Citi still too big after "ad hoc" bailout-audit

WASHINGTON Thu Jan 13, 2011 3:38pm EST

WASHINGTON Jan 13 (Reuters) - Citigroup's (C.N) 2008 bailout was "strikingly ad hoc" and the bank is arguably still too big and interconnected to be allowed to fail, a new government watchdog audit showed on Thursday.

The Special Inspector General of the Troubled Asset Relief Program (SIGTARP) said it was concerned about the lack of objective criteria applied by government officials in their decision to save Citigroup from collapse.

But it found no evidence officials made the wrong choice in bailing out the banking giant and noted Treasury has earned a profit of more than $12 billion on its investment in Citi.

"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," the inspector general's report said.

"Given the urgent nature of the crisis surrounding Citigroup, the ad hoc character of the systemic risk determination is not surprising, and SIGTARP found no evidence that the determination was incorrect."

The Treasury provided $45 billion to Citigroup on two tranches in late 2008 and also provided a guarantee for a portfolio of $301 billion in Citigroup assets. More support was extended in 2009 as the government exchanged its preferred shares for a 27 percent equity stake in the company, which was fully sold off in December.

The SIGTARP report also said the government's actions increased the moral hazard associated with the bailout program.

"When the government assured the world in 2008 that it would not let Citigroup fail, it did more than reassure the troubled markets -- it encouraged high-risk behavior by insulating risk-takers from the consequences of failure."

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

Post crisis reform legislation is partly aimed at creating a mechanism to allow large financial firms like Citi to fail without devastating consequences, similar to the shut-down regime for smaller depository banks. Firms that would be considered systemically important would be identified by a new council of regulators and subjected to higher capital standards.

The SIGTARP report called on the Financial Stability Oversight Council to apply objective criteria in determining which firms are systemically important. It also said the new council should "not simply accept the adaptability of Wall Street firms to work around regulation, but instead maintain the flexibility to respond in kind." (Reporting by David Lawder; Editing by Andrew Hay)

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