Fed Nominee Stanley Fischer Has a Citigroup Problem

By Pam Martens: March 4, 2014

Stanley Fischer, Former Vice Chairman of Citigroup, Nominated to Serve as Vice Chairman of the Federal Reserve Board of Governors

Last evening, the U.S. Senate Banking Committee made the unexpected announcement that it was postponing the confirmation hearing of Stanley Fischer to serve as Vice Chairman of the Federal Reserve Board of Governors. Two other Fed nominees were to be vetted today. The hearing had been scheduled for 10 a.m. this morning in the Dirksen Senate Office Building. No reason was given for the postponement.

There are surely some veteran lawyers at the Securities and Exchange Commission (SEC) hoping the nomination of Fischer has been scuttled. The thought that Stanley Fischer, a former Vice Chairman of the serially corrupt Citigroup, could become Vice Chairman of the Federal Reserve, a regulator of mega banks like Citigroup, is not a source of comfort. Fischer was nominated for the post by President Obama, whose devotion to failing up on Wall Street regularly sets new heights.

As if as on cue, news broke just yesterday that Federal prosecutors have issued grand jury subpoenas to Citigroup in a money-laundering investigation, a topic with which the bank is intimately familiar.

During Fischer’s stint at Citigroup, from February 2002 through April 2005, he “amassed a personal fortune of between $14.6 million and $56.3 million” according to Bloomberg News. During that same period, Citigroup was repeatedly charged with fraud and embarked on its own exotic financial shenanigans that would end up collapsing the firm in 2008.

On April 28, 2003, the SEC charged that the investment banking business of Citigroup, Salomon Smith Barney, issued “fraudulent” research on telecommunications companies to promote its investment banking business. Jack Grubman, the company’s star telecom analyst, was the point man in the fraud according to the SEC and Citigroup rewarded him handsomely for it. The SEC noted in its complaint that “between 1999 and August 2002, when he left the firm, Grubman’s total compensation exceeded $67.5 million.”

Grubman was forced out of Citigroup in August 2002, while Fischer served on its Board. The New York Times noted dryly in an editorial at the time:

“Critics of Jack Grubman’s last deal, his $32 million severance package, are missing the big picture. Sure, most of the companies whose stock the fabled Wall Street telecom analyst bullishly plugged have gone bankrupt. But look at it this way: While investors lost $2 trillion in the implosion of the sector, his employer, Citigroup, made $1 billion in fees from the feverish dealmaking he helped arrange. It is no wonder the financial giant felt moved to show its appreciation, even as it forced him out.”

Exactly three months after the SEC’s complaint involving fraudulent research at Citigroup, the SEC charged Citigroup with aiding and abetting the Enron fraud, writing on July 28, 2003 that the company designed complex financial structures to help Enron “(1) inflate reported cash flow from operating activities; (2) underreport cash flow from financing activities; and (3) underreport debt.”

It should have been easy for any Wall Street regulator to deduce from Citigroup’s shady deals for Enron and Worldcom that it was highly likely it was not accurately reporting its own debt exposure. But that didn’t happen. Citigroup collapsed in 2008 and is only alive today because the U.S. government pumped in $45 billion in equity, made $300 billion in asset guarantees, and the Fed chipped in over $2 trillion in below market rate loans to the listing shipwreck.

In August 2012, the law firm Kirby McInerney settled a shareholders’ lawsuit against Citigroup for $590 million. The 547-page amended complaint depicts a financial institution that gamed the system with high risk leverage, off-balance-sheet gambles it inevitably lost and dysfunctional checks and balances — all while its Board and regulators were asleep at the switch.

The lawyers at Kirby McInerney wrote:

“As plaintiffs’ investigation of Citigroup’s subprime CDOs [Collateralized Debt Obligations] demonstrates, Citigroup’s 2004-2007 subprime CDOs produced tens of billions of dollars of super senior tranches – and, effectively, Citigroup never sold (except with its money-back guarantees) a single one. The essence of an underwriter’s function is to sell the securities it underwrites. Citigroup’s inability/failure to accomplish any such sales was an alarming but unheeded red flag as to the value and liquidity of these instruments. The difficulty in selling these super senior tranches was of Citigroup’s own making: it had stripped yield from these super seniors in order to make the junior tranches more marketable. These super seniors thus became, effectively, all risk and no reward.”

During 2004 and 2005, Citigroup sold $25 billion of CDO commercial paper super senior tranches with a guarantee to repurchase them all, at full price, if collateral concerns ever disrupted the rollover of the commercial paper. In addition to a fee of $375 million for the underwriting, it received $50 million annually for that money-back guarantee.  This permitted Citigroup to hide its exposure off its books while boosting revenues by $50 million a year.

In addition, Citigroup created seven off-balance-sheet Structured Investment Vehicles (SIVs), totaling $100 billion.  Citigroup used “Enron-like accounting” to disclaim any exposure to the SIVs which did not appear in its public financial statements. This allowed the firm to avoid capital charges and reserves while enjoying income of at least $100 million per year from the SIVs.

The lawsuit noted that:

“In November and December 2007, Citigroup admitted that the purported ‘off balance sheet’ aspect of its SIVS was and had always been a fiction. With the stroke of a pen, approximately $50 billion of SIV liabilities (and the lesser value of the impaired assets purportedly collateralizing those liabilities) were transferred from ‘off’ Citigroup’s balance sheet to ‘on.’ Once there, they immediately degraded it. Citigroup’s capitalization was further weakened, its credit ratings were cut immediately, and billions of dollars of write-downs ensued.” Citigroup’s share price collapsed into the low single digits.

Sandy Weill, the Chairman and CEO who was at the helm of Citigroup when Fischer was there, stepped down as Chairman in 2006 after making over $1 billion in compensation during his tenure. Robert Rubin, former U.S. Treasury Secretary, who also served on Citigroup’s board, received over $120 million in compensation during his tenure from 1999 to 2009.

Fischer, who holds dual citizenship with Israel, is a former governor of the Bank of Israel. He served as First Deputy Managing Director of the International Monetary Fund from 1994 to 2001 and Chief Economist at the World Bank from 1988 to 1990. From 1973 to 1994 he taught economics at the Massachusetts Institute of Technology (MIT).


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