On February 14, 2008, John Lyons, the examiner in charge of large bank supervision at the OCC, sent Citigroup and its auditors a scorcher of a valentine. In a nutshell, it said that Citigroup had no idea what it owned and had no idea how to value it. “Risk management had insufficient authority,” it said. The board “had no effective oversight role,” and “matters requiring attention” ranged from corporate governance and risk management, in general, and CDO valuation, in particular.
Eight days later, on February 22, Citi unveiled its annual report to shareholders. In that report, Vikram Pandit personally attested that Citi had full control over its finances and that its valuations were reliable; the auditor, KPMG, said exactly the same thing.
The FCIC should have asked questions about this—after all, the OCC letter comes from its own archives. But it doesn’t seem to have done so, which means that it has fallen to Jonathan Weil to do the digging and to construct a timeline and to ask awkward questions. The problem is that Weil, as excellent as he is, doesn’t have nearly the power that the FCIC had. So he can get stonewalled easily:
Pandit, Crittenden and O’Mara didn’t return phone calls. A KPMG spokesman, George Ledwith, declined to comment, as did an OCC spokesman, Kevin Mukri. A Citigroup spokeswoman, Shannon Bell, declined to discuss the OCC’s findings.
It’s now certain that Citi and its auditors were well aware of the problems the bank had in valuing its assets—those problems were clearly spelled out to the bank in a formal letter from its regulator. And yet, as Weil writes:
Somehow KPMG and Citigroup’s management decided they didn’t need to mention any of those weaknesses or deficiencies. Maybe in their minds it was all just a difference of opinion. Whatever their rationale, nine months later Citigroup had taken a $45 billion taxpayer bailout, still sporting a balance sheet that made it seem healthy.
Both Pandit and KPMG are still in place; their la-la-la-la-we-can’t-hear-you approach to disclosure seems to have worked perfectly. But the SEC should look into this. It’s the formal disclosures in the 10K which now look deceptive at best and downright fraudulent at worst. I know it’s fun to chase hedge funds for insider trading. But we’re still waiting for the crisis-related prosecutions to begin, and this would seem to be a fruitful place to start—especially given Pandit’s newfound hero status.
Felix Salmon is a financial writer, editor, and podcaster. A former finance blogger for Reuters and Condé Nast Portfolio, his work can be found at publications including Slate and Wired, as well as his own Substack newsletter.