WASHINGTON Jan 13 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
"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
"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
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
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)