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Did Citigroup improperly value repo collateral?

Revelations today by Bloomberg columnist Jonathan Weil raise important questions about operations in the repurchase market during the financial crisis of 2007 and 2008.

Weil reports that Citigroup Inc. executives knew in February 2008 that the giant bank’s internal controls were a “mess,” including the way it valued mortgage securities, yet somehow the executives and their auditor KPMG LLP failed to tell Citigroup shareholders about the shortcomings.

Weil draws this information from documents the Financial Crisis Inquiry Commission has posted to its web site as it winds down its operations.

If Citigroup inaccurately valued its mortgage securities, that raises at least three issues for the repurchase market:

– Does this mean Citigroup was knowingly using inaccurately valued securities as collateral for repo loans?
– Does this lend credibility to repo borrower allegations that lenders arbitrarily devalued collateral during the crisis, forcing borrowers to scramble to raise more collateral or suffer sometimes fatal losses, and driving the bank panic in 2007 and 2008?
– Does this mean valuation of asset-backed securities can never be reliable and securitization is irreparably broken?

 The Financial Crisis Inquiry Commission did not ask nor answer these questions, and Weil did not mention them.

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