When Citi does something bad, it goes all in.
By Pam Martens and Russ Martens of Wall Street on Parade.
The business media was abuzz yesterday with reports that two of Citigroup’s federal regulators – the Office of the Comptroller of the Currency and the Federal Reserve – are considering reprimanding the bank for failure to improve its risk management systems. Trust us: there is a lot more to this story than you’re reading about in the main stream press. Citigroup doesn’t do anything small. When it does something bad, it goes all in – sometimes even assigning a code name.
Let’s start with the “Dr. Evil” trade. That was actually the code name that Citigroup traders assigned to an attempt to exploit a weakness in a European bond trading system. Citigroup was fined $26 million in 2005 by Europe’s Financial Services Authority for the trades.
Citigroup employees gave another code name, “Buca Nero” – Italian for “Black Hole” – to an accounting maneuver that made debt appear to be an investment at the debt-strapped Italian dairy company, Parmalat. The company collapsed in 2003 in what became Europe’s largest ever bankruptcy.
In 2005 Citigroup settled with the Securities and Exchange Commission for $101 million for helping the notorious Enron inflate its cash flows and under report its debts. The same year, Citigroup settled with private litigants for $2 billion over its role in the bankruptcy of Enron.
Then there were those infamous SIV liquidity puts. In the leadup to Wall Street’s financial collapse in 2008, Citigroup had been creating Structured Investment Vehicles (SIVs) and using them to place toxic subprime debt off its balance sheet. The problem was that those SIVs promised to provide liquidity to buyers of its commercial paper if the market bulked and wouldn’t roll over the commercial paper. That meant that Citigroup, in providing those liquidity puts, had to put this toxic debt back on its own balance sheet and take massive losses. Citigroup’s stock went to 99 cents in 2009 as it was receiving the largest taxpayer bailout in U.S. history.
While all of the above had been going on, Sandy Weill, the Chairman and CEO of Citigroup, had amassed a fortune from the bank through a technique that compensation expert Graef “Bud” Crystal called the Count Dracula stock option plan. You couldn’t kill it; not even with a silver bullet. Nor could you prosecute it, because Citi’s Board of Directors had signed off on it.
The plan worked as follows: every time Weill exercised one set of stock options, he got a reload of approximately the same amount of options, regardless of how many frauds the bank had been charged with during that year.
Crystal explained in an article for Bloomberg News that between 1988 and 2002, Weill “received 96 different option grants” on an aggregate of $3 billion of stock. Crystal says “It’s a wonder that Weill had time to run the business, what with all his option grants and exercises. In the years 1996, 1997, 1998 and 2000, Weill exercised, and then received new option grants, a total of, respectively, 14, 20, 13 and 19 times.”
By the time Weill stepped down as CEO in 2003, he had received over $1 billion in compensation, the majority of it coming from his reloading stock options. (Weill remained as Chairman of Citigroup until 2006.) One day after stepping down as CEO, Citigroup’s Board of Directors allowed Weill to sell back to the corporation 5.6 million shares of his stock for $264 million. This eliminated Weill’s risk that his big share sale would drive down his own share prices as he was selling. The Board negotiated the price at $47.14 for all of Weill’s shares.
To window dress the share price for beleaguered shareholders after the financial crisis, the bank did a 1-for-10 reverse stock split on May 9, 2011. (For each 100 shares of stock, the shareholder was left with just 10 shares.) At yesterday’s closing stock price of Citigroup of $48.15 (actually $4.82 had it not done a 1-for-10 reverse stock split), shareholders are still down 90 percent from where the stock traded in 2007.
Given that background (and Citi’s much worse long-term rap sheet), consider the news circling around Citigroup over the past week. Last Thursday, the fact-checking website, Logically, broke the news that a Senior Vice President at Citigroup, Jason Gelinas, was living a secret life as a promoter of the conspiracy group, QAnon. According to his resume at LinkedIn (now removed), Gelinas had worked at Citigroup for 17 years and was Director of GFTS Core Technology Services. An unrelated help wanted ad at Citi described GFTS as follows:
“Global Functions Technology Services [GFTS] provides application development and other technology services for global functions, including Compliance, Enterprise Risk, Finance, Human Resources, Legal, Real Estate, IT Risk, Procurement, and General Services…”
Notice that the word “risk” appears twice in that sentence. But Gelinas, whose job goal was to look out for risk at Citigroup, was potentially a big risk himself. According to the FBI, QAnon may be a domestic terrorist threat…