Why Are We Bailing Out Citigroup? (Updated)
Citigroup is currently valued at about $20.5 billion. It received $25 billion from the Treasury already, and is now poised to receive another bailout. Here’s how they got to where they are.
There, Citigroup’s chief executive, Charles O. Prince III, learned for the first time that the bank owned about $43 billion in mortgage-related assets. He asked Thomas G. Maheras, who oversaw trading at the bank, whether everything was O.K.
Mr. Maheras told his boss that no big losses were looming, according to people briefed on the meeting who would speak only on the condition that they not be named.
For months, Mr. Maheras’s reassurances to others at Citigroup had quieted internal concerns about the bank’s vulnerabilities. But this time, a risk-management team was dispatched to more rigorously examine Citigroup’s huge mortgage-related holdings. They were too late, however: within several weeks, Citigroup would announce billions of dollars in losses.
Normally, a big bank would never allow the word of just one executive to carry so much weight. Instead, it would have its risk managers aggressively look over any shoulder and guard against trading or lending excesses.
But many Citigroup insiders say the bank’s risk managers never investigated deeply enough. Because of longstanding ties that clouded their judgment, the very people charged with overseeing deal makers eager to increase short-term earnings — and executives’ multimillion-dollar bonuses — failed to rein them in, these insiders say.
Today, Citigroup, once the nation’s largest and mightiest financial institution, has been brought to its knees by more than $65 billion in losses, write-downs for troubled assets and charges to account for future losses. More than half of that amount stems from mortgage-related securities created by Mr. Maheras’s team — the same products Mr. Prince was briefed on during that 2007 meeting.
Explain to me why we’re wasting money on this bank? Citi’s problems aren’t what the bailout was sold to us as–not knowing the value of assets, etc. Citi’s problem is that it was horribly mismanaged. Why shouldn’t we let them go into bankruptcy, exactly? Really, I have no idea.
UPDATE (Dave Schuler)
Without defending the bailout in answer to Alex’s question I think that Citigroup is being bailed out to prevent a bank run both here and abroad. The banking industry is enormously more centralized than it was 70 years ago. Citigroup’s failing would be like thousands of 1930’s-era banks failing.
Update (Steve Verdon): I don’t think letting Citigroup go into bankruptcy would have anywhere near as bad as letting the New York Bank of the United States go into fail utterly. When it failed the New York Bank of the United States had 450,000 depositors and was the fourth largest depository bank in New York. And keep in mind that $20.5 billion today would have been $1.58 billion back in 1930. So saying it would be like letting thousands of banks fail strikes me as alarmist. Would it be bad? Yes, would it be a catastrophe that would have brought down the entire financial sector? No probably not. Keep in mind that while things are not like they were in 1930 there are additional safe guards such as deposit insurance backed by the government of upto $250,000 to name just one difference.