Citi’s Taxpayer Parachute
Why are Robert Rubin and other directors still employed?
Another Sunday night, another ad hoc bank rescue rooted in no discernible principle. U.S. taxpayers, who invested $25 billion in Citigroup last month, will now pour in another $20 billion in exchange for preferred shares paying an 8% dividend.
Taxpayers will also help insure $306 billion of Citi’s mortgage-backed securities. Citi will cover the first $29 billion in losses on these toxic assets, and then taxpayers will cover 90% of the rest, in exchange for another $7 billion in preferred. Dilution for Citigroup investors? Yesterday’s 58% pop in the bank’s share price suggests the bailout is a good deal for equity holders. For taxpayers, it is another large exposure for uncertain benefits.
More than a year into the financial crisis and decades into the perception that Citi is too big to fail, we once again have three tired guys making it up as they go. We wish Treasury Secretary Henry Paulson, New York Federal Reserve President Tim Geithner and Fed Chairman Ben Bernanke cared as much about their obligations to U.S. taxpayers as they do about the expectations of Asian investors. Few would argue that a bank with Citi’s size and scope wasn’t too big to fail, but is it too much to ask Washington to develop a policy that isn’t crafted in a scramble of private phone calls?
To be fair, there are virtues here, when placed in the context of this year of bailouts. Unlike the initial AIG “rescue,” this deal appears to be helping the intended beneficiary. In contrast to Bear Stearns, there is a more plausible case for systemic risk. What is missing is a statement that at least some American bankers still have the freedom to fail, an essential ingredient if we hope to restore functioning capital markets. Not a single one of Citigroup’s senior managers and directors will be let go as a condition of taxpayer assistance that now totals close to $350 billion.
“Citi never sleeps,” says the bank’s advertising slogan. But its directors apparently do. While CEO Vikram Pandit can argue that many of Citi’s problems were created before he arrived in 2007, most board members have no such excuse. Former Treasury Secretary Robert Rubin has served on the Citi board for a decade. For much of that time he was chairman of the executive committee, collecting tens of millions to massage the Beltway crowd, though apparently not for asking tough questions about risk management.
The writers at the Deal Journal blog remind us of one particularly egregious massaging, when Mr. Rubin tried to use political muscle to prop up Enron, a valued Citi client. Mr. Rubin asked a Treasury official to lean on credit-rating agencies to maintain a more positive rating than Enron deserved. What signal will President-elect Barack Obama send if his Administration, populated with Mr. Rubin’s protégés, allows this uberfixer to continue flying hither and yon on the corporate jet while taxpayers foot the bill?
Chairman Sir Win Bischoff has held senior positions at Citi since 2000. Six other directors have served for more than 10 years — including former CIA Director John Deutch, Time Warner Chairman Richard Parsons, foundation executive Franklin Thomas, former AT&T CEO C. Michael Armstrong, Alcoa Chairman Alain Belda, and former Chevron Chairman Kenneth Derr.
When taxpayers are being asked to provide the equivalent of $1,000 each in guarantees on Citi’s dubious investments, how can these men possibly say they deserve to remain on the board? All the more so given that Citi’s board has lately been airing dirty laundry about Mr. Bischoff’s role and leaking petty grievances. The directors all but started a run on the bank themselves, even as the bank assured the world it was sturdy enough to withstand any losses.
Oh, and to get the FDIC on board, Citi has agreed to implement the agency’s proposal to modify delinquent mortgages to avoid foreclosures. The White House believes the program will cost almost three times FDIC estimates. And even though more than half of modified mortgages go delinquent again, Citi will modify mortgages to create lower payments now, in the hope that escalating payments later will avoid more delinquencies down the road.
While other banks can claim to be victims of the current panic, Citi is at least a three-time loser. The same directors were at the helm in 2005 when the Fed suspended Citi’s ability to make acquisitions because of the bank’s failure to adhere to regulatory and ethical standards. Citi also needed resuscitation after the sovereign debt disaster of the 1980s, and it required an orchestrated private rescue in the 1990s.
Such a record of persistent failure suggests a larger — you might even call it “systemic” — management problem: If taxpayers have to risk so much to save Citigroup, then regulators should at least exert the discipline to break up this behemoth so it is never again too big to succeed, much less to fail.