Why Did Citi Get Bailout Money Meant For ‘Healthy’ Banks?
There remains an enduring mystery from the government’s bank bailout: Why did the initial rescue package last October, designed only for nine “healthy” banks, provide $25 billion to Citigroup, the faltering banking giant?
Some clues may emerge over the next week as the Senate Banking, Housing and Urban Affairs Committee conducts hearings about the bailout program, known as TARP, or Troubled Asset Relief Program.
Lawmakers and congressional auditors have been unable to pin down details about the decision-making process for that initial round of the TARP.
Treasury Secretary Timothy Geithner, as part of his Senate confirmation, was asked to provide documentation of the “processes and criteria” used for the initial investments. In response, he pledged a “full explanation,” if confirmed. But as of Tuesday, eight days after he took office, the senator who requested the information, Kentucky Republican Jim Bunning, had not received a reply, according to Senate aides. Geithner, now in his second week as secretary, has not yet responded, but intends to “in the near future,” according to an e-mail on Wednesday from a Treasury official.
Geithner is slated to appear before the Senate panel on Feb. 10 to discuss the TARP. It will be his first appearance before the Senate committee with jurisdiction over banking issues.
The Congressional Oversight Panel, set up by Congress to monitor the TARP, has criticized the “Citigroup experience” in two reports. In a report last month (PDF), the panel questioned how Citigroup had qualified as a “healthy bank” last October, yet, a few weeks later, required another $20 billion government infusion and a federal guarantee of $300 billion of its troubled assets, as part of a different TARP program designed to avoid systemic risk.
“These events,” the oversight report said, “suggest that the marketplace assesses the assets of some banks well below” the government’s valuations.
Congressional aides and investigators have inquired about the initial bailout investments at the Treasury Department and the Federal Reserve Bank of New York. But so far, they say, they have not received a precise description of the process. Geithner is the former president of the New York Fed, which, as Citigroup’s primary regulator, was involved in the TARP program.
The mystery traces back to Oct. 13, when Henry Paulson, then the secretary of the Treasury, summoned the heads of nine major financial institutions—six commercial banks and three investment banks—to a meeting. Congress had just passed emergency legislation to help bolster the seriously weakened credit markets and Paulson wanted to invest $125 billion in these leading firms. Geithner also attended the meeting.
The banks were not all enthusiastic about it—Citigroup, in a report released Tuesday, said “we did not seek this investment”—but all the banks went along.
The next day Treasury formally unveiled the first stage of the bailout program, steering applicants to their “primary federal regulator for specific enrollment details.” But, the release went on, “nine large financial institutions have already agreed to participate in this program.” The release described the nine as “healthy institutions” and subsequent regulations limited the recipients to “generally sound banking organizations.”
The government never specified what it meant by “healthy,” but regulators typically rely on a series of ratings, ratios and other measurement tools to assess a bank’s soundness. Compared to its regional peers, Citigroup was significantly weaker, according to publicly available ratios. Even before the Paulson meeting, there were concerns within Treasury and among investors about the health of Citigroup.
More than a week before the Paulson meeting, according to a congressional staffer, a senior Treasury official cited the example of a collapse by Citigroup during a private briefing on TARP implementation. The stock market, meanwhile, was delivering its own bleak message about Citigroup. From Oct. 1 to Oct. 9 the company’s stock plunged from $23 to $12.93. It recovered to $18.62 following Treasury’s announcement that it would inject capital but continued a downward spiral over the next month, reaching $3.77 by Nov. 21.
By then Treasury and federal regulators, including the New York Fed, had put together a new program, the Targeted Investment Program. This was not for healthy banks, as the guidelines, released this year, make clear. The first recipient of funds under the TIP was Citigroup, which received $20 billion. In addition, the government guaranteed a large portion of $301 billion in Citigroup’s troubled assets in return for another $7 billion in preferred stock.
The “eligibility considerations” for TIP, as released on Jan. 2, make clear they apply to anything but healthy firms. They cite the impacts from “destabilization” of an institution, the extent to which a firm “is at a risk of loss of confidence” that could “cause major disruptions to credit markets” and whether a firm can get access to other sources of capital and liquidity.