* Audit says ad hoc nature of bailout not a surprise
* Watchdog warns Citi still too big to fail
* Watchdog credits Treasury with protecting taxpayer
(Adds statement from Rep. Bachus)
By David Lawder
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, or SIGTARP, said it was concerned about the lack of
objective criteria applied by government officials in their
decision to save Citigroup from collapse at the height of the
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 SIGTARP report also said the government's actions
increased 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."
The SIGTARP report found that the Citigroup bailout
achieved the government's primary goal of restoring market
confidence in Citigroup but also "carefully controlled" risks
of losses on asset guarantees.
It said Citigroup may now 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."
Citigroup said in a statement that it is a "fundamentally
different" and stronger company today, with reduced risk
exposure, overhauled risk management and a more focused
strategy on core banking activities.
The Treasury provided $45 billion to Citigroup in 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 Treasury's head bailout official, Acting Assistant
Secretary for Financial Stability Tim Massad, said legislation
last year to reform financial rules aims to end the need for
bailouts by creating a mechanism that lets them fail.
"During the economic crisis, there were no tools to break
down a failing institution without putting the entire financial
system at risk," he said in a statement. "The Dodd-Frank Act
puts in place necessary protections for taxpayers that ends
bailouts and reduces the potential for moral hazard."
Republican lawmakers, however, seized on remarks by
Treasury Secretary Timothy Geithner contained in the audit in
which he said it was possible the government would have to "do
exceptional things again" if faced with another large shock.
"The doctrine of 'too big to fail' unfortunately remains
alive and well in Washington," House Financial Services
Committee Chairman Spencer Bachus said in a statement.
Under the Dodd-Frank reforms, 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 Jan Paschal)