How Taxpayers Were Royally Screwed on the Citigroup Bailout

By Pam Martens: August 7, 2012 

(Part One.  Part Two will run tomorrow.) 

Even after a massive taxpayer bailout, Citigroup would continue to honor its $400 million, 20-year commitment and pay out an installment of $20 million to have the new Mets’ baseball stadium named Citi Field. (Graphic by Elves at Wall Street On Parade.)

When the U.S. taxpayer bailed out Citigroup and its two billionaire shareholders (Saudi Prince Alwaleed bin Talal and Sandy Weill, the company’s former Chairman and CEO), the public was unaware of just how financially corrupted the firm had become.  We have those perpetually  invisible hands of lawyers at the SEC and Citigroup to thank for that. 

In this December 14, 2007 letter, Gary Crittenden, CFO of Citigroup at the time, responds to questions of serious financial irregularities posed by Kevin Vaughn, Branch Chief at the time of the SEC.  Pages 22 through 32 of this correspondence have been completely redacted.  They are still redacted after the U.S. taxpayer pumped $45 billion into the firm, over $300 billion in loan guarantees, and over $2 trillion in absurdly low cost loans from the Federal Reserve Bank of New York, where Sandy Weill sat on its Board of Directors from January 2001 through December 2006. 

One question that is not redacted, just the answer from Citigroup, was whether the firm had changed how it was valuing its assets.  We still don’t know the answer to that pivotal question almost five years later. 

On July 29, 2010, over two and one half years after Vaughn’s questions were posed, after almost $2.5 trillion had been pumped into Citigroup to prop it up, we finally learned what had been on Mr. Vaughn’s mind in December of 2007.  Citigroup had lied about its subprime mortgage loan exposure by $39 billion, not just verbally to investors, but in the financial statements it filed with the SEC.  While financial fraud of this magnitude would typically be worthy of jail time, the SEC delivered minor slaps on the wrists to just two individuals. Gary Crittenden, the CFO paid $100,000; Arthur Tildesley, the head of Investor Relations, paid $80,000. Citigroup paid the pittance of $75 million. (Remember, when the Controller of New York State took on Citigroup over its fraudulent research practices, it settled for $2.65 billion.) 

But then on September 27, 2011, we learn that there may have been a dirty fix involved with that deal.  It’s now more than three years since the taxpayer bailed out Citigroup and we’re still looking at giant gaps of white space where facts should be.  Even the Inspector General of the SEC, who is supposed to be the watchdog that shares with the American people what the SEC withholds or covers up, has redacted the guts of this report

We do learn this much from the report.  A whistleblower has come forward and told the SEC that: 

“…just before the staff’s recommendation was presented to the Commission, Enforcement Director Robert Khuzami had a ‘secret conversation’ with his ‘good friend’ and former colleague, a prominent defense counsel representing Citigroup, during which Khuzami agreed to drop the contested fraud charges against the second individual. The complaint further alleged that the Enforcement staff were ‘forced to drop the fraud charges that were part of the settlement with the other individual,’ and that both individuals were also represented by Khuzami’s friends and former colleagues, creating the appearance that Khuzami’s decision was ‘made as a special favor to them and perhaps to protect a Wall Street firm for political reasons.’ The complaint also alleged that Khuzami’s decision had the effect of protecting Citigroup from private litigation, and that by not telling the staff about his secret conversation, Khuzami ‘directly violated recommendations by Inspector General Kotz in previous reports about how such special access and preferential treatment can cause serious appearance problems concerning fairness and integrity of decisions that are made by the Enforcement Division.’ ” 

The report essentially whitewashes the claims against Khuzami, but does not remove the stench.  We learn that if you’re Citigroup, you get to tell the SEC how cases will be settled.  Citigroup’s lawyers, Larry Pedowitz of the law firm of Wachtell, Lipton, Rosen & Katz and Brad Karp of Paul, Weiss, Rifkind, Wharton & Garrison made a formal settlement offer in a letter to the SEC dated September 8, 2009.  In the letter, Citigroup’s lawyers state: 

“You have asked us to make a formal settlement offer. We are willing to settle on the basis of a Section 17(a) charge for the October 1 and 15 disclosures, with related Section 13 charges. We also will agree to pay a significant penalty.” 

Tomorrow, we’ll look at who actually owns Citigroup and just how Royally screwed the public was as stockholders in the bailout. 

Bookmark the permalink.

Comments are closed.