Bailed Out Citigroup Is Going Full Throttle into Derivatives that Blew Up AIG
The objection to the bank bailout was that, if banks were simply rescued, they would not see any reason to alter their behavior. And it has indeed come to pass, as Pam Martens and Russ Martens point out in Wall Street on Parade:
Having closely observed how Citigroup collapsed under the weight of its own corruption and risk-taking hubris in 2008 and spread its contagion across Wall Street, a headline we never dreamed we would see in our lifetime is shown above from Risk Magazine’s web site. The article under the heart-stopping headline is dated January 27, 2016 and informs readers that Citigroup is now viewed by clients as one of the top-three market makers in single name Credit Default Swaps in both North America and Europe.
Credit Default Swaps are the instruments that blew up the giant insurance company, AIG, in 2008, requiring the U.S. government to bail out the company to the tune of $185 billion. The bailout money went in the front door of AIG and was then funneled out the backdoor to the big Wall Street banks that had used AIG as their counterparty to guarantee their bets on Credit Default Swaps. The AIG bailout was effectively a backdoor bailout of the biggest banks on Wall Street.
Credit Default Swaps also played a role in Citigroup’s implosion in 2008, which necessitated the following government bailout: $45 billion in equity infusions; over $300 billion in asset guarantees; and more than $2 trillion in cumulative, below-market-rate loans from the Federal Reserve. Citigroup, then and now, holds insured savings deposits while at the same time engaging in high risk trading at both its investment bank and commercial bank.
Sheila Bair was the head of the Federal Deposit Insurance Corporation (FDIC) during the 2008 crash. The FDIC is the Federal agency that insures the deposits of U.S. commercial banks and savings associations. Bair published an authoritative book on the crisis, Bull by the Horns. This is an excerpt of what Bair had to say about Citigroup’s management of risk and its Credit Default Swaps:
By November, the supposedly solvent Citi was back on the ropes, in need of another government handout. The market didn’t buy the OCC’s and NY Fed’s strategy of making it look as though Citi was as healthy as the other commercial banks. Citi had not had a profitable quarter since the second quarter of 2007. Its losses were not attributable to uncontrollable ‘market conditions’; they were attributable to weak management, high levels of leverage, and excessive risk taking…It was taking losses on credit default swaps entered into with weak counterparties, and it had relied on unstable volatile funding – a lot of short-term loans and foreign deposits. If you wanted to make a definitive list of all the bad practices that had led to the crisis, all you had to do was look at Citi’s financial strategies…What’s more, virtually no meaningful supervisory measures had been taken against the bank by either the OCC or the NY Fed…Instead, the OCC and the NY Fed stood by as that sick bank continued to pay major dividends and pretended that it was healthy.
The OCC and the New York Fed are doing the exact same thing today – cowering under the lobbying and political clout of Citigroup – which perversely just hired Mervyn King, the former head of the Bank of England, the U.K.’s central bank, now that former Treasury Secretary Robert Rubin has collected his $120 million from Citigroup and moved on. . .