Citigroup's Pandit, Feds Ignore the Elephant in the Room

Last Updated Mar 4, 2010 3:05 PM EST

In an extraordinary piece of political theater, Citigroup (C) CEO Vikram Pandit this morning ducked, bobbed and weaved his way through questions from members of the federal Congressional Oversight Panel about whether the banking giant is too big to fail.

"We're only as big as what is required to serve our clients in a competitive market," said Pandit, who has shunned the media spotlight even as other top banking executives run the gauntlet in Washington. "I completely agree that we or no other institution should get to a too big to fail situation," he added.

Several of the panelists, particularly AFL-CIO director of policy and special counsel Damon Silvers, seemed stunned by some of Pandit's remarks. "I think you've given clear answers, but I don't believe you've given credible answers."

I second the motion. One niggling detail undermines Pandit's suggestion that Citi has yet to reach a TBTF "situation": history. If memory serves, this is the company that in the heat of the financial crisis had to get $45 billion in TARP funds and a $300 billion guarantee from the federal government lest it melt into a puddle of bad debt.

COP chairwoman and Harvard law prof Elizabeth Warren took another tack in trying to draw Pandit out on the question of whether Citi is systemically risky. She asked if the perception among investors that Citi is effectively insured by the government against losses benefits the company's credit rating, tilting the industry playing field in its favor.

Again, Pandit refused to bite. He argued that the markets look at many factors, such as a banking company's earnings, capital reserves and liquidity, in judging its prospects.

OK, let's answer the question for him: Yes. Citi has an A credit rating -- much higher than a company in its enfeebled condition deserves -- for one reason, which is that everyone knows that Uncle Sam has its back. But don't take my word for it. Here's Standard & Poor's in a Feb. 9 report in which the ratings agency flatly states that the only reason Citi retains a strong credit rating is because of that government safety net:
We continue to assume that the U.S. government will support highly systemically important financial institutions such as Citi at the 'A' holding company rating level. Given what we view as improvement in Citi's stand-alone credit profile, removal of extraordinary government support as a rating factor could result in a downgrade of Citi, but to a lesser extent than under prior scenarios.
If Pandit wouldn't acknowledge that Citi is TBTF, senior U.S. Treasury official Herb Allison, who also addressed the panel, wouldn't even admit that Citi was essentially broke when taxpayers bailed it out. Asked repeatedly about whether Citi is systemically risky, he conceded only that Citi "and other banks were on the brink of failure" in late 2008. Thanks for clearing that up.

"I'm disappointed at how you're narrowing your testimony," Silvers snapped, adding the he didn't understand "why it is that the U.S. government can't admit what everyone in the world knows, which is that Citigroup... was a failing institution."

That's easy. Because if it did, the government would have to do something serious to ensure that it never again has to rescue a dangerously big bank. The only way to do that is to break up financial giants like Citi. And the Obama administration, along with the financial industry, is on the record as opposing that idea.
  • Alain Sherter On Twitter»

    Alain Sherter is an award-winning business journalist who has written for The Deal, MarketWatch and Thomson Financial Media.

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