Citigroup's Leadership and the FDIC

According to the Wall Street Journal, the Federal Deposit Insurance Corp (FDIC) thinks that something stinks with regard to its recent review of Citigroup’s management.  This is detailed in the article “Review of Citi Draws Wary FDIC Response” (10/6/09, Section C1).        

First, let me provide a little background information about Citigroup’s situation.  Citigroup is one of the largest banks in the world, and has to date taken about $50 billion dollars in government money in order to stay afloat in the wake of the financial crisis.  Citigroup was one of the largest players in the mortgage markets, as well as other risky dealings, which has led it to the brink of collapse.  Since 2007 both the value of Citigroup as well as its shares have lost over 90% of their value (this according to articles from the BBC and the New York Times which I found online).  Many people believe that Citigroup continues to be insolvent.  The problem is that Citigroup is so large that its collapse would almost certainly trigger another meltdown of the financial markets.  This is what worries the FDIC, who has to insure all of those bank accounts that Citigroup maintains.  Should Citigroup go under, the FDIC (with tax payer money) would be responsible to make investors whole with regard to their savings, and up to $250,000 each.  The FDIC naturally wants to make sure that the right people are in the right management positions at Citigroup so that a collapse can be averted, and Citigroup can eventually return to solvency.

What alarms the FDIC is not that the report about Citigroup’s management was so bad—it was that it was so good.  Some at the FDIC have “expressed doubts about the rigor of the report, which was based partly on interviews of Citigroup executives who were asked to rate the effectiveness of their colleagues,” states the Journal.  It is obvious that what troubles the FDIC is that this information may not be accurate because of the way it was collected.  The integrity of the data is clearly in dispute.  According to the article, “One person close to the agency described the outside report as ‘a total whitewashing.’”  A firm called Egon Zehnder was commissioned to do the study.  There are also now questions about the qualifications of that firm. 

This is a management dilemma that impacts not only Citigroup and the FDIC, but all of us taxpayers as well.  We have already invested billions into propping Citigroup up, and could be on the hook for billions more if something happens.  It is therefore incumbent upon the FDIC to make sure that right and proper studies are being done to adequately assess Citigroup’s leadership.

If Citigroup were truly interested in turning themselves around, they would be inclined to adequately assess of their own company.  Unfortunately, what is happening here smacks of corruption and underscores why the government should not be involved in these matters to begin with.  If true, free markets were being utilized Citigroup would no longer be in business.  The FDIC has swooped in, taken over, and dismantled hundreds of insolvent small banks in the wake of this crisis.  There must be significant frustration that they can’t do that here.  This is a real conundrum because basically the only people who can really fix this problem are the leaders of Citigroup—the very same leaders who is being questioned by the FDIC.  Citigroup’s management will one day truly need to assess their bank, without the whitewashing, if they ever want to get the government out of their hair.