Marketplace Scratch Pad

Citi’s bridge over troubled waters

Scott Jagow Mar 4, 2010

Speaking of Too Big To Fail, there were some sparks at a congressional hearing today on that very subject. Plus, a thank you note from the CEO of Citigroup.

From the New York Times:

Elizabeth Warren, a head of the Congressional Oversight Panel who has strongly advocated the breakup of too-big-to-fail banks, expressed concern in her opening statements that Citigroup received an undeservedly favorable credit rating that might encourage it to take undue risks. She also noted that the bank had a history of being bailed out.

“The sheer magnitude of Citigroup’s operations, and the company’s history of receiving extra government support has led this panel to this conclusion,” Ms. Warren said. “Citigroup enjoys an implicit government guarantee.”

But Treasury official Herbert Allison denied that. Quote: “There is no too big to fail guarantee on the part of the U.S. government.”

So, Allison can say unequivocally there’s no TBTF guarantee, but he won’t answer simple questions about Citigroup’s health two years ago? The Wall Street Journal highlighted this exchange:

Panel members locked horns with Mr. Allison over his reluctance to answer some questions, primarily regarding the health of Citigroup when the government injected capital into the bank in late 2008. Panel member Damon Silvers, pressing Mr. Allison on whether the bank was at risk of failure at the height of the financial crisis, said it was “extraordinary that it is not possible to have a straightforward conversation.”

“I do not understand why it is that the United States government cannot admit what everyone in the world knows, which is that in that week that Citigroup was a failing institution,” Mr. Silvers said.

Citi CEO Vikram Pandit would only say that Citi’s health was “dramatically affected” by the collapse of the housing market. And he is grateful to you for not letting his bank’s mistakes result in utter failure. In his testimony, Pandit thanked the taxpayers for their generosity:

For Citi, as for many other institutions, this investment built a bridge over the crisis to a sound footing on the other side, and it came from the American people… American taxpayers still hold 27% of Citi’s common stock, and we look forward to helping them realize value on that investment. Citi owes a large debt of gratitude to American taxpayers.

While “supporting” financial reform, Pandit — not surprisingly — held back on specifics. More from the Times:

For example, Mr. Pandit, stressed “banks should operate as banks, focused completely on serving their clients” but he stopped short of formally endorsing the Volcker Rule, which strictly bars banks from proprietary trading or sponsoring private equity units or hedge funds. He also advocates strengthening consumer protection at the federal regulatory level, but stopped well short of endorsing a new agency.

Despite all the stop-shorting by Pandit and the stone-walling by Allison, these hearings could prove crucial to what kind of regulation we actually wind up with. Stay tuned.

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