Is Citigroup Under Orders from Its Regulators to Break Itself Up?

 

Is Citigroup Under Orders from Its Regulators to Break Itself Up?

By Pam Martens and Russ Martens: January 20, 2022 ~

Jane Fraser, Citigroup CEO

The last thing that Fed Chairman Powell needs in his second term are the sleazy details of the Fed’s trading scandal being released by investigators and to have to bail out the same megabank that Fed Chair Bernanke secretly bailed out from December 2007 through at least mid-July 2010. Obviously, we’re talking about Citigroup.

Citigroup has been announcing major asset sales so rapidly since December that one has to wonder if the Office of the Comptroller of the Currency and/or the Fed is cracking the whip. (We’ll get to the significant details of why that might be the case in a moment.)

On January 11, Citigroup announced that it intended to sell its consumer, small business and middle-market banking operations of Banco Nacional de México, otherwise known as Banamex. In 2017, Citigroup settled a criminal probe with the U.S. Department of Justice over money laundering at Banamex USA, involving money transactions in Mexico. As part of the settlement, the bank “admitted to criminal violations by willfully failing to maintain an effective anti-money laundering (AML) compliance program with appropriate policies, procedures, and controls to guard against money laundering and willfully failing to file Suspicious Activity Reports (SARs).” The bank paid a $97.44 million fine.

On January 13, Citigroup announced that it was selling its consumer banks in Indonesia, Malaysia, Thailand and Vietnam to UOB Group. The sale was expected to be valued at approximately $3.6 billion. Notably, Citigroup made sure to point out in its press release that it expected the transaction “to result in the release of approximately US $1.2 billion of allocated tangible common equity, as well as an increase to tangible common equity of over US $200 million.”

On January 18, Bloomberg News reported that Citigroup was in “advanced talks with Taiwan’s Fubon Financial Holding Co. for a sale of its mainland China consumer business….” Bloomberg reported that the assets “could be valued at about $1.5 billion.”

On December 23, Citigroup announced that it had “reached agreement with Union Bank of the Philippines on the acquisition of its consumer banking franchise in the Philippines.” Again, Citigroup emphasized the positive impact on its tangible common equity, stating that it expected the transaction to provide “an increase to tangible common equity of approximately $500 million.”

Tangible common equity is what federal bank regulators look at to see if a megabank like Citigroup can weather significant financial strains. In 2008, Citigroup did not weather such a storm and received the largest bailout in U.S. banking history. The U.S. Treasury injected $45 billion of capital into Citigroup; there was a government guarantee of over $300 billion on certain of its assets; the FDIC provided a guarantee of $5.75 billion on its senior unsecured debt and $26 billion on its commercial paper and interbank deposits; and secret revolving loans from the Federal Reserve while Bernanke sat at the helm sluiced a cumulative $2.5 trillion in below-market-rate loans to Citigroup from December 2007 to the middle of 2010.

Despite all that, Citigroup became a 99-cent stock in the spring of 2009 and its share price (dressed up with a 1-for-10 reverse stock split) remains down 88 percent from where it was trading pre-crisis on January 1, 2007.

Sheila Bair was the head of the FDIC during the 2008 financial crisis. In her 2012 book, Bull by the Horns, Bair makes an astonishing revelation about Citigroup. Despite the trillions of dollars in revolving loans and capital infusions used to prop up Citigroup, its federally-insured commercial bank, Citibank, actually had only $125 billion in U.S. insured deposits according to Bair.

As it turns out, the bulk of Citibank’s deposits were foreign and a large part of those deposits were not insured or had low insurance amounts. Had this foreign money decided to run for the exits on fear of a Citigroup collapse, the FDIC might have been looking at just a $125 billion problem but the rest of the financial system was looking at $2 trillion on the books of Citigroup, $1 trillion off the books, and God only knows how many trillions of dollars of derivative counterparty agreements lurking in the shadows.

Bair indicates her belief that Citigroup’s two main regulators, John Dugan (a former bank lobbyist) who headed the Office of the Comptroller of the Currency (OCC) and Tim Geithner, then President of the Federal Reserve Bank of New York, were not being forthright with the public on Citigroup’s real condition.

John Dugan, Former Bank Lobbyist; then Head of Citigroup’s Regulator, the OCC; Now Citigroup’s Board Chair

Guess who is Chairman of the Board of Directors of Citigroup today? The same John Dugan. (You can’t make this stuff up; it’s simply too Orwellian for the human brain to assimilate, which is what the denizens of Wall Street are counting on.)

The first hint that regulators were bearing down on Citigroup came when Citigroup’s Board of Directors decided to cut its CEO’s pay by $5 million from what it had been in 2019. Michael Corbat retired as CEO in February of last year, handing the reins to Jane Fraser, the first woman CEO of any major Wall Street bank.

The Board provided the following statement in an SEC filing to explain this drastic pay chuck for Corbat:

“In determining executive incentive compensation awards, the Compensation Committee reduced Mr. Corbat’s incentive compensation award based on its assessment of his performance in respect of risk and control concerns that underlie Consent Orders that were entered into during 2020 between Citi and the Federal Reserve Board and the Office of the Comptroller of the Currency, and to reflect a one-time shared responsibility adjustment which impacted the Executive Management Team for such concerns.”

The actual situation was decidedly worse than the above paragraph suggests. On October 7, 2020, when the public was focused on the vice-presidential debate that evening between Kamala Harris and Mike Pence, the Federal Reserve and Office of the Comptroller of the Currency (OCC) announced consent decrees with Citigroup’s Citibank, and levied a $400 million fine.

The OCC’s Consent Order  was like nothing we have ever seen in our 35 years of monitoring Wall Street. Harsh penalties were threatened but the actual crimes or transgressions the bank had committed were not specified.

In a breathtaking sentence, the OCC reserved the right to order the firing of senior executive officers and “any and/or all members of the Board.”

A bank regulator firing an entire Board of a megabank on Wall Street is unheard of. Something very serious must have transpired to unleash such a threat.

There was a clue in the Consent Order from the Federal Reserve about something that Citigroup might have done to earn the wrath of the Federal Reserve. The Consent Order referenced the statute 12 CFR 225.4(a) which includes a section on the Federal Reserve receiving “written notice” before the bank purchases or redeems its stock when those actions over the preceding 12 months would “equal 10 percent or more of the company’s consolidated net worth.”

Bloomberg News had reported that over the prior three years, between dividends and stock buybacks, Citigroup had “returned almost twice as much money to its stockholders as it earned, according to the data, which includes dividends on preferred shares.”

At the end of the third quarter of 2008, the year of the Wall Street crash and Citigroup’s implosion, Citigroup’s federally-insured bank, Citibank, was sitting on $35.6 trillion notional (face amount) in derivatives according to data from the OCC. (See Table 1 in the Appendix.) The OCC’s most recent report for the quarter ending September 30, 2021 shows Citibank sitting on $44.37 trillion in notional derivatives. Not only was there no meaningful reform of Citigroup, but its risk profile actually increased. (See related articles below.)

If you genuinely want to save the United States from another economic and financial collapse, make the time today to call your Senators and House Rep in Washington and demand hearings on restoring the Glass-Steagall Act to separate federally-insured banks from the Wall Street casino.

Related Articles:

Citigroup Has More Derivatives than 4,701 U.S. Banks Combined; After Blowing Itself Up With Derivatives in 2008

JPMorgan Chase and Citibank Have $2.96 Trillion in Exposure to Credit Default Swaps

The Doomsday Machine Returns: Citibank Has Sold Protection on $858 Billion of Credit Default Swaps

Congress Is Facilitating “Catastrophic Risk” by Allowing Federally-Insured Banks to Be Owned by Wall Street’s Trading Houses

Citigroup Has Made a Sap of the Fed: It’s Borrowing at 0.35 % from the Fed While Charging Struggling Consumers 27.4 % on Credit Cards

A Private Citizen Would Be in Prison If He Had Citigroup’s Rap Sheet

SEC: Citigroup Ran a Secret, Unregistered Stock Exchange for More than Three Years

Robert Rubin Exorcises Citigroup from His Career in Today’s NYT OpEd

LINK

Congresswoman Maxine Waters Steps into the Ring as Referee in the Battle for Control of the FDIC

 

Congresswoman Maxine Waters Steps into the Ring as Referee in the Battle for Control of the FDIC

By Pam Martens and Russ Martens: December 27, 2021 ~

Congresswoman Maxine Waters, Chair of House Financial Services Committee

Maxine Waters is the Chair of the House Financial Services Committee. That Committee oversees the nation’s banks, including the megabanks on Wall Street that are serially charged by prosecutors with ever creative ways of looting the public. Waters’ Committee also oversees the bank regulators, which are frequently “captured” by Wall Street. One of those bank regulators has now come into the cross hairs of Waters.

Typically, if one is a captured bank regulator, one goes to extreme lengths to hide that fact. Thus, it is unusual that the Chair of the Federal Deposit Insurance Corporation (FDIC), Jelena McWilliams (a Trump holdover), has decided she has the power to run the federal agency with an iron hand and overturn the will of her Board of Directors. Even more unusual, McWilliams is engaging in this battle with her Board in public.

We’ve seen plenty of nasty corporate board battles over the years but this is the only time we can recall that the Chair of a federal banking regulator has taken the position that she, unilaterally, can override a decision voted favorably on by a majority of her Board of Directors.

The FDIC is the federal bank regulator that oversees federal deposit insurance and sends examiners into the banks that are federally insured in order to maintain their safety and soundness. The fact that three large, federally-insured banks in the U.S. (Citigroup, Wachovia, and Washington Mutual) blew themselves up during the 2008 financial crisis, suggests that exactly how the FDIC conducts its oversight of these institutions, and just how large and unmanageable it allows them to become, is a serious matter for Congressional oversight. (See OCC Says JPMorgan Chase Has $29.1 Trillion of Custody Assets; That’s $8 Trillion More than the Assets of All Banks in the U.S.)

Jelena McWilliams, Chair of the FDIC

House Financial Services Chair Waters has now stepped into the ring to stop the FDIC’s McWilliams from delivering a knock-out punch to her Board of Directors on the issue of how large bank mergers are being rubber-stamped by bank regulators. Last week, Waters sent a five-page letter thrashing McWilliams over her recent “obstructionist acts” to overturn the decisions of the Board of Directors of the FDIC and demanding that she provide the legal basis for her actions. Waters wrote:

“Following a 2018 deregulatory rollback of the Dodd-Frank Act’s enhanced prudential framework that applies to the largest banks, and as experts warned would happen in its aftermath, we have seen an acceleration of proposed and approved mergers in recent years creating even larger banks — including mergers of BB&T with SunTrust, First Citizens with CIT, and U.S. Bank with MUFG Union Bank. Unfortunately, there is evidence that regulators’ rates of approving pending merger applications has accelerated, even as the trend of large regional bank consolidation has picked up at a concerning pace. Communities directly affected by bank consolidation need access to financial services in order to recover from the pandemic, and we need a bank merger review framework that takes into account these dynamics.”

Waters demanded answers from McWilliams to her letter by January 21 and asked her to “stop these obstructionist acts and join the bipartisan efforts underway to strengthen the bank merger review process to ensure it is being conducted in the best interests of workers, consumers, and communities throughout the country.”

Prior to last week’s letter, Waters had sent a shot over the bow to McWilliams by releasing a public statement on December 16 which included this text:

“As I wrote last week, and at a time when a wave of megamergers is making our banking markets less competitive, I welcome the long-overdue steps by banking regulators to finally update their bank merger review procedures. However, I am deeply concerned by recent actions taken by the FDIC Chairman to — in an unilateral, unprecedented, and potentially unlawful move — attempt to thwart the will of the majority of the FDIC to seek public input on this matter. I am calling on Chairman Jelena McWilliams to explain her legal authority for attempting to veto this action approved by a majority of the FDIC Board, including by apparently directing agency staff to issue a public statement disavowing the sensible request for information from the public, and subsequently rejecting a motion to include the notational vote authorizing the request in the minutes at this week’s board meeting.”

There appears to be something highly unusual (and unseemly) afoot when it comes to Wall Street megabanks and their regulators in Washington. Saule Omarova just removed herself from consideration to become the head of the Office of the Comptroller of the Currency, the regulator of national megabanks like Citigroup and JPMorgan Chase that operate across state lines, after her bizarre proposal for radically redesigning the financial system to move all bank deposits from commercial banks to the Federal Reserve and eliminate FDIC insurance was published in a legal journal. It didn’t help either when it was revealed that Omarova, the nominee to oversee banks with $14 trillion in assets, had been arrested at age 28 for shoplifting.

Now we have the head of the FDIC (that Omarova proposed eliminating) taking the nutty position that she has the authority to override the votes of a majority of her Board of Directors.

Then there is the strange lack of vetting of the head of the criminal division of the U.S. Department of Justice, Kenneth Polite, whose division decides whether to prosecute the Wall Street megabanks or simply continue to hand out deferred prosecution agreements for criminal acts like parking tickets for being 30 minutes overdue on your meter.

It’s long past the time for Maxine Waters, and the Chair of the Senate Banking Committee, Senator Sherrod Brown, to start connecting these dots in a public hearing – and forcing all individuals to give their testimony under oath. It’s the names of the people sitting in the shadows and pulling the strings that Americans need to hear about.

https://wallstreetonparade.com/2021/12/congresswoman-maxine-waters-steps-into-the-ring-as-referee-in-the-battle-for-control-of-the-fdic/

Dallas Fed, Home to the Largest Trading Scandal in Fed History, Quietly Runs a Help-Wanted Ad for a New General Counsel and Ethics Officer

 

Dallas Fed, Home to the Largest Trading Scandal in Fed History, Quietly Runs a Help-Wanted Ad for a New General Counsel and Ethics Officer

By Pam Martens and Russ Martens: December 24, 2021 ~

Robert Kaplan, Former President of the Dallas Fed

The Dallas Fed has not publicly announced the retirement or dismissal of its General Counsel, Sharon Sweeney. And yet, it is currently running a help-wanted ad to replace her. Sweeney is still listed as General Counsel on the Dallas Fed’s website. We placed a call to the bank’s media contact this morning to clarify the details and left a message. We’ll update this article if we receive further information.

Sweeney has been with the Dallas Fed for the past 36 years. She doubles as the Dallas Fed’s Ethics Officer and put her signature to former Dallas Fed President Robert Kaplan’s outrageous financial disclosure forms, year after year. Those forms indicated that Kaplan was trading in and out of S&P 500 futures contracts in “over $1 million” trades – even in 2020 when he sat as a voting member of the Fed’s Open Market Committee and was privy to sensitive, market moving operations of the Fed to deal with plunging markets and business closures as a result of the pandemic. Kaplan also made “over $1 million” trades in numerous individual stocks. (See Kaplan’s financial disclosure forms from 2015 through 2020 here.)

After news of Kaplan’s trading went viral this year, he stepped down on September 27. The same day, the President of the Boston Fed, Eric Rosengren, also stepped down. Rosengren had been trading in and out of real estate investment trusts in 2020.

S&P 500 futures allow an individual to trade almost around the clock from Sunday evening to Friday evening, while stock exchanges in the U.S. are open only on weekdays from 9:30 a.m. to 4:00 p.m. ET. S&P 500 futures gave Kaplan access to making directional bets on where the market would go after the stock market closed, which is typically when the Fed makes market-moving announcements. The most popular and liquid S&P 500 futures contract is the E-mini. A trader can get as much as 95 percent leverage on this contract – far more than the 50 percent leverage that is available for stock trades.

Kaplan is a sophisticated Wall Street veteran who worked at Goldman Sachs for 22 years, rising to the rank of Vice Chairman. As such, he would have certainly understood that the type of trading he was doing could subject him to an investigation for insider trading as well as removal from his job. But instead of avoiding all trading activity, Kaplan jumped in with both feet according to his financial disclosure form for 2020.

The year 2020 presented a prime opportunity for a nimble trader to make huge gains (or losses) in the stock market from short-term trading. As a result of the lockdowns from the pandemic, GDP fell by 31.4 percent in the second quarter of 2020– the largest decline on record. At numerous times during 2020, the Fed was making dramatic market-moving announcements of interest rate cuts and the creation of a multitude of emergency lending facilities and emergency measures. From January 1, 2020 through April 30, 2020, based in no small part on these Fed announcements, the S&P 500 Index gyrated from down 30 percent in late March to up 10 percent by the end of April.

Adding to suspicions surrounding Kaplan, and Sweeney who signed off on his trading disclosures, was the fact that Kaplan failed to follow the specific instructions on his financial disclosure forms and provide the date of each trade. Where the purchase date or sell date should have been indicated, Kaplan simply placed the word “multiple.”

Wall Street On Parade requested the specific dates of Kaplan’s trades from the Dallas Fed. They declined to provide them. We filed a Freedom of Information Act (FOIA) request with the Federal Reserve Board of Governors. After stonewalling us, it eventually said it did not possess the trading information.

The mere hint that a Federal Reserve Bank President was trading in S&P 500 futures contracts should have sent its General Counsel/Ethics Officer racing to its Board of Directors to report this serious matter. And yet, Kaplan’s financial disclosure forms show he was able to get away with this type of trading since joining the Dallas Fed as its President in 2015.

The new help-wanted ad the Dallas Fed posted this week for a new General Counsel indicates these desired character traits:

“Leads with a clear set of values, demonstrates integrity in all situations and is a role model of ethical conduct

“Expertise with current and evolving legal issues and trends in banking, financial regulation, payments, technology and governance and ethics…”

The ad also states this: “OUR BANK has one of the most recognizable brands around the world.” That is true now, thanks to Kaplan and Sweeney, but not in a good way.

To date, there has been no word that the Securities and Exchange Commission or Justice Department is involved in the investigation of Kaplan’s trading. Federal Reserve Chair Jerome Powell has indicated that he referred the Fed’s trading scandal to the Fed’s Inspector General. Unfortunately, the Fed’s Inspector General reports to the Fed’s Board of Governors and he can be terminated by them with a two-thirds vote. That’s not what the American people will accept as an “independent” investigation.

Making this trading scandal all the more urgent for the Justice Department is the fact that there is significant reason to believe that two mega banks on Wall Street, both of which are supervised by the Fed, may have been involved in the trading by Kaplan and former Boston Fed President Rosengren. See our report: New Documents Show the Fed’s Trading Scandal Includes Two of the Wall Street Banks It Supervises: Goldman Sachs and Citigroup.

https://wallstreetonparade.com/2021/12/dallas-fed-home-to-the-largest-trading-scandal-in-fed-history-quietly-runs-a-help-wanted-ad-for-a-new-general-counsel-and-ethics-officer/