By Pam Martens and Russ Martens: November 17, 2022 ~
Just two business days after the crypto exchange FTX filed for bankruptcy and headlines swirled around the world suggesting it had used its crypto token to perpetuate a massive fraud reminiscent of Madoff’s Ponzi scheme, the New York Fed thought this would be an ideal time to announce it was launching a digital token pilot with the serial fraudster, Citigroup. (See here for the unintelligible, jargonized version from the New York Fed; here for the decrypted translation from CoinDesk; and here for a sampling of Citigroup’s rap sheet.)
If the New York Fed teaming up with Citigroup isn’t troubling enough, the New York Fed also reveals that “ Legal services are being provided by Sullivan & Cromwell LLP….” for the pilot token project. (Why does one need to hire a Big Law firm for a pilot program using a “theoretical” concept?)
The announcement from the New York Fed came just two days after Wall Street On Parade published an article raising questions about the extensive role of Sullivan & Cromwell in handling acquisitions for FTX while simultaneously representing Alameda Research. The co-founder and CEO of FTX at the time was Sam Bankman-Fried. (He stepped down last Friday amidst the scandal.) Bankman-Fried is reported to have used $10 billion of FTX’s customer money for trading at his hedge fund, Alameda Research, and to prop up his crypto token, FTT. Most of that customer money has now gone poof according to media reports, along with the value of the token.
After what would appear to be a failure on the part of Sullivan & Cromwell to do proper due diligence on FTX before it facilitated it buying up other crypto companies, Sullivan & Cromwell has now somehow managed to become the law firm making bankruptcy filings on behalf of FTX in bankruptcy court in Delaware while simultaneously handling prosecutor inquiries about FTX. That’s a lot of hats to be wearing. (The law firm of Holland & Knight has filed a challenge to the bankruptcy filing in Delaware, arguing that it represents FTX Digital Markets located in the Bahamas, where the primary FTX corporate interests are located.)
The New York Fed has a very long and sordid history with Citigroup, one of the Wall Street mega banks that actually own the New York Fed, while the New York Fed’s bank examiners are supposed to supervise it. According to an audit done at the request of Congress by the Government Accountability Office (GAO), the New York Fed was the regional Fed bank that funneled the bulk of $2.5 trillion in secret loans to Citigroup to prop it up during the 2007 to 2010 financial crisis. The Fed then battled against the media in federal court for more than two years to keep the amount and details of those loans (as well as loans to other banks) a secret.
Beginning in December 2007 and lasting through at least June of 2010, Citigroup received the following in bailouts: $2.5 trillion in secret cumulative loans from the Fed; $45 billion in capital injections from the U.S. Treasury; the Federal government guaranteed over $300 billion of Citigroup’s assets; the Federal Deposit Insurance Corporation (FDIC) guaranteed $5.75 billion of its senior unsecured debt and $26 billion of its commercial paper and interbank deposits. Despite all that, Citigroup’s stock traded at 99 cents in early 2009.
By propping up Citigroup, the Fed and the U.S. government was also propping up the wealth of one of Citigroup’s largest individual stockholders – Sanford (Sandy) Weill, the former Chairman and CEO of Citigroup. Weill became a billionaire as a result of ginned up stock options at Citigroup. Weill had been a Director on the Board of the New York Fed. He became close to New York Fed President, Tim Geithner. See our report: As Citigroup Spun Toward Insolvency in ’07- ’08, Its Regulator Was Dining and Schmoozing With Citi Execs.
Weill’s stock riches grew out of what corporate compensation expert Graef “Bud” Crystal called the Count Dracula stock option plan – you simply could not kill it; not even with a silver bullet. It worked like this: every time Weill exercised one set of stock options, he got a reload of approximately the same amount of options.
Crystal explained for Bloomberg News that between 1988 and 2002, Weill “received 96 different option grants” on an aggregate of $3 billion of stock. Crystal says “It’s a wonder that Weill had time to run the business, what with all his option grants and exercises. In the years 1996, 1997, 1998 and 2000, Weill exercised, and then received new option grants, a total of, respectively, 14, 20, 13 and 19 times.”
When Weill stepped down as CEO in 2003, he had amassed over $1 billion in compensation, the bulk of it coming from his reloading stock options. (He remained as Chairman of Citigroup until 2006.) Just one day after stepping down as CEO, Citigroup’s Board of Directors allowed Weill to sell back to the corporation 5.6 million shares of his stock for $264 million. This eliminated Weill’s risk that his big share sale would drive down his own share prices as he was selling. The Board negotiated the price at $47.14 for all of Weill’s shares.
At yesterday’s closing price, Citigroup’s share price was the equivalent of $4.84 – down 89.7 percent from the price that Citigroup bought back Weill’s shares nineteen years ago. (Citigroup did a 1 for 10 reverse split on May 9, 2011, leaving shareholders with 1 share for each 10 shares previously held.)
To quote former bank regulator William Black, “the best way to rob a bank is to own one.” Apparently, the same can now be said for crypto exchanges.
Instead of the Fed learning lessons from Citigroup’s implosion in 2008 and obscene bailouts, Citigroup has been allowed to revert to the same hubristic practices that rendered it insolvent in 2008, loading up on opaque derivatives and off-balance sheet exposures. (See related articles below.)