At Citigroup, It’s the Same as It Ever Was

6 | By Shah Gilani

Flashback to the 2008 credit crisis.

There’s Citigroup Inc. (NYSE: C) – bent-over by arrogance, off-balance sheet liabilities and derivative weapons of mass destruction in an insolvent fetal position.

Back in those dark days, Citi’s “Help! I’ve fallen, and I can’t get up!” cries were heard loudly across the interconnected, too closely correlated banking landscape.

Federal Reserve defibrillators were immediately attached to the heart of the too-big-to-fail bank, via its capital and liquidity arteries, and its survival was miraculously guaranteed.

Fast-forward to the gold statue just awarded to Citigroup for passing the Federal Reserve’s 2015 bank stress tests.

As Citi grabbed the Oscar from winking Fed presenters, the capital markets and America cheered, “You’ve come a long way baby!”…

Repeating the Past

Too bad the truth is that Citi has gone a long way back to where it was in 2008. And the Fed, which acted like a regulator and resuscitator back then, is now only acting out its part as regulator and likely will have to resuscitate Citigroup yet again in the coming financial crisis.

What’s really going on behind the curtain is nothing short of frightening.

First of all, the Fed is as clueless now as a regulator as it was going into the credit crisis.

As Citigroup’s principal regulator, the Fed was blind right up to Oct. 28, 2008, when it had to direct $25 billion from the new Troubled Asset Relief Program (TARP) to Citi. Nor did it see that on November 17, 2008, the failing bank would have to fire 52,000 employees.

Or that by the end of the following week Citi shares would lose 60% of their market value. Or that a week later Citi would need another TARP infusion of $20 billion, in addition to Fed guarantees on $306 billion of its securities held as “investments.”

In fact, the Fed never saw it would have to, according to a 2010 Government Accounting Office report, soak up more than $2 trillion in below-market-rate loans as part of its bailout lending programs.

So it shouldn’t surprise anyone that, following the latest stress tests, the Fed now thinks Citigroup has done a good job managing its capital and capital ratios.

Citi has done a good job.

But how it has done good is the problem.

A Crooked Scale

Citigroup has been trumpeting its exit from subprime lending and talking up how it has become more focused on capital and return on capital and equity metrics. And while Citi has been doing that, the Fed hasn’t noticed the bank has done that by taking on more “assets” that require less capital to hold.

I’m talking about derivatives.

The problem with calculating reserve requirements and capital requirements when it comes to derivatives is that there’s no real transparency on derivatives positions or counterparty risk calculations. How a bank accounts for its derivatives risk exposure can be masked in multiple ways. For example, how banks weigh the risks of certain assets is a matter of internal modeling.

Applying standardized capital reserve requirements to “risk-weighted” assets is a slippery slope if the assessment on the building in question can be mitigated by obscuring what’s really in the building. With internal models, it’s your building – you describe to the regulators what’s in it.

Citigroup’s investment bank unit held $32 trillion (notional amount) worth of derivatives in 2009. At the end of the third quarter of 2014, the unit held $70 trillion of derivatives.

The New York Times reported the other day that while the nation’s largest bank, JPMorgan Chase & Co. (NYSE: JPM), decreased its derivatives holdings by 17%, Citi has been buying up derivatives portfolios, including a $250 billion derivatives book from Deutsche Bank AG (NYSE: DB).

Adding weapons of mass financial destruction into a black-box building like Citi, where it tells regulators how solid its foundation is, against which it is assessed, is scary.

In her 2012 book, Bull by the Horns: Fighting to Save Main Street From Wall Street and Wall Street From Itself, former Federal Deposit Insurance Corp. (FDIC) Chair Sheila Bair gives us her insider view of Citigroup at the time of the credit crisis.

“By November, the supposedly solvent Citi was back on the ropes, in need of another government handout,” Bair writes. “The market didn’t buy the [Office of the Comptroller of the Currency]‘s and NY Fed‘s strategy of making it look as though Citi was as healthy as the other commercial banks. Citi had not had a profitable quarter since the second quarter of 2007. Its losses were not attributable to uncontrollable ‘market conditions’; they were attributable to weak management, high levels of leverage, and excessive risk taking. It had major losses driven by their exposures to a virtual hit list of high-risk lending; subprime mortgages, ‘Alt-A’ mortgages, ‘designer’ credit cards, leveraged loans, and poorly underwritten commercial real estate. It had loaded up on exotic [collateralized debt obligation]s and auction-rate securities. It was taking losses on credit default swaps entered into with weak counterparties, and it had relied on unstable volatile funding – a lot of short-term loans and foreign deposits.”

There’s a history of bad acting, both on the part of the Fed as a regulator and of Citi as a badly managed, leveraged risk-taking-for-profits TBTF bank. So I might be forgiven for being skeptical that Citi’s passing grade on its Fed-administered stress tests is a sign anything other than business as usual in the world of protected banks being coddled by their central bank supervising saviors.

P.S. I encourage you all to “like” and “follow me on Facebook and Twitter. Once you’re there, we’ll work together to uncover Wall Street’s latest debaucheries – and then we’ll bank some sky-high profits.

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6 Responses to At Citigroup, It’s the Same as It Ever Was

  1. TED MAYHEW says:


    Please give us a description of exactly what are derivatives.

    Derivatives are spoken of in the trillions of dollars and I can’t get my mind around just what could be so expensive in the form of an investment. How can these make a profit for the holders like Citigroup?

    Many thanks,


  2. Jaime says:

    I don’t, probably never will, fully understand derivatives. And what little
    I know about credit default swaps is that they are the equivalent of insurance
    taken out by a banker on a high risk loan, with the swap banker paying premiums on the swap, and the seller collecting the premiums. Only the
    seller is not really regulated as an insurer, and doesn’t have to set up
    loss reserves on the premiums.

    Why did bankers make the highly risky loans in the first place????
    Why did the regulators not question loan portfolios which had overly
    risky loans in excessive amount of the bank assets??

    I didn’t go to some fancy, overpriced, Ivy League school, Just Bradley
    U. Peoria Illinois, But what little I did absorb from a corporate finance
    course was that financial leverage amplifies earnings, but in a bad
    downswing also amplifies Losses!!!!!!!

    Somehow the conservative banking that my uncle learned at the
    University of Illinois and at the Federal Reserve became unsexy,
    and to stodgy, and has been supplanted by a go go form of banking
    that applies excessive risk, uses “Risk Management” tools which
    don’t manage risk, and garbage back securitized securities investment.
    Bankers in the 40’s and 50’s had 30% to 40% capital and set up
    cushions against huge downdrafts. Now they live on the edqe
    with 10%, maybe!!!!

  3. walter moses says:

    Thanks for verifying my thoughts on this rogue bank. After the 1 for 10 stock split Citi is still a lousy $5.00 stock. Should be delisted from the exchange.

  4. H Scott Watson says:

    I will mention also, and would like to see you discuss it, that Citi also recouped some by instantly – as soon as the bail out deal was a sure thing – jumping interest rates on credit card debt from 5.31% to 24.99% without any cause. That and the fact that others did almost as badly is what killed me and caused me to lose my whole investment portfolio by trying to keep the bills paid until I could sell my home at less than a bargain basement price!

  5. H. Nissan says:

    I have an account at Interactive Brokers. Behind that account the cash is kept at Citi bank. Should I move to another broker who is backed by a different bank?

  6. Edouard D'Orange says:

    Does anybody who could do something about these growing, pending problems read Mr. Gilani’s columns? Or do they just ignore every potential financial failure and possible catastrophe?

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