So Citi basically got the troubled asset protection it sought from the government in the Wachovia deal. Here’s Zaring and Carney and the government statement.
Yesterday’s Times did a pretty good job of describing how Citi went off the rails. Among other things, a dysfunctional risk management system (the risk officer went fishing with the head of the bond business he was supposed to be supervising); a CEO (Prince) who “didn’t know a C.D.O. from a grocery list"); advised by Robert Rubin, who pushed for more risk.
How bad was it? “Citigroup’s risk models never accounted for the possibility of a national housing downturn.” That ridiculous notion, as I've said, was at the heart of AIG and many other companies, which I've described as "living in a child's world in which real estate prices always go up."
Citi was bolstered in its absurd assumption by the bond raters. The Times quoted John Dugan, head of Comptroller of the Currency, as saying: “There is really no excuse for institutions that specialize in credit risk assessment, like large commercial banks, to rely solely on credit ratings in assessing credit risk.”
No excuse, but why did it happen? There will be a temptation to blame the individuals. I suspect, for example, that this will kill a major role for Rubin in the Obama administration.
But I’ve been saying for awhile that the problem is in the structure. We have seen in the current meltdown and in Enron that conventional corporate governance has not been able to handle the opaque complexity. As I've pointed out:
These firms apparently did not have a governance model suited to investing in an increasingly complex world. The regulators (SEC) couldn’t be expected to fill the gap. I have already discussed where this is headed: nimble, highly incentivized partnerships such as hedge funds, private equity, venture capital.
Markets will produce this result on the off-chance we're prepared to let them. I fear that we’re more likely to see regulation that shores up the status quo – the continued dominance of giant corporations that mucked up the banking system.
Comments