By Pam Martens and Russ Martens: February 16, 2021 ~
Rewarding bad behavior with obscene pay is the sine qua non of Wall Street. Thus it’s a remarkable event to see a CEO of a mega Wall Street bank get punished with a 21 percent pay cut.
Michael Corbat is slated to retire this month as Citigroup’s CEO and be replaced by Jane Fraser, the first woman CEO of any major Wall Street bank. (The news would be more welcome if the areas that Fraser previously supervised at the bank did not have all those fines and sanctions.)
The Board delivered an unusual kick in the pants to Corbat on his way out the door. It cut his compensation for 2020 by $5 million from what he had been awarded for 2019. Corbat’s total compensation went from $24 million in 2019 to $19 million for 2020. The announcement was made in Citigroup’s 8-K filing with the Securities and Exchange Commission on Friday evening. The Board explained its action as follows:
“In determining executive incentive compensation awards, the Compensation Committee reduced Mr. Corbat’s incentive compensation award based on its assessment of his performance in respect of risk and control concerns that underlie Consent Orders that were entered into during 2020 between Citi and the Federal Reserve Board and the Office of the Comptroller of the Currency, and to reflect a one-time shared responsibility adjustment which impacted the Executive Management Team for such concerns.”
The long and short of it is that Citigroup’s federally-insured bank, Citibank, was fined last year for doing something so egregious that its federal regulators didn’t even dare to define it in print. On October 7, when all eyes were on the vice-presidential debate that evening between Kamala Harris and Mike Pence, the Federal Reserve and Office of the Comptroller of the Currency (OCC) announced consent decrees with Citigroup’s Citibank, and slapped it with a $400 million fine.
The OCC’s Consent Order was like nothing we have ever seen before in our 35 years of monitoring Wall Street. Harsh penalties were threatened but the actual crimes or transgressions the bank had committed were not specified.
Whatever Corbat had done or failed to do must have been very serious because the OCC reserved the right to order the firing of senior executive officers and “any and/or all members of the Board.”
There was a clue in the Consent Order from the Federal Reserve about something that Citigroup might have done to earn the wrath of the Federal Reserve. The Consent Order referenced the statute 12 CFR 225.4(a) which includes a section on the Federal Reserve receiving “written notice” before the bank purchases or redeems its stock when those actions over the preceding 12 months would “equal 10 percent or more of the company’s consolidated net worth.”
In June of last year, Bloomberg News reported that over the prior three years, between dividends and stock buybacks, Citigroup had “returned almost twice as much money to its stockholders as it earned, according to the data, which includes dividends on preferred shares.”
The Federal Reserve Bank of New York knows it can’t afford to allow Citigroup to blow itself up again, thus the harsh talk of replacing the entire Board of the bank. It was just a dozen years ago that the Fed, the Treasury and the FDIC had to prop up Citigroup with the largest bailout in global banking history, to prevent it from creating a non-stoppable run on other major banks that were counterparties to its derivative trades.
The U.S. Treasury injected $45 billion in capital into Citigroup; there was a government guarantee of over $300 billion on certain of its assets; the FDIC provided a guarantee of $5.75 billion on its senior unsecured debt and $26 billion on its commercial paper and interbank deposits; and secret revolving loan facilities from the Federal Reserve sluiced a cumulative $2.5 trillion in below-market-rate loans to Citigroup from December 2007 to the middle of 2010.
A rational person would think that all of those federal regulators that oversee the discordant parts of this Frankenbank would have reined in the risks at this bank over the past dozen years. Tragically, just the opposite has occurred.
At the end of the first quarter of 2008, the year of the Wall Street crash and Citigroup’s implosion, Citigroup’s bank holding company was sitting on $41.3 trillion notional (face amount) in derivatives according to data from the OCC. The OCC’s most recent report for the quarter ending September 30, 2020 shows Citigroup’s bank holding company sitting on $42.4 trillion in notional derivatives. (See Table 2 in the Appendix.)