Vikram Pandit’s deceptive reporting

By Felix Salmon
February 24, 2011

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On February 14, 2008, John Lyons, the examiner in charge of large bank supervision at the OCC, sent Citigroup and its auditors a scorcher of a valentine. In a nutshell, it said that Citigroup had no idea what it owned and had no idea how to value it. “Risk management had insufficient authority,” it said, the board “had no effective oversight role,” and “matters requiring attention” ranged from corporate governance and risk management in general and CDO valuation in particular.

Eight days later, on February 22, Citi unveiled its annual report to shareholders. In that report, Vikram Pandit personally attested that Citi had full control over its finances and that its valuations were reliable; the auditor, KPMG, said exactly the same thing.

The FCIC should have asked questions about this — after all, the OCC letter comes from its own archives. But it doesn’t seem to have done so, which means that it has fallen to Jonathan Weil to do the digging and to construct a timeline and to ask awkward questions. The problem is that Weil, as excellent as he is, doesn’t have nearly the power that the FCIC had. So he can get stonewalled easily:

Pandit, Crittenden and O’Mara didn’t return phone calls. A KPMG spokesman, George Ledwith, declined to comment, as did an OCC spokesman, Kevin Mukri. A Citigroup spokeswoman, Shannon Bell, declined to discuss the OCC’s findings.

It’s now certain that Citi and its auditors were well aware of the problems the bank had in valuing its assets — those problems were clearly spelled out to the bank in a formal letter from its regulator. And yet, as Weil writes:

Somehow KPMG and Citigroup’s management decided they didn’t need to mention any of those weaknesses or deficiencies. Maybe in their minds it was all just a difference of opinion. Whatever their rationale, nine months later Citigroup had taken a $45 billion taxpayer bailout, still sporting a balance sheet that made it seem healthy.

Both Pandit and KPMG are still in place; their la-la-la-la-we-can’t-hear-you approach to disclosure seems to have worked perfectly. But the SEC should look into this. It’s the formal disclosures in the 10K which now look deceptive at best and downright fraudulent at worst. I know it’s fun to chase hedge funds for insider trading. But we’re still waiting for the crisis-related prosecutions to begin, and this would seem to be a fruitful place to start — especially given Pandit’s newfound hero status.

Update: Shannon Bell emails with the full official statement from Citi:

“Citi maintains rigorous disclosure controls and procedures to support its CEO and CFO certifications.  These controls and procedures were followed in connection with the filing of the 10k in February 2008, and Citi’s certifications were entirely appropriate.”

(Cross-posted at CJR)

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3 comments so far

Unfortunately, the SEC and other regulators may have made themselves irrelevant on these types of issues. The real action may need to be a lawsuit from investors who lost money when Citicorp tanked big time after Pandit and Citi’s auditors announced that internal controls were just fine.

Posted by ErnieD | Report as abusive

Right on, ErnieD. If no one steps up to make the robber barons accountable for their actions, it’s going to keep on happening… and only get worse.

Posted by hsvkitty | Report as abusive

We must not blame Citigroup only. What is described in the article is the failure of the Basel II framework, not Citigroup. Fortunately, Basel III is way better, although we cannot expect that it will solve all the problems.

The article covers what happened in February 2008. In July 2009 we had the enhancements to the Basel II framework that try to mitigate these risks.

According to the Basel Committee:

“The supplemental Pillar 2 (supervisory review process) guidance addresses several notable weaknesses that have been revealed in banks’ risk management processes during the financial turmoil that began in 2007.

The areas addressed include:

– Firm-wide governance and risk management;
– Capturing the risk of off-balance sheet exposures and securitisation activities;
– Managing risk concentrations;
– Providing incentives for banks to better manage risk and returns over the long term; and
– Sound compensation practices.

The Pillar 3 (market discipline) requirements have been strengthened in several key areas, including:

– Securitization exposures in the trading book;
– Sponsorship of off-balance sheet vehicles;
– Resecuritization exposures; and
– Pipeline and warehousing risks with regard to securitization” exposures

George Lekatis

Posted by GeorgeLekatis | Report as abusive
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