As Citigroup Spun Toward Insolvency in ’07- ’08, Its Regulator Was Dining and Schmoozing With Citi Execs

By Pam Martens and Russ Martens: January 7, 2014

Timothy Geithner Is Sworn in as 75th U.S. Treasury Secretary As His Wife, Carole, Looks On

Before Timothy Geithner became the 75th Secretary of the U.S. Treasury in 2009, he served as the President of the Federal Reserve Bank of New York for five years. The New York Fed is one of Wall Street’s primary regulators. But after leaving his post at the New York Fed, Geithner testified before the U.S. House of Representatives’ Committee on Financial Services on March 26, 2009 that he was not regulating Wall Street as he earned his $400,000 a year with car, driver and private dining room.

At the 2009 hearing, in response to a question from Congressman Ron Paul, Geithner said:

“That was a very thoughtful set of questions. I just want to correct one thing. I have never been a regulator, for better or worse. And I think you are right to say that we have to be very skeptical that regulation can solve all these problems. We have parts of the system which are overwhelmed by regulation…It wasn’t the absence of regulation that was a problem. It was, despite the presence of regulation, you got huge risks built up.”

When Geithner says, “for better or worse,” I think most Americans would agree that Geithner’s failure to know that he was a regulator at an institution he headed for half a decade that employed hundreds of bank examiners was probably worse for the country, not better, given that he oversaw the greatest financial collapse since the Great Depression and the most expensive taxpayer bailout in the history of finance.

In written testimony before the same hearing, Geithner added that “We can’t allow institutions to cherry pick among competing regulators, and shift risk to where it faces the lowest standards and constraints.” And yet, Geithner’s appointment calendar suggests that this is exactly what Citigroup did as Geithner accommodated it as willingly as a concierge at one of those exclusive Manhattan hotels.

According to Geithner’s appointment calendar for 2007 and 2008 (available online courtesy of an article the New York Times published in 2009), Geithner excelled in hobnobbing, despite the appearance of outrageous conflicts of interest. He was the Relationship Manager In Chief as he managed his own relationship with Citigroup into a job offer to be its CEO.

During 2007 and 2008, Citigroup entered an intractable death spiral owing to a decade of obscene executive pay, off balance sheet debt, toxic assets and mismanagement of its unwieldy disparate business lines. Instead of functioning as the tough cop on the beat in regulating Citigroup, Geithner hobnobbed, holding 29 breakfasts, lunches, dinners and other meetings with Citigroup executives.

When Sandy Weill stepped down from Citigroup in 2006, SEC filings show he still owned over 16.5 million shares of the company’s stock, in addition to the $264 million he had sold back to the company in 2003. As the company teetered toward insolvency in the 2007-2008 period, Weill had a vested interest not to see his stock position wiped out by a government receivership of Citigroup. The very last thing Geithner, as Citigroup’s regulator, should have been doing was meeting privately with Weill.

On January 25, 2007, Geithner not only hosted Weill to lunch at the New York Fed, but Geithner brought his teenage daughter to the lunch. Geithner’s appointment calendar shows Elise Geithner, his daughter, sharing his chauffeured car to work with her father and then joining him at lunch with Sandy Weill. In case you’re wondering, Take Your Daughters and Sons to Work Day was April 26 that year, not the day of this luncheon. A few months later, on May 17, 2007, Geithner joined Weill for breakfast at the expensive Four Seasons.

Another troubling aspect of Geithner’s obliviousness to the arms-length role expected of regulators and the firms they regulate, Geithner met privately, without other Fed staff, with top Citigroup execs and traveled to Citigroup’s corporate headquarters in Manhattan on most occasions to meet with them. His one on one meetings included Robert Rubin, former U.S. Treasury Secretary and Chair of the Citigroup Executive Committee; Charles “Chuck” Prince, CEO; Gary Crittenden, CFO (who would be later charged by the SEC for grossly understating Citigroup’s subprime exposure in October 2007); Sir Win Bischoff, Board Chairman; Vikram Pandit, who became CEO after the departure of Prince; Lewis Kaden, Vice Chairman; and Tom Maheras, co-head of Citigroup’s investment bank.

If Geithner did not believe he was a regulator, why was he meeting with these individuals on a private basis. Two troubling answers come readily to mind.

In an article by Jo Becker and Gretchen Morgenson published by the New York Times on April 26, 2009, Geithner admits that Sandy Weill spoke with him about becoming Citigroup’s CEO after Prince resigned following multi-billion dollar losses in late 2007. Were Geithner’s many trips to Citigroup actually job auditions? Geithner turned down the job offer and went on to become U.S. Treasury Secretary in 2009 where his advocacy for Citigroup’s survival played a far more important role than he could have as its CEO.

The other troubling possibility is that Geithner did not take other staff with him from the New York Fed because he was strategizing with Citigroup on how to resolve their massive financial problems. Indeed, on April 7, 2008, Geithner’s appointment calendar shows that a meeting was convened at the New York Fed and given the title: “Citigroup Strategy, Structure & Personnel Issues.” The meeting was attended by Geithner, Citigroup CEO Vikram Pandit, Citigroup Vice Chairman Lewis Kaden, and several staffers at the New York Fed. The meeting was held after hours, from 5:30 to 6:30 p.m.

Strategizing on a company’s structure and personnel issues does not sound like the job of a regulator but the job of a competent CEO and Board of Directors.

While all of this wining, dining and strategizing was going on between Geithner and Citigroup, the company was melting away and showing an insatiable appetite for taxpayer support. On October 28, 2008, Citigroup received $25 billion in Troubled Asset Relief Program (TARP) funds. On November 17, 2008, the company announced it was terminating 52,000 workers. Four days later, its stock closed at $3.77, a loss of 60 percent of its market value in one week. Its market cap was worth less than the government had invested just three weeks prior.

On November 23, 2008, Citigroup had to be completely propped up by the government with another TARP infusion of $20 billion and asset guarantees on $306 billion of securities held by Citigroup. In addition, by 2010, the Government Accountability Office would report that it had soaked up over $2 trillion in below market-rate loans from the bailout lending programs – most of which were operated by the New York Fed.

Geithner, who is said to be writing his own memoir on the era and has announced he is joining the Wall Street firm Warburg Pincus as President, was not held in high esteem in three major books written about his handling of the Wall Street crisis. In Ron Suskind’s Confidence Men, Geithner is said to have ignored a direct order from President Obama to wind down Citigroup.  In Neil Barofsky’s Bailout, Geithner is portrayed as heartless in his assessment of the Home Affordable  Modification Program (HAMP), viewing it as a way to “foam the runways” for the banks, slowing down the foreclosure stream so the banks could stay afloat, with no sincere intention of helping struggling families stay in their homes.

But no one was harsher on Geithner than former FDIC Chair during the crisis, Sheila Bair, in her book, Bull by the Horns. Bair believes that Citigroup’s two main regulators, John Dugan (a former bank lobbyist) at the Office of the Comptroller of the Currency and Geithner, as President of the New York Fed, were not being forthright on Citigroup’s real condition. In the book, Bair explains Citigroup’s situation in 2008 as follows:

“By November, the supposedly solvent Citi was back on the ropes, in need of another government handout.  The market didn’t buy the OCC’s and NY Fed’s strategy of making it look as though Citi was as healthy as the other commercial banks. Citi had not had a profitable quarter since the second quarter of 2007.  Its losses were not attributable to uncontrollable ‘market conditions’; they were attributable to weak management, high levels of leverage, and excessive risk taking. It had major losses driven by their exposures to a virtual hit list of high-risk lending; subprime mortgages, ‘Alt-A’ mortgages, ‘designer’ credit cards, leveraged loans, and poorly underwritten commercial real estate.  It had loaded up on exotic CDOs and auction-rate securities.  It was taking losses on credit default swaps entered into with weak counterparties, and it had relied on unstable volatile funding – a lot of short-term loans and foreign deposits.  If you wanted to make a definitive list of all the bad practices that had led to the crisis, all you had to do was look at Citi’s financial strategies…What’s more, virtually no meaningful supervisory measures had been taken against the bank by either the OCC or the NY Fed…Instead, the OCC and the NY Fed stood by as that sick bank continued to pay major dividends and pretended that it was healthy.”

Another red flag with Geithner, according to Bair, was his proposal for the FDIC to provide all out support to Citigroup, guaranteeing all of its debt, including its half trillion in foreign deposits.  Bair refused to permit this. With Geithner’s 29 meet and greets with Citigroup, one has to wonder just who whispered this idea into Geithner’s ear.

The FDIC did agree to guarantee Citigroup’s issuance of new debt, providing it was used for lending to help stimulate the economy. What the FDIC examiners found was that “Citi was using the program to pay dividends to preferred shareholders, to support its securities dealer operations, and, through accounting tricks, to make it look as if funds raised through TLGP [Temporary Liquidity Guarantee Program] debt were actually raising capital for Citi’s insured bank.”

Last October, Carmen Segarra, a bank examiner and lawyer employed at the New York Fed, filed a lawsuit alleging that Relationship Managers at the New York Fed attempted to intimidate her into changing her critical review of another Wall Street firm. When she refused, she says she was fired. There is now enough hard evidence to warrant a full scale Congressional investigation of the New York Fed’s fitness to continue as Wall Street’s regulator.

 

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