Repo’s role in Citigroup’s 2008 implosion

In this January 2011 accounting of the Citigroup implosion in late 2008 by the Office of the Special Inspector General of the Troubled Asset Relief Program (SIGTARP), authors stress that the too-big-to-fail problem is still with us.

They also write repeatedly about the role the repurchase market played in the crisis while rarely mentioning the R-word (repo).

Selections from the report:

Federal Reserve Board (FRB) Chairman Bernanke told SIGTARP that Citigroup’s biggest problems were credit and confidence, and an Federal Reserve Bank of New York (FRBNY) official told SIGTARP that FRBNY had observed this same type of activity preceding the failure of Lehman. He told SIGTARP that “banking is a game of confidence…and we saw the behavior and the lack of confidence, …[which] was alarming.” …

By mid-November 2008, Citigroup had started receiving calls from investors, counterparties, fund
managers, and other professional investors inquiring about the viability of the institution, and asking for more and better collateral on Citigroup debts that the investors held. The Office of the Comptroller of the Currency Deputy Comptroller for Large Bank Supervision told SIGTARP that “numerous counterparties called with concerns about counterparty risk.” FRBNY President Geithner told SIGTARP that he observed the stock price declining and funding becoming shorter term and more expensive on a daily basis.

According to an FRBNY official, by November 21, 2008, counterparties began to “pull back from
Citigroup” because of its perceived decline in creditworthiness. This meant, as he described it, that Citigroup’s counterparties were increasingly unwilling to engage in financial transactions with Citigroup or to provide it with credit. These included federal funds market counterparties (other depository institutions that would normally extend Citigroup credit in overnight borrowing) and, even more troubling, secured financing counterparties. The FRBNY official described short-term funding through secured financing as a “good liquidity barometer.” Liquidity is the degree to which an asset can be easily converted to cash.

An FRBNY official told SIGTARP that it was “a bad sign” when lenders started to differentiate Citigroup’s collateral from its peers or declined short-term funding for Citigroup. Another FRBNY official stated that it was clear the market was singling out Citigroup, as its peers were not experiencing the same problems. Citigroup was also having difficulty issuing commercial paper. A former Citigroup Treasurer told SIGTARP that it became hard for Citigroup to finance commercial paper for any length of time beyond overnight but stated that it was not an important avenue of liquidity. FRBNY officials told SIGTARP that commercial paper purchasers such as mutual funds lost confidence in Citigroup’s ability to repay, which forced Citigroup to issue debt with shorter maturities….

Specifically, FRB regulators believed that a Citigroup failure would have destabilized the global financial system by seriously impairing already disrupted credit markets, including short-term interbank lending, counterparty relationships in qualified financial contract markets, bank and senior subordinated debt markets, and derivatives. (A qualified financial contract is a type of financial agreement that includes, but is not limited to, securities contracts, forward contracts, repurchase agreements, and swap agreements.)

Regarding the too-big-to-fail situation, the report concludes:

The Government’s actions with respect to Citigroup undoubtedly contributed to the increased moral hazard that has been a direct byproduct of TARP. While the year-plus of Government dependence left Citigroup a stronger institution than it had been, it remained, and arguably still remains, an institution that is too big, too interconnected, and too essential to the global financial system to be allowed to fail.
When the Government assured the world in 2008 that it would not let Citigroup fail, it did more than reassure troubled markets – it encouraged high-risk behavior by insulating risk takers from the  consequences of failure.


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