Many Americans may remember the fall of 2008 as a chaotic and frightening series of teetering dominoes—huge financial firms that had bet too much on the housing market. Many Americans may also recall experiencing a tremendous anger as the government rescued one stumbling giant after another. In September, Washington bailed out the government-created mortgage investors Fannie Mae and Freddie Mac. Then the feds rescued the insurance titan AIG, effectively a bailout of all the Wall Street firms to which AIG owed money. Among the great financial houses, only Lehman Brothers was allowed to fail.
But the Lehman moment of market discipline didn’t last long. The government then came to the rescue of money market mutual funds and issuers of commercial paper. By early October, President George W. Bush had signed the Emergency Economic Stabilization Act into law, creating the $700 billion Troubled Asset Relief Program. Roughly ten days later, financial regulators began spending this pot of rescue money, announcing direct investments in America’s largest banks. But was there one bank in particular that had regulators scared enough to engage in such radical interventions in the economy?
In the fall of 2008, few people in America had access to more information about the health of American financial institutions than FDIC chairman Sheila Bair. Four years later, she looked back on that season of crisis and wrote: “I frequently wonder whether, if Citi had not been in trouble, we would have had those massive bailout programs. So many decisions were made through the prism of that one institution’s needs.”1
Roughly eighty years after Senator Carter Glass blamed City Bank’s Charlie Mitchell for the great crash of 1929, another prominent federal official was suggesting the same bank may have been responsible for the historic taxpayer-backed rescues of 2008. But Bair’s case was stronger. She was not drawing a grand conclusion about the financial economy, but rather providing an eyewitness account and exploring the discrete question of how she and her fellow regulators came to approve historic interventions.
On Monday, October 13, 2008, Bair, Geithner, Bernanke, and Treasury Secretary Hank Paulson gathered the heads of America’s banking giants at the Treasury building in Washington. The regulators told the bankers that their firms were all going to accept government capital investments and also enroll in a temporary FDIC program guaranteeing their debts.
The regulators also told the assembled bankers how much the government would invest in each of their firms: $25 billion each in Citigroup, JPMorgan Chase, and Wells Fargo; $15 billion in Bank of America; $10 billion each in Merrill Lynch, Goldman Sachs, and Morgan Stanley; $3 billion in Bank of New York; and $2 billion in State Street.
The idea was to invest in all the major firms regardless of their health so as not to stigmatize those most in need of capital. But at least one banker, Wells Fargo CEO Richard Kovacevich, didn’t want the federal government as a shareholder and said his bank didn’t need the money. Under pressure from his regulators, he eventually relented. On the other end of the long table, Citigroup’s Vikram Pandit quickly embraced the idea of “cheap capital.” Recalls Bair, “Treasury was asking for only a 5% dividend. For Citi, of course, that was cheap; no private investor was likely to invest in Pandit’s bank.”2
When news of these federal capital injections hit the markets, stocks rallied. Along with the money came assurance from regulators that the big banks were all healthy and that the new capital was simply to allow them to lend more to Main Street consumers and businesses in need of credit. But after the initial market euphoria, investors started selling stocks on the theory that the US economy must really be in awful shape if it needed so much help from Washington. This is always the danger when government seeks to restore confidence in markets. How can anyone be confident in a market that requires so much assistance? As in every other sphere of human activity, genuine respect must be earned.
Competitors like Jamie Dimon’s JPMorgan Chase enjoyed such respect. But at Citi, it turned out that $25 billion in new taxpayer capital wasn’t nearly enough to earn the respect of investors and corporate depositors. On Thursday, October 16, 2008, just three days after Pandit and the other bankers had learned that Uncle Sam was their new shareholder, Citigroup released its quarterly earnings report. It was not pretty.
Revenues had plunged 23 percent. Citi posted a $2.8 billion quarterly loss, its fourth straight. The news was bad on both Main Street and Wall Street. The company announced a $4.4 billion write-down in its “Securities and Banking” segment, and the consumer business around the world was struggling. The Wall Street Journal reported: “Citigroup is facing soaring defaults on its giant global portfolios of mortgages and credit-card loans, which dragged its consumer-banking and cards divisions to a combined third-quarter net loss of nearly $2 billion. The trouble isn’t confined to the U.S.; Citigroup reported rising defaults in the U.K., Spain, Greece, Mexico, Brazil, Japan and India. Even corporate loans are souring at an increasing clip.”3
Just days after receiving a huge slug of cheap capital, Citi was in trouble again. By November 19, “its stock price had dropped precipitously. In the view of Secretary Paulson, the company was teetering on the brink of failure. The company’s survival was in doubt,” according to a 2011 report from the government’s inspector general for the Troubled Asset Relief Program.4
Preventing such moments from occurring was of course the job of the Federal Reserve and the Office of the Comptroller of the Currency. The Fed—specifically Geithner’s Federal Reserve Bank of New York—was supposed to watch over the whole Citigroup enterprise, while Comptroller Dugan’s team was supposed to monitor Citibank, the federally insured commercial bank subsidiary inside. But on-site examinations and off-site surveillance by teams of regulators had not succeeded in averting disaster. As for Sheila Bair’s FDIC, its main job was regulating smaller institutions, but it also maintains the deposit insurance fund of tens of billions of dollars to address failing institutions of any size. Since even its large checkbook could potentially be overwhelmed by the failure of a giant institution—which would then create the embarrassing need for the FDIC to call on taxpayer assistance—the agency is always wary of being on the hook for the enormous firms where it is not the primary regulator. In banking circles, the old joke is that the agency’s initials stand for Forever Demanding Increased Capital. Senior officials at the FDIC have often hoped for a larger capital buffer at banking giants like Citi. Unfortunately, those seeking a safer regulatory system are regularly disappointed.
As FDIC chairman, Bair also found it annoying that her fellow regulators were constantly thinking up ways to use her agency’s checkbook or its guarantees to bolster stumbling giants. It’s not that she was opposed to government intervention. Bair also favored rescuing people from the consequences of their bad credit decisions. It’s just that she preferred rescues of the individuals who borrowed too much rather than the bankers who lent too much.
Also, like every other regulator, she wasn’t eager to try to manage the failure of a giant like Citi. The FDIC has never seized such a large institution. And Bair hadn’t seized too many smaller ones, either. Appointed FDIC chairman by President George W. Bush in 2006, she had briefly served at the Department of the Treasury as assistant secretary for financial institutions and had earlier been head of government relations at the New York Stock Exchange, a regulator of futures trading and a Senate staffer. Her policy work was concentrated more in securities and commodities than in banking. As for her prior experience with the FDIC, in her memoir Bair explains that she “had worked with the agency during my Treasury days and had also served on an advisory committee it had set up on banking policy,” but admits that “I didn’t have a lot of personal experience with bank failures.”5
To her credit, she recognized quickly during the crisis that a federal decision to avoid such a failure by staging a bailout often occurred without substantive deliberation. She writes that the “unfairness” and “the lack of hard analysis showing the necessity of it trouble me to this day. The mere fact that a bunch of large financial institutions is going to lose money does not a systemic event make. And the rationale—to keep them lending—didn’t meet expectations.”6
Citi was losing money, all right, which in most other industries and even for most other banks would mean failure. But Citi plays by a different set of rules. An official at Geithner’s New York Fed would later tell the inspector general for the TARP program that the consensus among regulators was that they had to “save Citigroup at all costs” to stabilize the US financial system.7
At the time, Citi’s Pandit maintained that the bank had enough capital but was suffering from a tough environment and a perception problem among investors. This argument largely rests on the fact that at the time the firm was generally sound by the metrics that big banks and regulators had agreed to use in affirming the health of such institutions. But the crisis proved those metrics were not reliable measures of financial strength. Big banks and regulators had essentially agreed that giant firms can safely operate with heavy leverage while betting big on mortgage-backed securities. Sometimes they can’t. It should also be noted that when regulators conducted a “stress test” on Citi in early 2009, they concluded the firm needed more than $5 billion in additional capital, which prompted still another bailout, but let’s not get ahead of ourselves.
However much capital Citi needed, if a bank lacks credibility—and it’s the job of the bank to maintain the trust of market participants—it cannot survive absent federal assistance. In November of 2008 investors were selling Citigroup stock. It also became increasingly expensive to insure against the risk of a Citi default by purchasing credit-default swaps. Treasury Secretary Paulson was concerned that depositors “might start a run on Citigroup,” according to the IG’s report.8
On the morning of Thursday, November 20, 2008, Paulson and Geithner held a conference call with Bernanke, Bair, and Dugan. Bernanke told the inspector general they discussed Citigroup’s condition and the too-big-to-fail issue. During the call, Geithner said, “We’ve told the world we’re not going to let any of our major institutions fail. We are going to have to make it really clear we’re standing behind Citigroup.” According to Chairman Bernanke, it was “not even a close call to assist them.”9
At the FDIC, they seem to have been among the last to know about the severity of the bank’s troubles. As late as that Thursday evening, a report distributed among senior FDIC management noted challenges, but not a crisis:
Supervisory Perspective: Citigroup and its subsidiary banks have been under enhanced monitoring by FDIC dedicated examiners since the current financial crisis began. Given the recent deterioration in Citigroup’s stock price and CDS spreads and the considerable amount of negative inquiries from investors, the region is marshalling additional resources to assist in the risk assessment of the institution, including the use of examination specialists from the Large Bank Section.
Potential Impact on FDIC Insurance and Resolutions Missions: No immediate impact on the Resolution Mission.10
A subsequent email circulated that night among senior FDIC managers reported that some wealthy clients had withdrawn funds from Citi and a few hedge funds had reduced their trading with the giant financial house. The Union Bank of Switzerland had also reduced its exposure to the firm, but most big institutions were still willing to trade with Citi, as far as regulators could tell. “However, the considerable amount of inquiries from investors about Citi’s viability is a major cause for concern,” the FDIC’s Mark Richardson wrote.11
Overnight, Citigroup’s Global Transaction Services unit, which manages cash, facilitates trade, and executes payments for large organizations worldwide, experienced a $14 billion decline in available funds (about 5 percent of the total). On Friday, there were “significant corporate withdrawals (i.e., a run), primarily in the U.S. and secondarily in Europe,” according to the inspector general.12
That same day, the United Kingdom’s Financial Services Authority, which at the time was the regulator of British securities markets, imposed a $6.4 billion cash lockup requirement to protect the interests of Citigroup’s brokerage in the UK. It wasn’t this regulator’s job to keep Citigroup’s global financial empire afloat; the agency was charged with ensuring that the brokerage accounts of British customers remained whole. To say the least, the lockup was not a sign of confidence in Citi’s viability, and if this regulatory action were repeated elsewhere and applied to other Citi units it would likely take down the entire firm. When a financial company is stumbling toward the edge of a cliff, each regulator tries to secure money for whichever group of consumers they’re supposed to be protecting, and this is exactly what was happening at Citi. Back in the US, an FDIC staffer emailed Chairman Bair that foreign governments “are beginning to grab cash/ring fence . . . The FSA is going to look at Citi’s UK banks on Monday and may require lockups for them.”13
The Office of the Comptroller of the Currency and Citigroup guessed that Citibank would be unable to pay obligations or meet expected deposit outflows over the ensuing week. Citigroup’s own internal analysis projected that “the firm will be insolvent by Wednesday, November 26.”14 And if there was one group as nervous as the bank’s investors and customers it was the bureaucrats who were about to be called upon to manage its failure. As ever, the latest crisis in the banking sector caught many regulators by surprise. FDIC staff did a seat-of-the-pants calculation and estimated the agency’s potential exposure to Citibank to be in the range of $60 billion to $120 billion. Even at the low end of that estimated range, losses would “exhaust the $34 billion or so in the [Deposit Insurance Fund]” according to an internal FDIC email on Saturday, November 22.15
As time went by, some at the FDIC doubted that the range of exposure was that high given that Citi had largely funded itself with sources other than US-insured deposits. But even at the high end of their initial guess, it would hardly have strained the finances of the federal government to honor its promise to depositors. And of course the government ended up exposing taxpayers to far greater potential losses by extending the safety net to cover people and assets that Washington had never promised to insure.
As for the impact on the markets of a Citi failure, the FDIC seems to have accepted Geithner’s forecast of catastrophe. Bair later told the IG: “We were told by the New York Fed that problems would occur in the global markets if Citi were to fail. We didn’t have our own information to verify this statement, so I didn’t want to dispute that with them.”16 Bair initially resisted the idea of a taxpayer rescue but ultimately joined the other financial regulators in the bailout consensus. Writes Bair: “I finally acquiesced. We were all fearful of what would happen to an uncontrolled failure of Citigroup.”17 Treasury, the Fed, and the FDIC announced their new plan to save the firm on November 23, 2008.18 Treasury would invest another $20 billion in exchange for Citi preferred stock paying an 8 percent dividend. Also, along with the FDIC, Treasury would create a federal safety net under many of Citi’s most risky assets.
An internal FDIC document described the arrangement: “To prevent the firm’s collapse, Citi management has proposed a guarantee program where more opaque assets are ring-fenced with unexpected losses covered by the U.S. government.” The core of this aspect of the bailout was the segregation of a pool of about $300 billion of Citi’s most questionable loans and investments. Citigroup would be responsible for the first $37 billion of any losses from this pool, and the government would absorb any additional losses. But because Citi’s information systems were so bad, the government couldn’t tell exactly what it was insuring. According to an internal FDIC document: “Given the difficulty Citi is having in describing the specific assets within the $300B pool, what is covered by the guarantee will need to be more clearly defined.”19
However it was defined, the November bailout still wasn’t enough to keep Citi standing. By early 2009, the newly installed Treasury Secretary Timothy Geithner was floating a new plan to split the firm into one healthy bank and one sick bank, the latter saddled with the most troubled assets. Recalls Bair:
I was surprised when Tim started reaching out to me directly on the possibility of doing a good-bank/bad-bank structure for Citi. Initially, he raised the idea of the FDIC setting up and funding a bad-bank, without imposing any loss absorption on shareholders and bondholders. I was flabbergasted. Why in the world would the FDIC take all the losses and let Citi’s private stakeholders take all of the upside with the good bank? During the second meeting, we discussed a proposal to have [Citi] shareholders help absorb losses . . . That was a nonstarter for Tim. He wanted the FDIC to take a hit . . . It was unbelievable to me how little Treasury was asking of the institution to right itself.20
By this point it was getting difficult to keep track of all the ways the federal government was helping the banking giant. We should add that government funding did not begin in the fall of 2008. By the end of 2007, Citigroup already owed $87 billion to the Federal Home Loan Banks, a system of government-sponsored enterprises that provides funding to support housing finance and “community investment.”21 Starting in January 2008, lending from the Federal Reserve began in earnest with $4.5 billion in mid-January rising to $72 billion by the end of the year.22 The FDIC debt guarantee program (TLGP) was tagged onto the other funding sources in mid-October 2008, and Citibank and Citigroup quickly began ramping up their available balances by November.23 By late October, the first $25 billion of TARP funding made its way to Citi, followed by another $20 billion of TARP funding weeks later. Hundreds of billions of asset guarantees also came online after Citi’s November rescue.
An internal FDIC document reveals the extent and sources of federal support, which at its peak added up to more than half a trillion dollars (see Table 16). To put this amount in perspective, the market capitalization of Citi at the end of January 2009 was less than $20 billion.24 So the Fed, the FDIC, the Treasury, and the FHLB—and by extension US taxpayers—had twenty-five times the exposure of the bank’s shareholders!
Table 16: Citigroup—US Government Support as of January 31, 2009
|
Program |
Amount ($s in billions) |
|
Fed Commercial Paper Funding Facility (CPFF) |
$25.0 |
|
Fed Term Auction Facility (TAF) |
$25.0 |
|
Fed Primary Dealer Credit Facility (PDCF) |
$13.0 |
|
Fed Term Securities Lending Facility (TSLF) |
$40.9 |
|
FDIC Guaranteed Term Debt (TLGP) |
$13.8 |
|
FDIC Guaranteed Commercial Paper (TLGP) |
$40.0 |
|
Troubled Assets Recover Program (TARP) |
$45.0 |
|
Federal Home Loan Bank (FHLB) |
$79.6 |
|
Asset Guarantee Program (Treasury $5 billion; FDIC $10 billion; Fed $220 billion) |
$235.0 |
|
TOTAL |
$517.3 |
Source: FDIC, “[Redacted] Memorandum Rating [Redacted] Comments,” undated memo, but likely from February or March 2009, 3. Document 1 obtained as part of Vern McKinley v. FDIC, no. 15-cv-1764 (KBJ).25
Typically opaque about its operations, the Fed tried to avoid releasing the details of how much it extended to Citi and other institutions throughout the crisis, but Bloomberg and Fox News fought for disclosure in a battle that went all the way to the Supreme Court.26 The justices declined to reverse the appeals court rulings in favor of the news organizations, and the Fed was compelled to release this data on their lending in March 2011.27
It is often said that the Reconstruction Finance Corporation of the 1930s was the inspiration for the 2008 TARP program: direct capital injections by the government to bolster the financial position of banks and restore confidence in a system in crisis.28 In both cases, Citi was unsurpassed among banks in the amount of government investment. During the Depression, the RFC approved injecting up to $50 million into National City Bank, putting the firm at the top of bank recipients along with Chase and Continental Illinois. During 2008 and 2009 Citi was again at the top of the list of bank recipients of TARP aid.29 After the bailouts of October and November, Citi would essentially receive still another bailout in 2009 when the government converted its preferred shares to common stock to spare Citi from having to pay a hefty dividend and to improve its capital ratios.
How much did Citi need all the help? Recall that in a letter to National City shareholders during the Depression the new president of the bank, James Perkins, cast the acceptance of RFC funding as a patriotic gesture to renew economic confidence. In announcing the October 2008 capital injections into the major banks, Treasury Secretary Paulson read from the same script:
These are healthy institutions, and they have taken this step of accepting taxpayer money for the good of the U.S. economy.
Maybe JPMorgan Chase and Wells Fargo were healthy, but Citi? Elizabeth Warren—before she became Senator Warren—chaired a congressional oversight panel that examined TARP spending. At a 2010 hearing she questioned Secretary Paulson’s assessment:
Chair Warren: I’d like to start this morning with Treasury’s role in overseeing TARP, generally and overseeing Citi, in particular. On October 14th, 2008, Secretary Paulson announced the creation of the Capital Purchase Program and the infusion of cash into nine financial institutions, including Citi, and under the program he announced—these are the words he used—“These are healthy institutions, and they have taken this step of accepting taxpayer money for the good of the U.S. economy. As these healthy institutions increase their capital base, they will be able to increase their funding to U.S. consumers and businesses.” On October 28, under that program, Citi got $25 billion and was pronounced a “healthy institution.”
And yet, on November 23rd, which I think is about three weeks and four days later, the Secretary of the Treasury said that Citi was—Citi and Citi alone—was in such dire straits that it would need an additional $20 billion, and that was, then, followed by . . . guarantees. What I want to understand is, how we describe Citi as a “healthy institution;” what does “healthy” mean now that it didn’t mean on October 14, 2008?
It fell to Herb Allison, then the assistant Treasury secretary for financial stability, to respond:
Mr. Allison: Thank you, Chair Warren, for your question. Again, as you know, the Treasury does not make comments about the financial health of any particular institutions. In having the funds repaid—
Chair Warren: I’m sorry, I was quoting the Secretary of the Treasury on the health of Citi and other financial institutions.
Mr. Allison: I think at the time that was an extreme situation. I’m not going to comment or second-guess what the Secretary of the Treasury at that time had to say.
Chair Warren: So, your position is that we declared it a healthy institution, and now we take no position on the financial health of Citi?
Mr. Allison: It’s not our policy to comment on whether any institution presents a systemic risk or on its particular health.30
The half-a-trillion-dollar bailout was a method of bypassing the system of FDIC insurance and resolution of failing institutions. For banks, the framework is relatively simple. Banks pay premiums, the FDIC invests the proceeds, and depositors are compensated for their insured deposits up to a certain amount if the bank fails ($100,000 before the crisis, $250,000 today). With a risk-based system of premiums, banks are punished for taking on higher levels of risk, just as a smoker will likely pay higher premiums for life insurance.31
If a bank fails outright, it is placed under receivership and goes out of business. In most cases the assets are sold and the liabilities (including some or all the deposits) are taken on by a third party, usually another bank. Shareholders usually lose everything and depositors above $250,000 and other creditors usually don’t get all their money back. Old management of the bank generally gets the boot.
For large or complex banks, a special institution called a “bridge” is created, which, as the name implies, is temporarily controlled by the government to bridge the time while the FDIC evaluates and markets the institution. By 2008, the FDIC had over twenty years of experience with bridge institutions, a reform that arose out of the Continental Illinois bailout and the challenge of resolving the 1980s megabank.32
The risk-based premiums and limited coverage, combined with the threat of being shut down, was thought to impose at least some discipline on institutions, even if not as rigorous as pure market discipline. But when the government opted to bail out Citi, uninsured depositors and other creditors were made whole, shareholders maintained at least some value, and the bank continued to operate, even though it should rightly have gone out of business.
Before federal officials threw out the rule book to stage a rescue, Sheila Bair had been willing to at least consider letting Citigroup fail:
As our discussions about how to best stabilize Citi began, I took the position that we should at least consider the feasibility of putting Citibank, Citigroup’s insured national bank subsidiary, through our bankruptcy-like receivership process. That would have enabled us to create a good-bank/bad-bank structure, leaving the bad assets in the bad bank, with losses absorbed by its shareholders and unsecured creditors.33
The authors wanted to explore this idea further, so more Freedom of Information Act requests were filed and litigation initiated. The FDIC found more than one hundred pages of relevant documents, but fought disclosure for three years.34 We can only speculate what form the receivership might have taken, but it would probably have involved some type of bridge entity that would have been used to market and sell the various pieces of Citi.
In a typical receivership, the FDIC tries to immediately transfer as much of the assets and liabilities to an interested bank as it can. Whatever assets remain are sold over time so the FDIC, the depositors above the FDIC insurance limit and nondeposit creditors can be repaid. If no banks are interested in the failing bank, the FDIC puts up the funding to cover all the insured depositors and then the FDIC and other creditors get paid back over time as the FDIC sells all of the assets. The FDIC is at risk of losing a large share of the funds it sends out the door. But according to Chairman Bair, in the case of Citibank it turned out that this risk wasn’t as large as some might have feared:
[Citi] had a highly unstable funding base; much of its funding came from deposits overseas, which were not covered by strong deposit insurance guarantees similar to those provided by the FDIC. It had very little in the way of domestic deposits that we insured so our direct exposure to it was quite small. Funding its U.S. assets with foreign deposits kept its deposit insurance premiums low.35
Is the US government the whole world’s insurer against financial loss? Some of Citi’s foreign deposits were likely the result of products offered to corporate clients and relatively affluent consumers through Citigold, a banking and wealth management subsidiary that catered to the rich and near-rich.36 All these depositors were bailed out by US taxpayers.
Because the foreign depositors were at risk and might pull their deposits and cause a run on Citi, this seems to have been treated as another argument in favor of a Washington rescue. Bair recalls:
To [Paulson and Geithner] pretty much anything that was big and in trouble was systemic and if it was systemic, that meant it was entitled to boatloads of government money and guarantees. The whole tenor of the conversation was that the government owed it to Citi to get it out of trouble. As Hank said in his book, “If they go down, it’s our fault.”37
The argument for intervention should have not only included an explanation of the alleged bad consequences of letting Citi fail, but also an analysis showing that a bridge entity would not have worked. Paulson’s argument for intervention was a conclusory statement: “If Citi isn’t systemic, I don’t know what is.”38 Geithner, the man who has admitted he didn’t know the field he was regulating, once again expressed certainty about the impact of allowing a giant business to fail: “The system couldn’t have handled the sudden collapse of a $2 trillion institution that provided much of the world’s financial plumbing.”39 Fed chairman Bernanke said that “a Citigroup failure had the potential to block access to ATMs and halt the issuing of paychecks by many companies and governments.”40
But after the crisis passed, when the inspector general reviewed the record he couldn’t find much analysis supporting such forecasts of financial Armageddon:
[T]he conclusion of the various Government actors that Citigroup had to be saved was strikingly ad hoc. While there was consensus that Citigroup was too systemically significant to be allowed to fail, that consensus appeared to be based as much on gut instinct and fear of the unknown as on objective criteria.41
Bair certainly wasn’t able to pry out of the New York Fed a coherent and detailed explanation of why the financial markets needed a Citi rescue. “To this day, I wonder if we overreacted,” she writes.42 Bernanke, Geithner, and Paulson have maintained that the financial bailouts were necessary and saved the country and the world from catastrophe. But Citi is not a bank that anyone involved in the federal response likes to discuss.
Banking regulators like to talk about problems with “shadow banking,” meaning the parts of the financial world that they don’t control. Citi, on the other hand, is a 2008 disaster that they have to own. It was America’s biggest and most prominent bank, overseen by teams of regulators from multiple federal agencies. Its DC lobbying shop was highly influential, and its top management included people with deep Washington relationships. Just as at the very start of the institution in the early 1800s, Citi in 2008 was arguably America’s most political bank.
At one point during the crisis, Bair says she realized that she had underestimated the New York Fed and the Treasury’s “determination to make Citi look healthier than it was. They wanted to bolster its ability to compete against the better-managed banks.”43 In his own memoir, Bernanke insists that Citi had to be rescued but acknowledges: “I did agree with Sheila that Citi was being saved from the consequences of its own poor decisions.”44
Shouldn’t somebody have gone through the formality of a substantive explanation for why America couldn’t live without a firm that seemed so deserving of failure? In March of 2011, Citigroup chairman Dick Parsons painted a dire picture for Bloomberg of life without a Citi bailout:
“You would go home in a cab, swipe your credit card, and it wouldn’t go through,” Parsons says. “You wouldn’t be able to buy a loaf of bread or clear a check. It would be like Egypt. People would be out in the streets.” Parsons had a chummy relationship with the Treasury secretary. “Timmy Geithner would say, ‘Call me directly, because this is too important an institution to go down,’” Parsons says. According to the Treasury secretary’s schedule, available online, Geithner spoke frequently with Parsons in 2009. The Citigroup chairman also got along well with Dugan, whom he calls a “good guy.”45
Mike Mayo, a longtime Wall Street bank analyst who has done perhaps as much analysis of Citigroup as anyone, asks: “Can that really be true? Citigroup’s continued existence is the only thing separating the United States and Egypt?”46 As big as it is, the bank only holds about 5 percent of US bank deposits.
What is particularly odd is that many of the same regulators who considered the institution not just important but indispensable to the economy simultaneously believed that it was not even a well-run bank. In February of 2009, the Wall Street Journal reported:
Former federal officials have dubbed Citigroup the “Death Star,” comparing the bank’s threat to the financial system with the planet-destroying super weapon in the “Star Wars” movies. Privately, in the words of one official, they regard the banking giant as “unmanageable.”47
The Journal added that some people inside the bank also weren’t exactly impressed:
In a recent meeting with investment bankers, Citigroup’s investment-banking chief, John Havens, was pushing his deputies to further streamline operations in order to reduce costs. One executive asked whether the changes needed to be made quickly. The question “is typical Citi,” Mr. Havens replied, suggesting that decisions at the company take too long, according to a person at the meeting. “That’s why Geithner is so intolerant with us these days,” Mr. Havens told the bankers.
Now, gallows humor is setting in. This week, some employees noted that they always thought that working for Citigroup—with its unwieldy bureaucracy and clashing fiefdoms—was like working for the government anyway.48
Citi had certainly been working under a lot of government oversight. Bart Dzivi, special counsel to the Financial Crisis Inquiry Commission, studied the regulatory response to Citi’s deteriorating condition. Dzivi summarized supervision by the Office of the Comptroller of the Currency as “light touch” and New York Fed oversight as “no touch.” He adds that “there were indications in 2004 and 2005 of building problems,” but regulators lacked the will to address them.49
When the crisis finally struck, hundreds of smaller institutions were shut down.50 But just as in the 1920s, 1930s, 1980s, and 1990s, the government made sure in 2008 and 2009 that Citi enjoyed the money and/or the regulatory forbearance necessary to survive. Bair advocated giving the same deal to all struggling banks: “I suggested that we at least set up a facility that would be generally available to all banks to purchase their troubled assets and liquidate them over time. I was tired of the attempts to provide special help to Citi.” Bair adds that for both the Comptroller’s office and the New York Fed, the bank had long been the “premier” institution under their supervision and they didn’t dare let Citi fail:
It had a huge international presence, and as such its failure would be not just a domestic, but an international embarrassment for those two regulators. What’s more, Tim Geithner’s mentor and hero, Bob Rubin, had served as chairman of the organization and . . . had had a big hand in steering it toward the high-risk lending and investment strategies that had led to its downfall.51
This determination to protect the bank led to the absurd situation in which the Comptroller’s office refused to give Citi a failing grade on the CAMELS system used to evaluate banks. As it was being saved from failure over and over again by the government, the taxpayer assistance became the justification for arguing that the bank was relatively healthy. By this standard, of course, no bank could ever receive poor grades as long as regulators were willing to favor it.52
No less absurd was the fact that within five years, the chief operating officer of one of the troubled Citi units that contributed to the firm’s struggles would become secretary of the US Treasury. Former Citigroup executive Jack Lew took office in 2013. Coincidentally, he succeeded Timothy Geithner, who had been the chief regulator responsible for overseeing the bank during its years of crisis.