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 )