Markets are still absorbing the Federal Reserve’s surprising smack-down of Citigroup. Under its chief executive officer, Michael Corbat, Citi had greatly strengthened its capital base — indeed, it had one of the best capital ratios of all the big banks — and had proposed modest dividend increases and stock buybacks.  Instead, City was the only big American bank that failed its review.

The Fed announcement, perhaps harking back to the Alan Greenspan tradition, was gnomic, to say the least. The Citi bombshell was buried in a few lines in both the press release and the much longer official statement.

While acknowledging Citi’s stronger capital position, the Fed stated that the rejection was based on “qualitative” weaknesses, including the bank’s “[in]ability to develop scenarios … that adequately reflect and stress its full range of business activities and exposures.” The bank will eventually be handed a detailed bill of particulars, perhaps in a week or so.

Corbat, a former Harvard football all-American, is a Citi lifer, with hands-on experience at most of the company’s hot spots. He was elevated specifically in 2012 to rebuild its balance sheet and strengthen internal controls.  Both he and his board seem to have been badly wrong-footed by the Fed turndown — Corbat had planned to dial into the Fed phone call from South Korea, but had to rush home to deal with the crisis.

The stress test failure came on top of a cascade of adverse events.

In late February, Citi had announced that its Mexican subsidiary, known as Banamex — the jewel of its international network — was out $400 million because of a garden-variety fraud operation. One Banamex client, a local oil servicing company, had regularly borrowed against its contracts with Pemex, the Mexican state oil company.  Banamex discovered, by accident it appears, that Pemex had previously suspended this client, but the client had continued to borrow against forged contract documents. Investigations are underway, and reports are that at least one Banamex employee was complicit in the fraud, possibly in collusion with some U.S.-based employees.