Current Bailout Of Citigroup Is Not Their First

December 1, 2008

The Facts

Citigroup has a long history of breaking laws, both legal & moral, on their way to become the biggest and most powerful in their industry. First established in 1812 as City Bank of New York, they were the biggest bank in the country by1894 under the name of National City Bank. During the 1920′s they became even bigger by selling securities to individual investors, which was illegal for the business they were in. Their actions played a major roll in the 1929 stock market crash. As a result of that crash, our government doled out tens of millions of dollars to bail out National City Bank (sound familiar?). There’s no record to be found that National ever paid back the money.

Four years after the stock market crash, National City Bank chairman Charles Mitchell was in front of a committee in Washington answering questions (sound familiar?). He admitted to committing crimes in his greedy quest to become the biggest bank. In addition to being accused of excessive pay (sound familiar?) the committee said more than any 50 men, Mitchell was responsible for the 1929 stock market crash. Mitchell never served any time for his crimes, although he did loose his job.

Because of this single event by National, the Glass-Steagall Act was passed that prevented commercial banks from getting into the insurance business (another look at the Glass-Steagall Act here).

The Washington Post published an article in November of this year it called “Citi’s relentless Quest for Growth”. In it, the Post says Citi owes much of its success “to its emphasis on size and innovation and a penchant for going around or getting rid of regulations in its way”. In the 1920′s, when it was illegal for a bank to sell securities to individual investors, National City Bank just started a new subsidiary where they could legally sell those securities. Of course, it was really the banks (depositors) money being used, but that made no difference to National. It really wasn’t their money anyway, so if anyone lost, it would be the investors & depositors (sound familiar?).

The end of Mitchell at National City Bank did not end Citi’s Modus Operandi. Walter Winston, chairman from 1970 to 1984, continued the MO. In spite of the fact that many banking regulations were overlooked by regulators, that wasn’t enough. Winston skirted other regulations that he didn’t like, and Citibank (their name at the time) continued to grow. Walter Winston was hailed as a forward-looking banking innovator. But the bank got into trouble again, and guess what; our government stepped in again with a lot of taxpayer money.

Phil Gramm

In 1998, Citicorp (another new name), decided they wanted to be in the insurance business, but the Glass-Steagall Act prevented them from doing so. But that didn’t stop them; they managed to get the infamous Phil Gramm to put together a new law called the “Gramm-Leach-Bliley Act“. That act not only repealed the Glass-Steagall Act, it opened up the flood gates for just about any kind of banking corruption anyone choose to pursue, and many did; hence the mess we are in today. But not to worry; the taxpayers have ridden in on their Calvary horses once again for Citi.

Since their victory in 1999, Citi has been in constant trouble. They’ve had to pay a $400 million dollar fine, and they cooked their books to cover billions in looses. In addition, their analysts were accused of issuing favorable reports on Enron and helping the latter hide their looses (we all remember Enron, don’t we?). Next, they had several of their bond traders indicted over a bond market plot where they sold $11 billion of bonds very quickly, which drove down the price. Once the prices were where they wanted them, Citi just bought them back. Finally, this year, before the unveiling of the financial crisis, Citigroup was fined for stealing millions of dollars from the accounts of credit card customers.

My View

Ok, so my first question is why this company is allowed to continue existing. If this is what our country views as a company worth saving, then we are in much bigger trouble than any of us think. It’s been said Citi is “too big to fail”; well, my considered opinion is that we, us taxpayers, can’t afford to not let them fail. But we taxpayers don’t stand a chance; George Bush’s point dogs on the case are not about to let them fail, and, to them, it doesn’t matter how much taxpayer money it takes. Henry Paulson, Tim Geithner, and Robert Rubin, the latter being a Citi board member, will continue to dole out the money until Citi has fully recovered. This fact is substantiated by those three giving Citigroup another 306 billion dollar guarantee just days after Paulson said he would leave the remaining $350 billion of TARP money for the Barack Obama boys. That little piece of news gave Citigroup’s stock a huge boost the following day. As for George Bush, he just make look back on this as his greatest triumph since his entire agenda for the past 8 years has been directed at taking care of wealthy people & large corporations, and promoting the neo-conservative ideology.

But all these current problems that Citigroup is having is not their fault. At least that’s what Vikram Pandit, Citigroup CEO, said on November 11th of this year. It’s the markets fault, according to Pandit, and I think we should believe him. We all know that in today’s world it’s everybody else’s fault when someone does something wrong; it’s never the person or persons fault that did the wrong. And there certainly wasn’t any greed involved!

Relative to the “to big to fail” syndrome, one could argue in that favor. With more than $3 trillion in assets and really being a global company with offices in just about every country in the world, their failure probably would do great harm. So, with what has happened now, along with Citigroup’s very tainted history, it will be interesting to see if our lawmakers, both Republicans and Democrats, will break this company up and force them back in line. I doubt anyone could script a better example of why corporations should not be allowed to grow to the “to big to fail” size. It will also be interesting to see if Citigroup pays back the loans from the taxpayers. If I had another life to bet, I’d bet that life on very little of the money being paid back, if any at all. And why should they; this little bailout ploy has worked for them twice before.

Two other very good reads on the Glass-Steagall Act and the consequences of its repeal can be found here and here.