FDIC Chairman Sheila Bair
When the preliminary results from the stress tests came back in mid-March, they matched what we had expected to see: Citi (even with its $45 billion in government capital) and a few others would be insolvent under the stress test assumptions. Citigroup still needed tens of billions of dollars’ more capital. However, if it raised that amount of additional capital, it would lose a very valuable tax break called a deferred tax asset (DTA). Citi could raise only a few billion more in additional capital before it would lose its DTA. That DTA was worth about $50 billion to Citi.

But as the Fed continued to review and refine the numbers, an interesting pattern emerged: the amount of capital Citigroup needed to pass the stress test was getting lower and lower. In fact, in some cases, the Fed and the OCC were using numbers regarding likely losses that were more optimistic than those of the better-managed banks. In one situation, they assumed losses would be only half of what one of the stronger banks was estimating.

The Fed and OCC decided to give the banks such as Citi credit if they planned to sell assets as a way to improve their capital ratios, even though the banks had no firm, legally enforceable agreements to sell them. Citi was also given special credit for its ring-fenced assets. And finally, the Fed and OCC made some very optimistic assumptions about Citi’s and other banks’ future earnings growth. The result: when the final stress test results were announced on May 7, lo and behold, Citi’s capital need was $5.5 billion—just below the amount it could raise without adverse tax consequences.

The total amount of capital required by the stress tests for all nineteen banks was $75 billion, $33.9 billion of that attributable to Bank of America, which was reeling from its overpriced purchases of Merrill Lynch and Countrywide. But the incongruous results for Citi stood out like a sore thumb. Indeed, Wells Fargo, one of the best-managed banks in the country, was told to raise $11.5 billion, twice as much as Citi. And much to our disappointment, the announcement of the stress test results did not include any firm commitments to review the managements and boards of directors of the institutions that needed to raise capital.

Excerpt From: Bair, Sheila. “Bull by the Horns.” Free Press. iBooks.

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HKO

Robert Rubin, Clinton’s Treasury Secretary, was instrumental in picking Vikram Pandit to be the CEO of Citigroup. Pandit took Citi down the path to catastrophe while Rubin watched from his board position. Rubin was also a major fundraiser for Obama and instrumental in Tim Geithner’s and other appointment in the administration. The special treatment of Citigroup was much more than merely suspicious.

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