

  21. johnfrombrooklyn says:

    Maybe Rubin is to blame but I love his work with The Beastie Boys.

  22. TrueBlue63 says:

    So sad that this is an old story in the USA. Research the creation of the SEC, shareholders have been getting screwed by execs for the entire history of the stock exchanges. And why shouldn’t they, they are never held accountable for their actions. Prison for execs that rape their co’s, that is the solution.

    If you don’t believe me, ponder this, not a single privately held company has been affected by this fiasco. I wonder why that is?

    • ADismalScience says:

      @TrueBlue63:

      Because they don’t have to publicly disclose their horrible losses? Private investment companies, like Hedge Funds, have gotten absolutely killed. Research current events, buddy.

  23. Justinh6 says:

    I see it as a value investment.

    I bought shares of Citi at under 4 bucks.

    This company is not going to fail.

    Two years ago the stock was near 40 bucks.

    People criticized them getting money from Abu Dhabi a year ago, now the banks without capital are going down the tubes.

  24. jaydez says:

    The $20 billion works out to be about $56,000 for every Citi employee.

    I’ll take mine in one lump sum in my paycheck please.

  25. dragonfire81 says:

    Credit is always a bit risky in any form. Our entire economy is built on it. What does that tell you?

  26. elysse says:

    So……. when are *we* next?

    I mean, if we’re going to go down with the ship anyway we may as well all have a good time getting there.

  27. Burgandy says:

    So is the banking fail bracket going to be updated?

  28. P_Smith says:

    Anybody else notice that this sort of crap didn’t happen before corporate mergers became commonplace?

    It’s not just the McCain/Gramm laws that made the mess possible, it’s the modern corporation, with multiple businesses under one management that is too big and unwieldy for even the competent to manage, never mind the corrupt.

  29. jcargill says:

    Too bad Citibank doesn’t have a union to blame.

  30. econobiker says:

    I guess the case for a different political party (than the two main business funded ones) should get more view now.

  31. AbsoluteIrrelevance says:

    Citibank, being a brick and mortar bank, has some of the worst CD rates compared to online and offline banks anywhere. I KNEW something was up when I saw several banners for a 4% 6 month CD. Not only banners, but fliers in their bank, too. That’s a lot of marketing to do for a suddenly competitive CD rate that only lasted a few days. Now with all this, I’m sure we’ll see that again.

    • oneandone says:

      @AbsoluteIrrelevance: I got something in the mail about a month ago from them to open up a checking account with at least $3,000 and win a chance to win 1,000,000 thank you points. Tempting, but I never win anything, so I passed it up. It seemed a bit desperate, though. Maybe now they will just give away the points….. then I will be tempted again.

  32. ELC says:

    Oh great – another Obama person who is coming from a failed private entity. Our govt is surely going to be a rip-roaring success in 2009. Thank you Obamamaniacs!

    • battra92 says:

      @ELC: Pretty much, we’re all funked for the next 2-4 years.

      Honestly, I hate how these people in government and otherwise who cause these problems get to keep their jobs and act like innocent bystanders.

  33. ELC says:

    Great, another Obama person from a failed private enterprise. And not just a little fail, but a massive one! Our govt is going to be a crap hole in 2009. Thanks Obamamaniacs! Ignorance was bliss in 2008, but the reality will sting soon enough.

  34. Canoehead says:

    To be clear – they are not blaming Rubin qua Secretary of the Treasury – they are blaming him because he was later a senior officer at Citi and an important advisor to the CEO at a time when bad decisions were being made.

    And he is still a part of the “Obama economic team”.

  35. kwsventures says:

    Welcome to Weimar Germany. The Fed has the printing press on overdrive. We are flooding the world with dollars. In the next few years, this policy will create massive hyperinflation. The dollar will drop like a rock. Read the history of post World War 1 Germany. We are setting up the same inflation nightmare.

  36. BytheSea says:

    This is what those smart people on tv mean when they say they could see the New Depression coming from from years away.

    So, basically, you need to be a sociopath to be a banker who causes a massive economic armageddon. WHY do they refuse to seek criminal charges for these sick immature assholes?

  37. 2719 says:

    Funny. I just received a latter from CitiBank telling me my APR will change from 6.49% to 14.99%, my credit score is 800+, never missed a payment, $10000+ credit line with $300 balance. Tried to buy a laptop on Newegg for $650 and they declined the charge. Had to call in to get it to go through.

    And I just learned they will get a ton of money from the government.

    F**k you Citi! Not paying for your mistakes…I feel sorry for the employees though.

  38. Yeraze says:

    I really want to know why nobody is talking about how Citigroup/Citibank wanted to buy Wachovia 6 weeks ago. How did they go from “Flush with enough cash to buy another bank” to “Broke” ?

    Hint: Because they were gonna get Wachovia for a $270B _profit_.

  39. ShadowFalls says:

    From the bank who wanted to drag Wachovia down with them…

  40. oregongal says:

    Its not bad enough that they hold my mortgage but now I gotta bail them out too? Dammit I WANT A BAILOUT!!!