Senator Elizabeth Warren (D-Mass). Photo credit: Wikimedia Commons.
Elizabeth Warren, the Democratic senator from Massachusetts, is mad at Citigroup (C 0.32%). And, at least in a general sense, justifiably so. But what she evidently fails to realize is that she's mad for the wrong reason.
Warren's beef with Citigroup
The senator expressed her frustration with the nation's third largest bank in a heated speech on the Senate floor last week. She was angry after a purported Citigroup-written addition to a spending bill repealed the so-called swaps push-out rule, which would have forced Wall Street banks to move risky derivatives out of their federally insured subsidiaries.
Warren's beef doesn't necessarily stem from the rule's repeal, though there's no question that factors into it, but rather from the fact that it serves as an unwelcome reminder of the lobbying power of Wall Street, and Citigroup in particular.
"In recent years, many Wall Street institutions have exerted extraordinary influence in Washington's corridors of power," she said. "But Citigroup has risen above the others."
Warren then proceeded through a laundry list of government officials with "close Citigroup ties," including three of the last four Treasury secretaries under Democratic presidents, the current vice chair of the Federal Reserve, the undersecretary for international affairs at the Treasury, a recent chair of the National Economic Council at the White House, and two former chairs of the Office of Management and Budget, among others.
The real issue with Citigroup: It's a lousy bank
Now, to be clear, I'm sympathetic to Warren's point, as I'm no fan of Wall Street banks. However, the fundamental problem isn't that Citigroup exerts too much power in Washington -- it is, after all, one of the nation's biggest financial institutions, with upwards of $2 trillion on its balance sheet. The problem instead is much simpler: Citigroup is a lousy bank.
Since the Roaring Twenties, which preceded the Crash of 1929 and thus the Great Depression, the New York-based lender has been mauled, and many times existentially so, by virtually every crisis and downturn to even tangentially touch the financial industry.
- In the early 1920s, sugar loans to Cuba "threatened to wipe out the total capital of the bank."
- Later that decade, its securities affiliate quietly repackaged failing bank loans to Latin American countries into bonds that were then sold to unwitting mom-and-pop investors across the country.
- In the early 1930s, it underwrote more than $100 million in loans and bonds for the Swedish "match king," Ivar Kreuger, who turned out to be running a Ponzi scheme.
- Half a century later it again lent billions of dollars to many of the same Latin American countries after its chairman and CEO at the time, Walter Wriston, proclaimed that "countries don't go bust."
- During the late 1990s, it fueled the Internet bubble by publishing fraudulent research reports about publicly traded telecommunications firms to artificially inflate the latter's share prices.
- Following the turn of the century, Citigroup was fined $4.75 billion for aiding and abetting the frauds at Enron and WorldCom.
- And, of course, if it weren't for an estimated half a trillion dollars in support from the federal government during the crisis of 2008-09, Citigroup would have followed Lehman Brothers into bankruptcy court.
And these are just to mention the most noteworthy examples of its ineptitude and outright duplicity, as it's also participated in recent scams to rig the foreign exchange and interest rate markets, and over the past five years it's paid $13.1 billion in fines and settlements to atone for mortgage and foreclosure fraud.
Citigroup: the Wall Street equivalent of kryptonite
Thus, to restate my point, the problem isn't that one institution above others wields too much influence in the corridors of federal power -- though, in Warren's defense, there's certainly reason to believe this is true. The real problem is that the institution that ostensibly does -- namely, Citigroup -- is a sorry excuse for a bank. It would be different, in other words, if, say, Wells Fargo or US Bancorp were pulling the strings.
Citigroup has proved time and again throughout history -- or, at least, since the Rockefeller family switched allegiance to Chase and therefore relinquished adult supervision of Citigroup's predecessor institution, National City Bank, early in the 20th century -- that it poses a systemic threat to the stability of the U.S. financial system.
Are these infirmities inseparable from the banking behemoth's underlying business model, or they are simply the result of a long period of egregious mismanagement? I don't know the answer, though given its history, one would be excused for concluding it's the former.
What I do know, however, is that Citigroup is the Wall Street equivalent of kryptonite. Its imprudent credit policies and insatiable appetite for risk have contributed to the soaring cost of FDIC insurance premiums at banks across the country. Its reoccurring calamities disgrace the entire U.S. financial system. And, thanks to its egregious losses during the financial crisis, its long-term shareholders have seen the value of their stake in the company drop by a staggering 90%.
Thus, at the end of the day, the issue isn't that banks are too big to fail. The issue also isn't that big banks exert an undue amount of influence in Washington. The issue is that we allow so many leaders from such a miserably led institution to creep into the inner sanctum of power. Perhaps this helps to explain why Washington itself so often fails to get things right.
