This week's revelations on the financial chicanery that should have decimated the monstrous zombie bank commonly known as Citigroup are little surprise to anyone with a healthy skepticism of fiatists, but it is at least encouraging to see that the Financial Crisis Inquiry Committee is bringing to the forefront, for everyone to see, the dirty laundry of Citi's irresponsible, multi-billion dollar balance sheet "omissions." As you can would expect, it stinks.
An article today from Bloomberg reveals the FCIC's latest disclosures regarding the major role of liquidity puts that crippled Citi in what I would call "Level-1 Jenga tower fashion." The liquidity puts Citi offered were basically guarantees on the debt-backed securities it sold that allowed the buyers to re-sell the securities back to Citi at face value if the markets froze and the buyers were not able to sell the debt themselves. The liquidity puts were obligations to buy back the debt if the securities did not perform: in other words, from Citi's perspective, they were collateralized debt obligations, or CDO's, and from the investor's perspective, they were debt-backed securities. Thus, Citi sold the securitized debt from its balance sheet in the bundled securities to investors, and promised to buy it back at face value if the investors wanted to sell and for some reason the market wouldn't pay full price. This is very important: what that simple statement should tell you is that Citi never thought they'd need to actually pay-out on the liquidity puts.
Think of this way: if you bought debt from Citi and you wanted to sell it, and could get a higher price on the market that you paid for it (ie: profit), then you'd surely sell the debt on the market, right? Of course: you would be crazy to sell the debt back to Citi at only face value when you could get more on the market. The only reason you wouldn't be getting a better offer on the market would be because the debt was not performing. Citi, on the other hand, is happily assuming that they'll never have to buy your debt back because they have declared that there will always be another buyer in the market because the "value" of the debt you purchased from them--with their buy-back guarantee--will only ever go up, up, up!
Do you get this? This is so patently arrogant that it is insane! Have you ever heard of a gold dealer who would sell you and your 5,000 closest friends $1150 gold today and guarantee that he'll buy it back from you tomorrow for $1150 if the price drops to $750 overnight? No--you haven't, because that guy would be outta business in no time! (But if you happen to know one, please give me his number.) Furthermore, can you imagine the capital that dealer would have to keep on hand to back up a promise like that--what would be the point of being a dealer? Sure, Walmart has its "Satisfaction Guarantee" that has allowed me to actually witness people returning birthday cakes with missing pieces at the customer service counter (and no, I'm not exaggerating), but Walmart's "guarantee" actually means Walmart is just going to send whatever you return to them back to the product maker and Walmart will demand a refund from the maker. Do you think Walmart would have such a generous return policy if it was actually costing them? No, because they, and the gold dealer, aren't totally insane. Citi on the other hand...
Indeed, in Citi's world--a world called Bankster's Paradise--it is apparently quite possible to create up risky assets, sprinkle them with fairy dust, chant a magic phrase, sell them with a money-back guarantee, and be totally confident that such assets will never, ever, ever lose value. And for would-be investors, any little apprehensions about purchasing something from Citi that was otherwise and fundamentally risky (because all investments are risky), despite what nonsense the market and ratings agencies say, could be assuaged and neutralized by the promise of a money-back guarantee! Sounds great, right?
You might be wondering, then, what possibly was packaged in these rock-solid debt securities that Citi was selling, and guaranteeing with face-value "liquidity puts," that Citi was so absolutely positively sure would never, ever, ever decrease in value, yet that investors needed just a little bit of encouragement to purchase. Well, take a wild guess--and no, it's not birthday cakes, and we know it's not gold. Think, now: what market bubble was never, ever, ever supposed to pop--what "asset" was never, ever, ever supposed to lose value, and what was everyone just so absolutely sure was an "investment" so solid that banks could give anyone a loan to buy one...or two....or three, whether or not the debtors had a job or even a pulse?
C'mon--a wild guess! You got it: the housing market!
Yes, indeed, we are back to those glorious mortgage-backed securities, the sure-fire, rock-solid debt behind Citi's liquidity-put-backed "assets." Buyers would purchase the securities thinking their value would increase, and for years, the buyers were right. Citi benefited from not only the sales, but also the fact that they never had to cover the liquidity puts they guaranteed. It moved the debt off their balance sheet and freed up capital for--guess what?--more loans! They couldn't sell them fast enough: according to the FCIC, the debt sales were in the hundreds of BILLIONS--$400 Billion in just 2005 and 2006 alone. In Citi's world, the market obviously could only go up forever: why else guarantee them? And lazy, non-investigative investors are saying, "Citi is guaranteeing them--they must be rock-solid!"
Rock-solid, huh? Hardly: we all know now that Citi was wrong. Investors were wrong. Testimony at the FCIC today revealed that in 2007, Citi found itself looking down the barrel of a $25,000,000,000 gun held by hundreds of debt holders who all the sudden wanted their face value back. The debt was toxic: no one on the market would buy it for face value, as the underlying assets--those pesky mortgages--were turning sour at record pace. This left the debt holders with one option: Citi's promise, and a very long line at the customer returns counter. Only unlike Walmart, Citi's the one left holding the bag.
See, in Bankster's Paradise, Citi thinks you can have it both ways, and given that they were bailed out by the taxpayer under threats of collapsing the entire global financial system and destabilizing the rings of Saturn, I guess they're right. Still, even realizing the insanity of guaranteeing hundreds of billions of debt-backed securities as CDO's on your side, one might think that someone crazy enough (Citi) to do that would at least put a little dough aside--just in case. So, did Citi do this?
Hell no! Citi, according to the FCIC, capitalized the guarantees at 0.8%. In other words, Citi put aside $1 for every $125 it "guaranteed" by the liquidity puts. This meant that with $25 Billion pointed at them, Citi had a whole $200 million. All the fairy dust in the world is not going to make that work. Nope, sorry. But if you've got friends in high places with the power to steal $787 Billion with the stroke of Bush's pen, that will work!
The American people should be outraged. To this day, in regards to Citigroup alone, US taxpayers remain on the hook at for at least $25 Billion and "own" a staggering 27% of this fraud-laced multi-national zombie banking behemoth. Additionally, the FDIC-backed paper Citi was allowed to sell accounts to at least $301 Billion. Citi has "repaid" $20 Billion of the original 2008 infusion of $45 Billion: I say "repaid" because, of course, this money is only being returned to the always bankster-run US Treasury's TARP (Troubled Asset Relief Program) fund. Of course, TARP was originally started by former Goldman Sachs CEO turned Bush administration Treasury Secretary Mr Hank Paulson, and the program is now in the hands of our latest pro-bankster Treasury Secretary, Mr Timothy Geithner. Mr Geithner, with the enthusiastic support of the Obama administration, has determined that TARP will basically be a never-ending, revolving bank-bailout account. Who knows how much more Citi and other zombies will get--again, it still has $25 Billion to return and $301 Billion in paper to settle before we're anywhere near off the hook. The FCIC has a lot of laundry to go through. Is somewhere in there some good ol' fashioned fraud?
An interview aired today, April 13, on the Charlie Rose Show with Jim Chanos, the legendary short-seller who has made billions by seeing through the smoke and mirrors of fraud-laced balance sheets ranging from Baldwin United in 1982 to Enron in the last decade. In the interview, Chanos noted that the "hole in Lehman Brothers was $150 Billion, give or take," which was "twice Enron." He noted that such "holes" in balance sheets mean that "there's fraud involved." Rose asked Chanos if he thought there ought to be criminal indictments, in reference to Lehman, and Chanos replied, "I think there ought to be a lot of criminal indictments." To date, no Lehman executives have faced any criminal charges.
I mention this because at least Lehman was allowed to drown under its own crimes. Citi, on the other hand, not only has seen no criminal investigation into fraud or anything else, but was bailed out with money stolen from the American taxpayers. Last week, Citi's former CEO Charles "Chuck" Prince gave testimony to the FCIC that he simply had no knowledge of how exposed Citi was, and that he "was not aware of the decisions being made on the trading desks" to retain the very CDO's that got Citi into trouble. Interestingly, though, he continued that admission with the statement that it would be "hard" for him "to fault the traders who made the decisions to retain these positions on Citi's books" if he had know about them. Mr Prince talked quite a bit in both his opening statement and in response to questions about how much he and his bank relied on credit ratings for, apparently, their own decision-making, and pretty much hung Citi's balance sheet on them. He seems to me to be laying much of his firms fiduciary responsibility on the backs of the credit rating agencies. Of course, if Citi wasn't up to such machinations, the credit rating agencies would not be of much concern. Mr Prince did a lot of blaming against the credit rating agencies (which, don't get me wrong, deserve plenty of scrutiny), but strangely, he didn't acknowledge that it was their very inflated ratings that allowed his bank's operations to work under Basel II. They were accomplices, and like after many crimes, they turned on each other. Mr Prince resigned on November 4, 2007--the same day Citi announced $11 Billion in write-downs due to it "money-back guarantee" MBS that had now become hard-core CDO's, and stated in his testimony that he watched his personal wealth of Citi stock nose dive from over $50/share to $1. Considering that he made many, many millions while at Citi, the commissioners didn't seem too sympathetic.
The write-downs that forced Mr Prince out of office, however much he wanted to blame it on the credit rating agencies, were not something that just appeared in November 2007. As this week's FCIC's hearings demonstrate, the demons were there all along--they just weren't on the balance sheet, and the idea that Prince and Rubin simply "didn't know" about $55 Billion in CDO's is specious at best. Citi investors didn't know, because the bank hid the exposure--which is why there was such a backlash, including against Mr Prince, in November 2007 when the bank finally acknowledged that huge $11 Billion loss. Up to that point, Citi had considered their magical liquidity puts so utterly risk-free that they literally did not place the $55 Billion in liabilities on the balance sheet. Does that sound right to you? It doesn't sound right to me, either. Check this out from a November 2007 Fortune article:
"Meanwhile, you might think the existence of the (liquidity) put would make it impossible for Citi to get those CDOs entirely off its balance sheet. But in fact Citi found a complex accounting rationale for doing exactly that, and the CDOs jumped entirely to somebody else's balance sheet. All that remained in Citi's realm was this sticky little matter of the puts - which, as we shall immediately see, ultimately worked to get these CDOs right back to their creator, Citi."
Ah, yes, balance sheets are rather flexible in Bankster's Paradise, don't you know. (Some day they'll be optional!) Actually, this is where Basel II rears its ugly head, yet again. Again, the above article was written in November 2007: within three months, we saw Countrywide and Bear Stearns fall, followed by infusions for Freddie and Fannie, a collapse of Lehman, a takeover of AIG, Merrill Lynch, WaMu, Citi, GM, and on and on. The FCIC has already taken testimony from Alan Greenspan over the role of his Federal Reserve in the financial crisis, and for the past couple of weeks, it has been focusing on these critical days early in the crisis at Citi. During those days in 2007, the man seated next to CEO Chuck Prince in the boardroom at Citi was the same man seated next to him at the FCIC hearing. That man was former Citi chairman and director, Robert Rubin.
Robert Rubin's testimony matched Mr Prince's insofar as its ability to demonstrate outright incompetence at the boardroom level. Case in point: Mr Rubin, who made over $100 Million at Citi, literally claimed to have simply not known or understood the banks exposure. This is quite a statement to believe when it's coming from the former CEO of Goldman Sachs and former Clinton Treasury Secretary, who sat on the board of directors of Citigroup for over a decade. Perhaps even more unbelievable is a claim Rubin made in November 2007, as Mr Prince was resigning and Citi was posting $55 Billion CDO exposure and $11 Billion losses. What Rubin said then he repeated to the FCIC last week, and did so with all little concern for its gravity as when he stated it the first time. In November 2007, as he was raking in over $1.5 Million a month at Citi while the bank was posting $11 Billion losses, Rubin said, simply, "Myself, at that point, I had no familiarity at all with CDOs."
"No familiarity at all with CDOs?" You gotta be kidding me.
Oh, okay, Mr Rubin. So--did you give that $100 Million back?
Didn't think so.
Cuz it's a "Bankster's Paradise," son. Coolio said it for gangstas, and I say it for bankstas. Of course, you've probably already recognized this entity by its other name--"The Taxpayers' Hell." As mentioned above, taxpayers remain on the hook for $25 Billion with Citi TARP money, $301 Billion in tax-payer backed Citi paper, and "own" 27% of Citi shares. And if that's not enough to get your blood pressure up, Mr Goldman-Sachs-Citi Robert Rubin has had the ear of the Obama administration since November 2008. In fact, he was under consideration for Treasury Secretary until he withdrew himself, and Obama picked Rubin's protégé, Mr Geithner. Rubin still holds "enormous influence" in the administration--just don't ask him about CDO's, of course. Or Citi. Or balance sheets. Or ethics.
And, finally, that last fact just demonstrates yet another phenomenon in Bankster's Paradise otherwise not normally seen in the real world: in Bankster's Paradise, no one ever gets held responsible for anything--especially incompetence, failure, or even fraud. That's who the FCIC is up against.