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Federal bailout of Citigroup called 'strikingly ad hoc' in watchdog report

WASHINGTON — The Treasury Department's 2008 rescue of Citigroup, once the world's largest bank, was "strikingly ad hoc," a government bailout watchdog said Thursday.

"While there was consensus that Citigroup was too systemically significant to be allowed to fail, that consensus appeared to be based as much on gut instinct and fear of the unknown as on objective criteria," said a report from Neil Barofsky, special inspector general for the Troubled Asset Relief Program.

In November 2008, the Treasury gave Citigroup a $20 billion emergency infusion, on top of $25 billion the prior month, from the $700 billion TARP fund. The government also backed about $300 billion of Citigroup assets, helping to prop up the New York-based bank as its share price plunged below $5 and some depositors withdrew funds.

"The absence of objective criteria for reaching such a conclusion raised concerns about whether systemic risk determinations were being made fairly and with consistent criteria," the report said.

Treasury Secretary Timothy Geithner told Barofsky that creating measurements for systemic risk was impossible because firms would "migrate around" the criteria, according to the report. Geithner led the Federal Reserve Bank of New York in 2008 when regulators allowed Lehman Brothers Holdings to fail and then bailed out American International Group in the same week.

"It depends too much on the state of the world at the time," the report cited Geithner as saying. "You won't be able to make a judgment about what's systemic and what's not until you know the nature of the shock" the economy is undergoing.

Geithner said that "we may have to do exceptional things again" if the shock to the financial system is large enough, the report said. Barofsky said that Geithner's remark "underscores a TARP legacy, the moral hazard associated with the continued existence of institutions that remain 'too big to fail.' "

Citigroup paid back $20 billion of its bailout funds, and the Treasury converted the remaining $25 billion into a 27 percent stake in the bank, which it began selling last year. It sold the last of its investment in December, realizing an overall gain for taxpayers of about $12 billion.

"It may have been ad hoc, but it worked," said Michael Goldstein, a professor of finance at Babson College in Massachusetts.

The aid was well designed based on "the final accounting of the government's assistance to Citigroup," wrote Tim Massad, the Treasury's acting assistant secretary for financial stability, in response to the report.

Barofsky said that the prospect of additional government relief may encourage excessive risk-taking by executives.

Citigroup "arguably still remains an institution that is too big, too interconnected and too essential to the global financial system to be allowed to fail," Barofsky said.

Federal bailout of Citigroup called 'strikingly ad hoc' in watchdog report 01/13/11 [Last modified: Monday, November 7, 2011 1:55pm]
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