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09.12.10

Do Banks Still Play Us for Fools?

Even after reports that Robert Rubin and other Citigroup execs failed to disclose a risky mortgage portfolio, Charlie Gasparino reports Wall Street is repeating the same sneaky behavior.

Citigroup, the most bailed out and dysfunctional of the big financial houses, has been acting extra-stupidly lately by barring an influential analyst who had the gall to question the bank’s accounting practices from meeting its senior executives. Following reporting by myself and others at Fox Business Network, Citi CEO Vikram Pandit has relented: The analyst, Mike Mayo, will get his long-awaited meeting with Citigroup brass, including Pandit himself.

But the Mayo pissing match—he will be doing a victory lap of sorts this week, making the media rounds, including an appearance on Fox Business at approximately 1:30 p.m. Eastern today—shouldn’t obscure a larger story. Specifically, how this behemoth, even with all the management changes it has endured during its relatively short (12 years) and tortured history, still breeds contempt for the needs of investors and the American taxpayer, who will be on the hook once again if Citi begins to falter, a distinct possibility.

The cost of Citigroup’s crappy (some would say corrupt) corporate culture became crystal clear last week, when the Securities & Exchange Commission released documents that showed just how many people inside Citigroup’s management team knew about its massive risk-taking, and the losses that would ultimately doom the bank.

Citigroup may hate what Mayo says, but should it share information with only those analysts it likes?

I covered the financial crisis from its beginning, when the demise of Bear Stearns' hedge funds began to shed light on how many firms invested in the same risky securities tied to the housing market. The problem for reporters was that the public disclosures about what the banks held proved routinely lousy. In conference calls with analysts, banks like Citi downplayed their risk-taking and the potential for losing big money, even as short sellers—investors who bet that stocks will drop—said the whole house of cards was about to fall.

Then, according to the SEC, in September 2007, Citigroup was confronted with the truth about its future: At least a half dozen senior executives—including CEO Chuck Prince, and Executive Committee Chairman Robert Rubin, maybe the second-most-powerful executive at the firm (for all his influence and compensation, the former Treasury secretary maintains that management responsibilities were not in his job description) and the board—were informed that the firm’s exposure to losses from investments in risky mortgage debt were in all likelihood some $40 billion larger than originally disclosed.

A couple of months later, when Citigroup finally disclosed the reality of its problems, Prince was replaced by Pandit, but Rubin remained. Nearly a year later, he probably wished he left with Prince. Following the bankruptcy of Lehman (its two year anniversary is this Wednesday), Citigroup was still losing money because of these bad bets. Its massive balance sheet with hundreds of billions of dollars of insured customer deposits began to falter. With its demise near, the feds stepped in and bailed out the bank in an unprecedented manner—billions of dollars in direct aid, hundreds of billions in guarantees on its toxic debt, and a direct equity infusion. The U.S. taxpayer became the largest shareholder of Citigroup, a stake that the Treasury Department is still trying to unwind.

What did the American taxpayer get for bailing out Citigroup? Tim Geithner and other government officials behind the effort will tell you a more secure banking system—Citigroup, like the rest of the banks that survived the 2008 financial crisis (albeit with taxpayer help), is stronger, holds more capital, and takes less risk than ever before. And they’ve learned their lesson: Regulators will no longer tolerate incomplete disclosures to investors about risk-taking gone bad.

Many of these claims are, of course, debatable. Because of the various new rules (including the Basel Committee’s rules this weekend), capital levels are higher, yet the big banks still take risks, and because the notion of “too big to fail” is now established,  thanks to the pathetic new U.S. financial-reform law, once the financial crisis is forgotten, wild risk-taking will resume.

One point that’s not debatable is whether banks like Citigroup have learned their lesson and are now more willing to level with the investing public—and the taxpayers they owe their existence to—when they screw up. They haven’t.

For the past year, Goldman Sachs has tried to tell the world that it somehow didn’t benefit from the various bailouts of the financial system and thus has the moral high ground to pay its traders whatever it wishes. Morgan Stanley, I am told, is throwing a lavish party nearly on the eve of the Lehman bankruptcy—and its own subsequent bailout—to alert the world that it is surviving and thriving. And so on.

Citi, however, is setting the standard, as epitomized by its Mike Mayo blackball. Citigroup may hate what Mayo says, but should it have the absolute right to bar him from the company—to share information with only those analysts it likes? I thought the securities laws were supposed to prohibit selective disclosure.

Nonetheless, Citi's platinum-plated team displayed an amazing degree of disrespect for what investors needed to know. I would like to think Bob Rubin advised ( definitely in his job description) Citi’s then-CFO Gary Crittenden, since charged by the SEC, to be as expansive as possible in disclosing potential losses.

To be sure, at the time, it would have been difficult to tell the whole truth about their failing bank. Rubin said he believed wholeheartedly in the Citigroup business model of combining risk-taking investment banking with taxpayer-insured commercial banking, even after Citi’s track record, serving as the investment bank for scams from Enron to Worldcom, and for often doling out to its clients lousy and arguably fraudulent stock research to small investors.

If he’d done the right thing, he could have set a standard for the rest of Wall Street. Instead, Rubin kept mum, as did Chuck Prince, and Citi was allowed to limp into 2008, and billions in bailouts.

That failure of leadership lives on, as the heirs to Rubin and Prince, notably Vikram Pandit and CFO John Gerspach, repeat the cycle, blackballing an analyst who wanted to understand Citi’s complex balance sheet on behalf of his clients. It’s a familiar cycle that will once again, I fear, be paid for, at the end, by the U.S. taxpayer.

Charlie Gasparino is a senior correspondent for Fox Business Network. He is a columnist for The Daily Beast and a frequent contributor to the New York Post, Forbes, and other publications. His new book about the financial crisis, The Sellout, was published by HarperBusiness.