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01.13.10

Why Citigroup's Going to Take the Fall

Citi was conspicuously absent from Day 1 of the hearings probing the origins of the financial crisis—but the bailed-out bank is sure to get a grilling from investigators. Simon Johnson on why unrepentant former Citi titans Sandy Weill and Robert Rubin also need a day in the court of public opinion.

It was striking that, on the first day of the Financial Crisis Inquiry Commission on Wednesday, Citi and its representatives were conspicuously absent from the witness box. After all, every major international financial crisis of the past 30 years has involved two elements—unregulated borrowers and Citi.

Often the unregulated borrowers, who get carried away or who are talked into becoming exuberant, are in the “emerging markets” of the day, which could be (and frequently is) in Latin America, Asia, or Eastern Europe. Most recently, the borrowers were high-risk home buyers in the United States.

But Prince and Pandit would just be the appetizer. The main course should be Sandy Weill and Robert Rubin.

In 1982, Citibank almost failed because of bad loans made to Latin America. In the late 1980s, the problems were centered on commercial real estate in the U.S.—there was another rescue in 1990-91, by a Saudi prince, no less. Citi was exposed to significant losses in 1998 when Long Term Capital Management nearly failed. And Citigroup, as it is now called, was bang smack in the middle of latest housing/derivatives/failure of risk management fiasco.

Indeed, former CEO Chuck Prince would be the likely winner if anyone ran a worst line of the global financial crisis competition. In July 2007, just as the storm clouds burst, he said, “As long as the music is playing, you’ve got to get up and dance. We’re still dancing.”

As a result, Citi danced its way into the cellar. Completely hammered by the collapse in house prices from 2007, shares lost 95 percent of their value. Citi very nearly failed several times in 2008 and early 2009—saved only by repeated and very generous government bailouts.

Citi’s absence from the first hearing of the commission, formed to investigate the causes of the financial crisis, cannot have been an oversight; nor, given the commission’s subpoena powers, can Citi refuse to cooperate. Phil Angelides, head of the panel, is a tough operator who demonstrated—as treasurer of California—that he knows how to walk softly and apply the business end of a big stick. Nor is it remotely possible that any reasonable person will consider the commission’s work done until Citi has been hauled in some fashion over the coals.

Most likely, Angelides has in mind an interesting and constructive piece of political theater. On Wednesday, the commission grilled four prominent bankers—from Goldman Sachs, Morgan Stanley, Bank of America, and JPMorgan Chase—and talked with some other market participants. On Thursday it moves on to some regulators. Presumably, the goal is to build the basic plot line in the public imagination and then—but only then—turn to Citi.

What will the Citi conversation look like, when the time comes?

The commission obviously will have to interview Chuck Prince and the current CEO, Vikram Pandit. The questions for them likely will focus on how exactly Citi came to make so many bad decisions and still can’t sort itself out. By all accounts, Citi is a cumbersome, out-of-control bank. Talking about some vivid examples of global overreach could be helpful. Why doesn’t it just break into more productive bits?

But Prince and Pandit would just be the appetizer. The main course should be Sandy Weill, the man who built Citi as a supposedly modern financial supermarket, and Robert Rubin, who was brought in to oversee strategic direction and to think deeply about risk.

Both Weill and Rubin have spoken candidly to the press since the crisis broke in earnest— Rubin to The Wall Street Journal in November 2008 and Weill to The New York Times more recently. Both made massive fortunes. Both seem completely unrepentant. Both exude hubris even to this day.

So let’s all sit down, take a national moment, and watch their body language as they are questioned. What did they learn about risk and when did they learn it? What were they thinking as they managed their way into the banking abyss?

Does Rubin regret any dimension of the deregulation over which he presided at Treasury during the 1990s, and which made the latest, greatest Citi madness possible?

Weill famously curtailed the activities of his proprietary traders after serious losses in 1998. He seemed, at one time, like the safest pair of hands on Wall Street. How did he get lured back into the business of betting his balance sheet (and more) on reckless risk taking?

The bank CEOs interviewed Wednesday may reasonably be considered the current kings of Wall Street. But Weill and Rubin are the titans who built the modern Citi. Perhaps both are now somewhat in exile, but they remain fascinating characters who accumulated enormous fortunes, ultimately at our expense. And, despite everything that has happened to the rest of us, they still appear to be very rich.

Let’s ask them directly—they and the Citi they built should have their day in the court of public opinion. We’ll learn a lot about the nature of power and wealth (theirs) and risk (ours) in modern America. Just don’t expect any tears, except perhaps our own.

Simon Johnson is a professor at MIT’s Sloan School of Management, and a senior fellow at the Peterson Institute for International Economics.