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UPDATE 2-Citi still too big after "ad hoc" bailout-audit
January 13, 2011 / 9:31 PM / in 7 years

UPDATE 2-Citi still too big after "ad hoc" bailout-audit

* 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 (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, 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 financial crisis.

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 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.

DIFFERENT COMPANY

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 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 Jan Paschal)

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