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.

FILED UNDER: Economics and Business, US Politics, , ,
Alex Knapp
About Alex Knapp
Alex Knapp is Associate Editor at Forbes for science and games. He was a longtime blogger elsewhere before joining the OTB team in June 2005 and contributed some 700 posts through January 2013. Follow him on Twitter @TheAlexKnapp.

Comments

  1. odograph says:

    This seems like the most strange and arbitrary bailout yet. I’m sort of waiting for the news cycle to digest it, and hopefully find some sense (or necessity).

  2. markm says:

    The top brass at Citi didn’t have to fly coach to Warshington to grove?…get tongue lashed?…they don’t need a better business plan to get a bailout?????????

    Odd.

  3. anjin-san says:

    I am with markm on this. We need to be equitable in dealing with the bailouts. Why do the big 3 have to go to DC to kiss congress ass, and not Citi?

    Detroit does not deserve a bailout, but we can either pay to try and keep them alive, or we can pay for the funeral. Either way the taxpayers are going to foot the bill.

    We cannot afford to have GM go bankrupt right now. I question Pelosi’s thought process…

  4. Bithead says:

    So some research into political donations from Citi board members and officers.

    Hardly arbitrary.

  5. Drew says:

    In a great Yogi Berra ism: “I feel strongly both ways.”

    Alex is correct. This bailout is a sham and – philosophically – should not be done. Citi got itself into this mess, its stakeholders should bare the brunt – not taxpayers. That is the American way…….well, at least it used to be.

    However, Dave is spot on. The concentration of the banking industry is the driver. The view from Washington is that the liquidity problems of a bank run outweigh the cost and injustice of the bailout. Sad but probably true.

    On that note – I chuckle (a sad chuckle) at those who rant that “failed Bush policies” caused this mess. Or that Obama should be inaugurated tomorrow to deal with it. Ask people to enumerate those “failed policies” and you generally get a blank stare, as does the query “exactly what will Obama do to fix it?”

    The hallmark economic policies during the Bush administration are the income tax rate reductions and loss of spending discipline. Neither caused the current problem.

    Some would scream “lax regulation!” But the repeal of Glass-Steagel, which enabled traditional business lenders to pursue risky interests as investment banking wannabees, preceded Bush, having been passed during the Presidency of a certain WJ Clinton. And does anyone need to be reminded that Bush’s proposed overhauls of mortgage mavens Freddie and Fannie went down in a torrent of (“you hate the poor”) criticism by the likes of Barney Frank, Maxine Walters and Chris Dodd?

    Dave S is right. Banking concentration is the issue; the “toxic waste” assets are sprinkled in and around an interconnected and concentrated global banking industry. And those banks haven’t wanted to lend to each other for fear of what might be on the other guys balance sheet. (“You insolvent, you.” Retort: “Takes one to know one.”) So if you want to criticize Bush, criticize him for not breaking up “Big Banking.”

    Was that doable?? I doubt it. The left was too busy whining and spinning conspiracy theories about really important things – like “Big Oil” – while taking finance lobbyists coin, for any consideration like that. Let’s see, the price of bank stocks today is……and the price of gas today is………?

  6. Dave Schuler says:

    Steve:

    I don’t know what the value of the New York Bank of the United States was but I do know that the value of the largest bank in the country in 1927 was $75 million. Assuming that the NYBUS was smaller and that there was a long tail, I doubt that my suggestion of thousands is that far off.

  7. Steve Verdon says:

    Dave,

    The two situtations are not comparable. We have no gold standard tying the Feds hands. We have deposit insurance. We have a very large economy that is more robust (i.e. other sectors of the economy are very large and unlikely to collapse becauase Citi goes belly up–e.g. health care). And a fucked up company like Citi needs to die. When you run a company into the ground keeping it going is just stupid. That is what we are doing, we are stuck on stupid.

  8. Drew says:

    Steve –

    But other things are different as well. primarily, globalism – the free flow of capital around the world. And a concentrated banking system.

    One of the vexing aspects (to me anyway) in explaining the current crisis is the proportionately small number of bad sub-prime loans that have been able to do this to the financial system.

    After all, mark all the sub-primes to zero and who cares? In the scheme of things its a small number. Not enough of a capital loss to bring the world to its financial knees. The problem appears to be a crisis in confidence among the banking players. Who’s balance sheet is OK, who’s is not? That is what froze interbank lending. That lead to concerns about corporate health, and hence froze the commercial paper market. Then you have a flight to government securities and so on. A pure liquidity crunch, nothing more. (or less) As you point out. The balance of the economy is/was relatively sound fundamentally. Are the Q2 and Q3 GDP numbers that distant a memory?!?

    Its all about liquidity and keeping capital flowing until order returns. Hence the Citi bailout debacle. Bad economics; bad justice. RealKapitalism.

  9. ew says:

    all of the socialist illuminati groups seem to be very much for the bailouts, but would our country really fall to pieces (as people think they would) if they were left to fiend for themselves? Or would it just possibly make US companies have to be more efficient?