Courtesy of Pam Martens
The business media was abuzz yesterday with reports that two of Citigroup’s federal regulators – the Office of the Comptroller of the Currency and the Federal Reserve – are considering reprimanding the bank for failure to improve its risk management systems. Trust us: there is a lot more to this story than you’re reading about in the main stream press. Citigroup doesn’t do anything small. When it does something bad, it goes all in – sometimes even assigning a code name.
Let’s start with the “Dr. Evil” trade. That was actually the code name that Citigroup traders assigned to an attempt to exploit a weakness in a European bond trading system. Citigroup was fined $26 million in 2005 by Europe’s Financial Services Authority for the trades.
Citigroup employees gave another code name, “Buca Nero” – Italian for “Black Hole” – to an accounting maneuver that made debt appear to be an investment at the debt-strapped Italian dairy company, Parmalat. The company collapsed in 2003 in what became Europe’s largest ever bankruptcy.
In 2005 Citigroup settled with the Securities and Exchange Commission for $101 million for helping the notorious Enron inflate its cash flows and under report its debts. The same year, Citigroup settled with private litigants for $2 billion over its role in the bankruptcy of Enron.
Then there were those infamous SIV liquidity puts. In the leadup to Wall Street’s financial collapse in 2008, Citigroup had been creating Structured Investment Vehicles (SIVs) and using them to place toxic subprime debt off its balance sheet. The problem was that those SIVs promised to provide liquidity to buyers of its commercial paper if the market bulked and wouldn’t roll over the commercial paper. That meant that Citigroup, in providing those liquidity puts, had to put this toxic debt back on its own balance sheet and take massive losses. Citigroup’s stock went to 99 cents in 2009 as it was receiving the largest taxpayer bailout in U.S. history.
While all of the above had been going on, Sandy Weill, the Chairman and CEO of Citigroup, had amassed a fortune from the bank through a technique that compensation expert Graef “Bud” Crystal called the Count Dracula stock option plan. You couldn’t kill it; not even with a silver bullet. Nor could you prosecute it, because Citi’s Board of Directors had signed off on it.
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