[NYTr] Wall Street Metes Out Street Justice to Citigroup

[All the News That Doesn't Fit]

Counterpunch - Nov 6, 2007
http://www.counterpunch.org/martens11062007.html

The Toxic Giant and Its Own Black Hole

Wall Street Metes Out Street Justice to Citigroup

By PAM MARTENS

After years of receiving slaps on the wrists by regulators for helping
insolvent companies hide the true state of their finances from
investors, Citigroup's day of reckoning has arrived in the form of
"street" justice.

Wall Street colleagues are publicly challenging the adequacy of
Citigroup's capital, its accounting practices, and its own black
hole-Cayman Islands debt structures. Some of the oldest Wall Street
firms are also refusing to pony up billions for a grand scheme endorsed
by the U.S. Treasury, ostensibly to unfreeze debt markets. Wall Street
firms see it as a bail out of Citigroup and just one more free ride
from the Feds.

Citigroup has been repeatedly charged in investor lawsuits with
creating off balance sheet structures to hide the debt of large U.S.
firms such as Enron. In each case, it has been allowed to pay millions
to regulatory bodies and billions to private plaintiffs to settle the
charges without an admission of guilt and avoid a public trial. These
trials, however, might have provided critical transparency and an early
warning to the public and its colleagues on Wall Street.

But next year, Citigroup will face trials in both Italy and the U.S. in
two separate actions for creating off balance sheet structures that
plaintiffs contend were significant contributors to the bankruptcy of
the giant Italian milk company, Parmalat. Citigroup named one of these
structures Buconero, Italian for "black hole." Another structure
Citigroup set up for Parmalat sold commercial paper, backed by fake
invoices, to U.S. money market funds. Citigroup contends it was "the
victim" in all matters related to Parmalat.

The U.S. trial, set for May of 2008 in a New Jersey State Court, is not
being brought by a U.S. prosecutor, but an Italian trustee for
Parmalat, Enrico Bondi.

Dave Serchuk, a reporter for Securities Week at the time, reported in
its February 2, 2004 issue that Citigroup had bundled essentially
worthless Parmalat debt and sold it in the form of asset backed
commercial paper to what U.S. investors thought were among the safest
and most liquid investments: money market funds. Unfortunately, the
incendiary Parmalat/Citigroup money market story failed to get picked
up by mainstream media.

Now, once again, one of the most troubling aspects of the current
Citigroup debacle that has gone unreported is the extent to which these
opaque and convoluted debt instruments managed by Citigroup, called
CDOs (collateralized debt obligations), got dumped into Cayman Islands
SIVs, transmuted into AAA-rated commercial paper, landed in the
so-called safe money market funds in the U.S., including an astonishing
amount at Citigroup's competitor, Merrill Lynch.

According to Standard & Poor's Structured Finance research reports,
Citigroup is managing the following Structured Investment Vehicles
(SIVs), incorporated in the Cayman Islands and not consolidated on
Citigroup's balance sheet: Centauri Corp., Beta Finance Corp., Sedna
Finance Corp., Five Finance Corp., and Dorada Corp. (1) In addition,
according to press reports, Citigroup created two more SIVs as recently
as November 2006: Zela Finance Corp. and Vetra Finance Corp. (2) These
SIVs contain approximately $80 Billion in what is increasingly being
viewed as toxic debt.

Knowing the history of Citigroup and knowing the safety and liquidity
requirements for money market funds, how did one of the oldest and most
sophisticated firms on the street, Merrill Lynch, end up with a
boatload of this SIV paper in its various money markets? The most
troubling of its money market exposure as of its July 31, 2007 filing
with the SEC is its Citigroup managed SIV commercial paper positions in
what one would think would be the safest of all its money market funds,
the Merrill Lynch Retirement Reserves Money Fund. Merrill's SEC filing
shows $52.9 Million in Beta Finance, $53 Million in Five Finance, $10
Million in Sedna Finance, and $10.7 Million in Zela Finance. (3)

In a research report written by Meredith Whitney for CIBC World Markets
on October 31, 2007, there is a key clue to why Citigroup has finally
lost the confidence of the street: "While Citigroup has stated that it
will not consolidate the assets of these 7 SIVs, it will continue to
provide liquidity. As such, Citigroup's assets would increase as it
extends short term funding to SIVs. With a bigger asset base, or
denominator, Citigroup's capital ratios would decline. While not
specifically disclosed, we know that part of the 6% sequential increase
in Citigroup's 3Q07 total assets was from the addition of commercial
paper issued to SIVs." (Translation: it can't find a new sucker to roll
over its maturing SIV commercial paper; it has become the sucker of
last resort along with its balance sheet.)

Citigroup's ignoble beginning foreshadowed its sorry state today. It is
the Frankenbank created back in 1998 out of the body parts of Travelers
Insurance, Salomon investment bank, Smith Barney brokerage, and retail
banking giant Citibank, with the brain of Wall Street titan, Sandy
Weill, implanted firmly to run a confidence game of unprecedented
proportions. (Mr. Weill retired from the firm a few years ago after it
made him a billionaire.)

Citigroup's creation required the repeal of depression-era investor
protection legislation (Glass-Steagall Act) put in place to prevent
stock brokerages and investment banks that are prone to high risk,
speculation and collapse from merging with commercial banks that hold
deposits earmarked for safety by a frequently gullible public.

I recently found in my files from that time a letter addressed to me
from one Robert Frierson, Associate Secretary of the Board of Governors
of the Federal Reserve System. The letter is dated September 23, 1998.
It is one of those quixotic examples of the relics of "we the people"
government struggling for air in the "we the corporations" era.

The letter is formal and polite and on watermarked paper with a faint
outline of our Nation's capital silhouetted underneath its ominous
text. The letter advises me that Frankenbank is going to move forward
but my testimony had been considered.

The letter was a followup to the public testimony I gave against the
merger on Friday, June 28, 1996 at the Federal Reserve Bank of New
York. Galen Sherwin, then President of the National Organization for
Women in New York City (now a civil rights lawyer for the New York
Civil Liberties Union) and I, then a naively optimistic civil rights
litigant against one of Weill's firms, had planned to simply protest
outside the building during the testimony by Sandy Weill sycophants.
Instead, we were pleasantly surprised to be courteously ushered inside,
giant protest signs and all, and afforded a slot to speak on one of the
panels. (Both the Federal Reserve's typed transcript of the testimony
and my hastily hand scribbled remarks are permanently archived on the
web site of this peculiar institution.) (4)

Here is an excerpt of what I had to say nine years and 90 Citigroup
market manipulations ago:

    "It is amazing how soon we forget. It was just 60 years ago that
4,835 of America's banks went broke and closed their doors, leaving
shareholders and depositors destitute. The underlying reason that this
happened was the lack of moral courage by our regulators and elected
representatives to just say no to powerful money interests. Instead of
just saying no, Washington handed the banks the equivalent of an ATM
card to the Fed's discount window to speculate in stocks ... We also
want to remember that the political dynamics that created the backdrop
for the banking meltdown in the '30s grew from a corrupt, cozy culture
between Wall Street and Washington ... We can hardly look to the
safekeepers of the public trust when they are falling over themselves
to reap campaign windfalls from Wall Street. Washington and regulators
are quick to criticize moral hazard when it is on foreign shores. Let's
look at the moral hazard incubating at Travelers and Smith Barney. In
1996, when the SEC and the Justice Department found that Smith Barney
was one of 24 firms fleecing their own customers through six or more
years of price fixing, no one went to jail. Within the last two years,
when a special prosecutor found that Smith Barney had bribed the former
U.S. agricultural secretary, again, no one went to jail. The firm is
currently under investigation by various municipalities for the
fraudulent markup of treasury securities, and that, in fact, is enough
to hold up this merger, since a criminal charge against a primary
dealer of treasury securities would lend its taint to one of America's
major money center banks ... ."

Ms. Sherwin testified regarding the private justice system at Weill's
Salomon Smith Barney that barred employees from accessing the nation's
courts as a condition of employment. That system was successfully
transplanted to the merged behemoth Citigroup and helps to explain how
transparency vanished at what Ms. Sherwin predicted to the Fed in 1998
would "grow into a bloated corporate tyrant."

In the end, all Ms. Sherwin and I had for our efforts was a letterhead
souvenir from the Fed and a web site archive reminding us we tried.

We were trumped by a stream of sycophants, nonprofits receiving money
from the subject under scrutiny.

Here's a representative example of what the Fed considered against our
testimony. Note that this doctor admits he has "no special credentials
in business economic matters" and then proceeds to urge the most
dangerous financial merger in the history of the world because he likes
Sandy Weill, whose name, by the way, is engraved on the building he
enters each day to receive a pay check.

"My name is Alberto Gotto. I am the provost for Federal Affairs at
Cornell University and the dean of the Joan and Sanford I. Weill
Medical College in New York City. Here as the dean of the medical
college in New York City, practicing physician and medical educator, I
have no special credentials in business economic matters, but I do want
to speak about an area in which I do have special and particular
knowledge, and that concerns the excellent corporate citizenship of the
Travelers Group and its Chairman and CEO Sanford I. Weill." (5)

The Bush administration would like to spin the current Wall Street
crisis as the product of millions of hapless poor people with bad
credit ("subprime") defaulting on their mortgages. Thus, it's been
dubbed "the subprime mess" in headlines spanning the globe. That poor
people were tricked into unconscionable mortgages predestined for
foreclosure by a Citigroup subsidiary, CitiFinancial, and other
predatory lenders, is but a symptom of the real disease and crisis. (6)

The Citigroup debacle rises from the same ideology creating endless
reports on failures of Federal agencies to perform their oversight
roles in protecting the American people with the taxes we give them to
do just that. Viewed collectively, one can only conclude that the Bush
administration has reengineered these taxpayer supported agencies to
stand down on corporate malfeasance with a mantra of corporate profits
before people and the flimsy overt pretext that free markets will
handily function in the place of regulators with subpoena power.

After millions of lead paint infested toys slipped by the Consumer
Product Safety Commission, dangerous drugs were rubberstamped by the
Food and Drug Administration (FDA), (only to be recalled after hundreds
of thousands of injuries, including death), FEMA, the Department of
Defense and Attorney General's office discredited for political
cronyism, along comes the Citigroup hubris as the poster child crying
out for timely enforcement of rules and regulations.

Citigroup's 10k filing with the SEC states that as a bank holding
company it is subject to examination by the Board of Governors of the
Federal Reserve. Having failed to heed the warnings nine years ago,
perhaps the Fed will listen now and hold that long overdue examination.


(1) Standard & Poor's on Citigroup's SIVs:
http://www.globalclearinghouse.org/wefbrazil/Docs/DerivativeProductCo.S%26P.pdf

(2) Citigroup creates two more SIVs in November 2006:
http://www.allenovery.com/AOWEB/NewsMedia/Editorial.aspx?contentTypeID=1&contentSubTypeID=7946&itemID=34301&prefLangID=410

(3) Merrill Lynch's holdings of Citigroup SIVs as of 7/31/2007 in one
money market.
http://www.sec.gov/Archives/edgar/data/356013/000119380507002461/e602645_nq-mlretirement.txt

(4) Pam Martens' and Galen Sherwin's testimony to the Federal Reserve
Board against the merger creating Citigroup. See Panel 25.
http://www.federalreserve.gov/events/publicmeeting/19980625/

(5) Alberto Gotto's testimony to the Federal Reserve. See Panel 20.
http://www.federalreserve.gov/events/publicmeeting/19980625/

(6) Anita Hill reports in this Boston Globe article how CitiFinancial
preyed on the uneducated and minorities:
http://www.boston.com/business/personalfinance/articles/2007/10/22/women_and_the_subprime_crunch/

See additional Congressional testimony here:
http://judiciary.house.gov/OversightTestimony.aspx?ID=880


[Pam Martens worked on Wall Street for 21 years; she has no securities
position, long or short, in any company mentioned in this article. She
writes on public interest issues from New Hampshire.]