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The Giddy Messages Citi Traders Sent While Lehman Died

  • Citi is accused of inflating $2 billion bankruptcy claim
  • ‘This is the time to make a lot of money,’ Citi manager says

As U.S. officials and bank executives scrambled to save the global financial system after Lehman Brothers’s bankruptcy in the fall of 2008, Citigroup Inc. traders were doing what traders always try to do.

"Ringing the register, homey,” Thomas Giardi, a trader in the bank’s credit derivatives trading unit, said in a chat message at 6:40 a.m. on Sept. 17, two days after Lehman’s bankruptcy. Subject line: "YOU MAKING $$$."

His gleeful boast -- along with at least a dozen from others -- came as Citigroup’s top traders were furiously trying to deal with thousands of derivatives terminated by Lehman’s collapse. Contained in chat messages and recordings from that turbulent September week, the exchanges are the most colorful, if not potentially damaging, evidence so far in a civil trial on allegations that Citigroup inflated its $2 billion bankruptcy claim related to those derivatives.

At the time of the bankruptcy, Lehman Brothers Holdings Inc. and Citigroup had entered into more than 30,000 derivatives trades tied to an estimated $1.18 trillion of wagers on everything from interest rates to corporate and sovereign debt. Lehman’s bankruptcy gave New York-based Citigroup the right to determine its damages.

Make Money

At stake in the trial, which began in April in U.S. bankruptcy court, is whether Citigroup has to return any of the $2 billion to unsecured Lehman creditors. Those creditors allege that the messages help show how the bank profited from the very financial instruments that regulators worried would take down other banks.

“Throughout this matter‎, Citi has always acted appropriately,” the bank said in a statement. “Citi will continue to vigorously pursue its right to recover the substantial damages it is owed as a result of Lehman’s breach of contract.”

Giardi didn’t return messages seeking a comment.

Lehman lawyers argue that heightened volatility in that period meant bigger profits for Citigroup.

“This is the time to make a lot of money,” Carey Lathrop, head of Citigroup’s credit division, said in a Sept. 17, 2008, recording, according to Lehman’s exhibits. “There are a lot less competitors... and there’s a lot of bid/offer spread. And people have to do things.”

$300 Million Risk

Two days after Lathrop’s recording, a trader would exult in what Lehman said was the hedging of much of the $300 million of risk in Venezuela’s sovereign debt.

"Ho! Forty bucks!" David Rosa, head of Asia/Pacific emerging markets, said in a Sept. 19 phone call. He was referring, Lehman lawyers said, to $40 million in profits a trader had made. 

“Four-zero, yeah,” replied Marc Pagano, head of emerging-markets credit trading.

“Holy smokes,” Rosa said.

Citigroup said in court papers that there was actually a $30 million loss, and that the emerging-markets credit group had mounting losses after Lehman filed.

In another example of how well Lehman said Citigroup traders were faring in the turmoil, Pagano was recorded as saying: “It’s like ‘Brewster’s Millions,’ every time you try to spend money you make more.” In that 1985 movie, a man struggles to spend $30 million in 30 days in order to inherit $300 million.

Lathrop, Rosa and Pagano, the only trader to be recorded, didn’t return messages seeking comment and Citigroup declined to comment on their behalf.

Hedging Techniques

Lehman also offered exchanges it said show that Citigroup, despite its protestations in court, was able to easily replace its risk using broad hedging techniques, known as macro hedging. It contends that Citigroup then inflated its claim by acting as if it had actually closed out each derivative contract individually and adding phantom fees.

Lehman lawyers say Citigroup picked prices to its advantage by using, for example, the bid or offer side of a trade rather than the midpoint. They cited a message by Pagano on Sept. 22 that Lehman said shows Citigroup’s inflated pricing strategy. 

"if we were to reprice individual deal bid/offer rather than net risk bid/offer it might have a large impact on all of our mtm result in that Leh would owe us more money." MTM refers to mark to market.

Citigroup’s methodology followed the so-called master agreements, governed by the International Swaps and Derivatives Association, that call for using “commercially reasonable procedures” to close trades, the bank said in court. Nothing requires picking a midpoint price to come up with a close-out cost, Citigroup lawyers said.

London Whale

Even after the hedging the bank was still sitting on substantial risk, Citigroup said at the trial, referring to that as “leaky bucket syndrome.” In court papers, it argued that the broad hedging techniques had major pitfalls, as demonstrated by JPMorgan Chase & Co.’s “London Whale” episode in 2012, when the bank lost more than $6 billion.

Indeed, by December, market sentiment had turned on the Venezuela debt, prompting Pagano to write in an email: “we are getting crushed in the LEH management book by $10mm...”

Darrell Duffie, an economics professor at Stanford University’s business school who specializes in derivatives hedging, said the dispute illustrates a problem that remains in trillions of dollars of derivatives today: The ISDA agreements allow parties broad leeway in how they set claims, he said, giving banks an incentive to overstate the damage.

Citigroup traders had worries, too, that week.

“It’s the end of the world as we know it,” Lathrop said in an 8:21 a.m. phone call on Sept. 16, presented by Lehman.

“I know,” Pagano replied. “F*cking AIG.”

American International Group Inc. was bailed out that day by the government, and Citigroup would go on to borrow as much as $99.5 billion under government assistance programs as of Jan. 2009.

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