Citigroup – Digging Its Own Grave

Posted on November 15, 2010 by JtowneJeff in Opinion

A few years ago, a blinding light was shed on Wall Street and the mortgage and investment industry. So bright a light, in fact, that the U.S. Government had to “lower the wattage”, so to speak. Economists and historians had begun comparing the then-current state of the economy to that of the economy leading up the Great Depression. The government did not want the country to worry about another Depression. If our economy were to sink to that depth again, it would require some serious belt-tightening in Washington, D.C. And they just couldn’t stomach the thought of that.

I recently called Customer Service for a credit card issued to me by Citibank (SD) N.A. to request a lower interest rate. My request, reasonable to me by my own estimations, was met with this reply: “Due to the current stagnation in the mortgage market, we cannot offer a lower APR than what is on your account. However, we do have an offer of 0% on balance transfers.” Thoughts raced through my mind. The mortgage market? Didn’t Citibank just get a huge bailout to cover all of their toxic sub-prime mortgage assets? Eventually, I spoke with a supervisor and got what I wanted: a lower interest rate. But it got me thinking.

On March 4, 1932 the United States Committee on Banking and Currency launched the Pecora Investigation, named for it’s fourth chief counsel, Ferdinand Pecora. The investigation’s intent was to discover the root causes of the 1929 stock market crash and subsequently the Great Depression. By the time Pecora took over the investigation, he was given little more than one month before he was to submit his final report to Congress. His interrogation of National City Bank (Citibank) made national headlines and led to the resignation of the bank’s president, Charles E. Mitchell. Pecora heard testimony from several high profile witnesses, from the president of NYSE, Richard Whitney, to powerful bankers, to speculators like Arthur W. Cutten. One such testimony, from J.P. Morgan, Jr., revealed that Morgan and many of his partners had not paid any income taxes in 1931 and 1932. The investigation also uncovered a myriad of abusive banking practices, from underwriting unsound securities to pay off bad bank loans to “pool operations” to support the price of bank stocks.

As a result of Pecora’s report, Congress passed several regulatory laws including the Glass-Steagal Banking Act, which separated commercial and investment banking, and the Securities Act of 1933, which set penalties for filing false or misleading information about stock offerings. The next year, Congress passed the Securities Exchange Act of 1934, forming the SEC, to regulate the stock exchanges. Ferdinand Pecora would later become one of the first commissioners of the SEC. Five years after the hearings had ended, Pecora published Wall Street Under Oath, his recount of the investigations. “Bitterly hostile was Wall Street to the enactment of the regulatory legislation,” he recalled. “Had there been full disclosure of what was being done in furtherance of these schemes, they could not long have survived the fierce light of publicity and criticism. Legal chicanery and pitch darkness were the banker’s stoutest allies.” Sound familiar?

Citigroup, the parent company, received $25 billion from the U.S. government prior to the highly-publicized bailouts, in which it received another $25 billion, along with guarantees for $306 billion in “risky assets”, mostly sub-prime mortgages. That’s $50 billion of taxpayer money to support a bank that has been blamed for the two largest economic crises in American history, plus a backwards funded “guarantee” for 6 times that amount. The United States Government owns 36% of Citibank. This bank was deemed “too large to fail” by politicians from both major parties. I would argue that Citigroup is “too corrupt to bailout”.

Indeed, Citigroup is not to take all of the blame for our current economic meltdown. A large variety of factors culminated over the course of at least a decade and eventually revealed their unsustainability. But one bank in particular has seen this show before. The predatory and deceitful practices were very different in the 1920’s, but the results are still the same. When a bank as large and as corrupt as Citigroup gets caught digging it’s own grave, the response should not be to bail it out. Rather, give the bank a few more shovels.

Tags: Charles E. Mitchell, Citibank, Ferdinand Pecora