Blame at Citi stretches to highest level

Laxity of bank's risk managers reaches back more than a year

November 23, 2008|By New York Times News Service

In September 2007, with Wall Street confronting a crisis caused by too many souring mortgages, Citigroup executives gathered in a wood-paneled library to assess their own well-being.

There, Citigroup's chief executive, Charles O. Prince III, learned for the first time that the bank owned about $43 billion in mortgage-related assets. He asked Thomas G. Maheras, who oversaw trading at the bank, whether everything was OK.

Maheras told his boss that no big losses were looming, according to people briefed on the meeting who spoke only on the condition that they not be named.

For months, Maheras' reassurances to others at Citigroup had quieted internal concerns about the bank's vulnerabilities. But this time, a risk-management team was dispatched to more rigorously examine Citigroup's huge mortgage-related holdings. They were too late, however: Within several weeks Citigroup would announce billions of dollars in losses.

Normally, a big bank would never allow the word of just one executive to carry so much weight. Instead it would have its risk managers aggressively look over any shoulder and guard against trading or lending excesses.

But many Citigroup insiders say the bank's risk managers never probed deeply enough. Because of long-standing ties that clouded their judgment, the very people charged with overseeing deal-makers eager to increase short-term earnings - and executives' multimillion-dollar bonuses - failed to rein them in, these insiders say.

Today, Citigroup, once the nation's largest and mightiest financial institution, has been brought to its knees by more than $65 billion in losses, write-downs for troubled assets and charges to account for future losses. More than half of that amount stems from mortgage-related securities created by Maheras' team - the same products Prince fretted about in that 2007 meeting.

Citigroup's stock has plummeted to its lowest price in more than a decade, closing Friday at $3.77. At that price, the company is worth just $20.5 billion, down from $244 billion two years ago. Waves of layoffs have accompanied that slide, with about 75,000 jobs already gone or set to disappear from a work force that numbered about 375,000 a year ago.

While much of the damage inflicted on Citigroup and the broader economy was caused by errant, high-octane trading and lax oversight, critics say, blame also reaches into the highest levels at the bank. The downfall was years in the making and involved many in its hierarchy, particularly Prince and Robert E. Rubin, an influential director and senior adviser.

Citigroup insiders and analysts say that Prince and Rubin played pivotal roles by drafting and blessing a strategy that involved taking greater trading risks to expand business and reap higher profits. Prince and Rubin both declined to comment for this article.

As treasury secretary during the Clinton administration, Rubin helped loosen Depression-era banking regulations that made the creation of Citigroup possible by allowing banks to expand far beyond their traditional role as lenders and permitting them to profit from a variety of financial activities.

And since joining Citigroup in 1999 as a trusted adviser to bank's senior executives, Rubin, who is an economic adviser on President-elect Barack Obama's transition team, has sat atop a bank that has been roiled by one financial miscue after another.

For a time, Citigroup's megabank model paid off handsomely. But when its trading machine began churning out billions of dollars in mortgage-related securities, it courted disaster. As it built up that business, it also moved billions of dollars of troubled assets off its books through accounting maneuvers to free capital. Because of pending accounting changes, Citigroup and other banks have been bringing those assets back in-house, raising concerns about a new round of potential losses.

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