Citigroup Executives Griped About Taxpayer's `Take-It-Or-Leave-It' Bailout

Citigroup Inc. executives, on the brink of a bank run in 2008 that U.S. officials believed could imperil the global economy, griped that terms of a taxpayer bailout would be too costly for the company.

“Many people” at Citigroup opposed the proposal, even after the bank’s stock price plunged below $5, companies started pulling deposits and trading partners demanded collateral, according to the top U.S. bailout watchdog. Federal Deposit Insurance Corp. Chairman Sheila Bair worried the bank wouldn’t be able to open on Monday, Nov. 24, the next business day.

The report yesterday by the inspector general of the Treasury Department’s Troubled Asset Relief Program, Neil Barofsky, lays out bank executives’ efforts to get a better deal during three days of negotiations in November 2008 that federal officials later dubbed “Citi Weekend.” Two months earlier, the bankruptcy of Wall Street firm Lehman Brothers Holdings Inc. had sent global markets into a tailspin.

“Citigroup executives were concerned that the government’s terms were very expensive in light of the amount of assistance provided,” according to the report. The New York-based bank didn’t agree to the terms until late Sunday night, when a deposit run was already beginning in Asia.

Because the bank’s global payment-processing division is so expansive, a collapse might have disrupted automated teller machines and kept companies and governments from making payroll, Federal Reserve Chairman Ben S. Bernanke told Barofsky. A Citigroup failure “would have been Lehman times two or three in terms of the financial sector and the economy,” Bernanke said.

Government’s Profit

Citigroup, led by Chief Executive Officer Vikram Pandit, 54, has since repaid its $45 billion of bailout funds and terminated a government-backed insurance policy on $301 billion of mortgages and other loss-prone loans and securities. The Treasury says it earned a $12 billion profit on the bailout, including dividend payments and gains on the sale of its stake.

The payoff hasn’t eliminated the risks Citigroup continues to pose, Barofsky wrote.

“While the year-plus of government dependence left Citigroup a stronger institution than it had been, it remained, and arguably still remains, an institution that is too big, too interconnected, and too essential to the global financial system to be allowed to fail,” Barofsky wrote.

Citigroup’s primary banking unit, Citibank, is operating under a memorandum of understanding with the Office of the Comptroller of the Currency requiring upgrades to risk management, according to the report. That agreement was signed in June 2008, five months before the company was rescued. Similar requirements were imposed in May 2008 by the Federal Reserve Bank of New York, according to the report.

‘Different Company’

A Citigroup spokeswoman, Molly Millerwise Meiners, declined to say what steps have been taken under the OCC agreement, and which steps must still be completed. She also declined to say whether the New York Fed agreement remains in effect.

“Citi is a fundamentally different company today,” Meiners said. “We have bolstered our financial strength, overhauled our risk management, reduced our risk exposures, defined a clear strategy and made Citi a more focused enterprise by returning to banking as the core of our business.” A New York Fed spokesman declined to comment. Calls to the OCC press office after business hours weren’t returned.

The bank’s assets totaled $1.98 trillion as of Sept. 30, up 2.3 percent from the end of 2008.

In February 2009, Bair e-mailed fellow regulators to say that Citigroup’s senior executives lacked sufficient bank experience and that changes were needed “at the top of the house,” according to Barofsky’s report.

Senior Managers

Her concern “arguably was not fully addressed,” Barofsky said. “Some of those in Citigroup’s senior management who came to the government seeking assistance in 2008 remain in place.” Andrew Gray, a spokesman for the FDIC, said that “the report provides a thorough overview of the events” without commenting specifically on Citigroup.

Citigroup had received $25 billion of bailout funds from the $700 billion bailout program in October 2008, when then- Treasury Secretary Henry Paulson doled out $125 billion to the nation’s largest banks, including JPMorgan Chase & Co. and Bank of America Corp. The following month, on Nov. 18, then-Citigroup director Robert Rubin -- himself a former Treasury secretary -- called Paulson to tell him that “short sellers were attacking the bank,” according to Barofsky’s report.

The bank had lost $20.3 billion in the prior four quarters. The stock plunged 20 percent to about $3.77 on Friday, Nov. 21, and concerns that a bank run might begin “were substantiated by significant corporate withdrawals,” according to the report.

Fundamentals

“It appeared to be market psychology without any regard to fundamentals,” Citigroup Vice Chairman Edward “Ned” Kelly told Barofsky. Funds in Citigroup’s global payments division tumbled by $13.8 billion, about 5 percent, in one night, according to the report.

A New York Fed official told Barofsky it was necessary to “save Citigroup at all costs” to stabilize the financial system. Pandit said “he did not know what the systemic effects of a Citigroup failure would be, and, essentially, that no one wanted to find out,” according to the report. “We saw what happened with Lehman, and we’re a lot bigger than Lehman,” Pandit told Barofsky.

Government officials pondered putting Citigroup into a conservatorship similar to the takeover of the mortgage-finance companies Fannie Mae and Freddie Mac, and decided against it, fearing the market might “perceive that the government had nationalized Citigroup,” according to the report.

Citigroup’s Proposal

By 3:36 a.m. the following morning, a Saturday, Citigroup had provided the New York Fed with a proposal for additional government assistance. Under its plan, Citigroup would issue $20 billion of preferred stock with a 5 percent annual dividend. Taxpayers would take any losses on the pool, which the bank estimated might reach $29 billion over 10 years, according to the report.

The government ran an analysis and projected $37 billion of losses, the report says. It countered with a “take-it-or-leave- it” proposal that would force the bank to accept a deductible of at least that amount, and make an additional payment of $7 billion of preferred stock with an 8 percent dividend.

The bank agreed to the deal to strengthen capital and “dramatically improve the market’s perception of Citigroup’s viability,” Kelly told Barofsky. The government gave Citigroup an additional $20 billion in exchange for preferred stock.

A year later, when Citigroup executives wanted to exit the bailout because of the accompanying compensation limits, they haggled again, according to the report. Because the bank had used the asset-guarantee program for only one year of the 10- year term, Citigroup wanted 90 percent of its money back.

‘Unacceptable’

“Treasury considered Citigroup’s ‘straight-line proposal’ to be ‘entirely unacceptable,’” the report reads. “The government took the position that the overwhelming majority of the value of the AGP was in the first few weeks of its existence, when the guarantee helped Citigroup avoid collapse.”

The government agreed to refund $1.8 billion, or about 25 percent of the payment for the guarantees.

Pandit, who joined Citigroup in 2007 when it bought his hedge fund for $800 million, acknowledged to a congressional panel in March 2010 that the bailout “built a bridge over the crisis to a sound footing on the other side, and it came from the American people.”

“I want to thank our government,” Pandit said.

To contact the reporters on this story: Bradley Keoun in New York at bkeoun@bloomberg.net; Donal Griffin in New York at dgriffin10@bloomberg.net.

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net

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