The monetary estimate of bad decisions on Citibank's balance sheet is indeed staggering. The bank that advertises itself as the financial firm that never sleeps, certainly must have worked around the clock to accumulate nearly 3 trillion dollars of bad assets.
Of course, the underlying problem at Citi was greed without any apparent understanding of risk. The problem was summed up in the following quote from a recent New York Times article.
"Many Citigroup insider's say the bank's risk managers never investigated deeply enough. Because of longstanding ties that clouded their judgement, the very people charged with overseeing deal makers, eager to increase short term earnings and executives multi million dollar bonuses failed to rein them in, these insiders say. While much of the damage inflicted on Citibank and the broader economy was caused by errant, high octane trading, and lax oversight, critics say, blame also reaches to the highest level of the bank."
The problems at Citibank were common at many other major financial institutions as well. The truth is that the Fed, the Securities and Exchange Commission, the Office of the Comptroller of the Currency and the Office of Thrift Supervision were all negligent in not doing their job of financial oversight.
Meanwhile, the ratings agencies added to the problem and gave all these bad mortgage loans their highest (AAA) rating. It may be a result of corruption or just plain incompetence. Some rating agencies may have even assumed that the national average house price would not decline.
In fact, Citibank has a long history of making bad mortgage loans. In the early 1990s the company nearly went under thanks to taking on lots of real estate risk in the wrong markets. Last week, the firm was on the brink of the financial abyss once again.
After Citi's shares plummeted 60% amid mounting concerns about its viability, the U.S. Treasury and the Federal Deposit Insurance Corp moved to save the firm. The terms of the bailout provided protection against the possibility of "unusually large losses" on an asset pool of approximately $306 billion of loans and securities backed by residential and commercial real estate, which will remain on Citigroup's balance sheet.
The Treasury will also inject another $20 billion in capital into Citigroup through the Troubled Asset Relief Program, receiving preferring stock that will yield 8%. Under the terms of the deal, Citigroup will absorb up to $29 billion in losses on the $306 billion portfolio of risky property-related assets; the government will eat 90% of any further losses, with Citigroup shouldering 10%.
The Citi never sleeps in making bad loans and it is apparent that they were not alone. Unfortunately, the American taxpayer will now pay a very steep price. In Sweden, the total bailout cost to solve a similar problem was twenty percent of GDP. That makes the 700 billion dollar taxpayer funded bailout bill passed by the United States Congress, a quarter of what will eventually be needed for our national financial repair.