Vikram Pandit’s Material Mistatements

It appears that Vikram Pandit’s failure to disclose material problems with Citibank’s valuation of its shitpile is another of the crimes we’re supposed to look forward and ignore. Jonathan Weil looks at how one of the documents disclosed in the FCIC dump–a February 14, 2008 OCC report finding that Citibank’s models for measuring the value of its shitpile were crap.

The gist of the regulator’s findings: Citigroup’s internal controls were a mess. So were its valuation methods for subprime mortgage bonds, which had spawned record losses at the bank. Among other things, “weaknesses were noted with model documentation, validation and control group oversight,” the letter said. The main valuation model Citigroup was using “is not in a controlled environment.” In other words, the model wasn’t reliable.

That report was addressed to Vikram Pandit.

But eight days later, in the annual report that Pandit certified himself, Citibank made no mention of its shitpile valuation problems.

Eight days later, on Feb. 22, Citigroup filed its annual report to shareholders, in which it said “management believes that, as of Dec. 31, 2007, the company’s internal control over financial reporting is effective.” Pandit certified the report personally, including the part about Citigroup’s internal controls. So did Citigroup’s chief financial officer at the time, Gary Crittenden.The annual report also included a Feb. 22 letter from KPMG LLP, Citigroup’s outside auditor, vouching for the effectiveness of the company’s financial-reporting controls. Nowhere did Citigroup or KPMG mention any of the problems cited by the OCC. KPMG, which earned $88.1 million in fees from Citigroup for 2007, should have been aware of them, too. The lead partner on KPMG’s Citigroup audit, William O’Mara, was listed on the “cc” line of the OCC’s Feb. 14 letter.

Now, if DOJ actually want to jail a high level criminal, this is the kind of easy thing they ought to look into. And perhaps Pandit’s failure to disclose Citi’s problems modeling shitpile is one of the things FCIC referred to DOJ.

But I doubt it. Pandit’s a former MOTU, after all, and MOTUs simply shouldn’t be bothered with minor things like misleading stockholders.

  1. PJEvans says:

    MOTUs simply shouldn’t be bothered with minor things like misleading stockholders.

    The stockholders may have a very different opinion. If they’re allowed to notice this….

  2. WilliamOckham says:

    Every new revelation makes me think of Enron. Apparently Skilling and Lay’s mistake was that they didn’t get everyone else in the business to go along…

    • thatvisionthing says:

      It reminds me of Lehman and the bankruptcy examiner’s report — one method Lehman used to value its assets was to compare them to Citigroup’s values — and also of EW’s recent post on how no one can keep track of operatives in Pakistan:

      Sunday, March 14, 2010
      Frank Partnoy: Lehman Examiner Punted on Valuation

      But an even more troubling section of the Lehman report is not Volume 3 on Repo 105. It is Volume 2, on Valuation. The Valuation section is 500 pages of utterly terrifying reading. It shows that, even eighteen months after Lehman’s collapse, no one – not the bankruptcy examiner, not Lehman’s internal valuation experts, not Ernst and Young, and certainly not the regulators – could figure out what many of Lehman’s assets and liabilities were worth. It shows Lehman was too complex to do anything but fail.

      The report cites extensive evidence of valuation problems. Check out page 577, where the report concludes that Lehman’s high credit default swap valuations were reasonable because Citigroup’s marks were ONLY 8% lower than Lehman’s. 8%? And since when are Citigroup’s valuations the objective benchmark?

      bold in the original

      • thatvisionthing says:

        And Lehman’s couldn’t have done it without the Geithner and the NY Fed:

        Time for Truth: Three Card Monte is for Suckers
        Tuesday, 03/16/2010 by Eliot Spitzer and William Black

        …Translation: The FRBNY knew that Lehman was engaged in smoke and mirrors designed to overstate its liquidity and, therefore, was unwilling to lend as much money to Lehman. The FRBNY did not, however, inform the SEC, the public, or the OTS (which regulated an S&L that Lehman owned) of what should have been viewed by all as ongoing misrepresentations.

        …The Fed wanted to maintain a fiction that toxic mortgage products were simply misunderstood assets, so it allowed Lehman to maintain the false pretense of its accounting. We now know from Valukas and from former Treasury Secretary Paulson that the Treasury and the Fed knew that Lehman was massively overstating its on-book asset values: “According to Paulson, Lehman had liquidity problems and no hard assets against which to lend” (p. 1530). We know from Valukas’ interview of Geithner (p. 1502):

        The challenge for the government, and for troubled firms like Lehman, was to reduce risk exposure, and the act of reducing risk by selling assets could result in “collateral damage” by demonstrating weakness and exposing “air” in the marks.

        Or, in plain English, the Fed didn’t want Lehman and other SDIs to sell their toxic assets because the sales prices would reveal that the values Lehman (and all the other SDIs) placed on their toxic assets (the “marks”) were inflated with worthless hot air. Lehman claimed its toxic assets were worth “par” (no losses) (p. 1159), but Citicorp called them “bottom of the barrel” and “junk” (p. 1218). JPMorgan concluded: “the emperor had no clothes” (p. 1140). The FRBNY acted shamefully in covering up Lehman’s inflated asset values and liquidity.

        I learned a new word the other day, “scienter.” If Citicorp can call Lehman’s crap “bottom of the barrel” and “junk” (p.1218), and Lehman’s values its crap on par in relation to Citicorp… and Paulson and Geithner and JPMorgan and Fuld and the auditors and everybody’s in on it — isn’t there a whole lot of scienter going on?

        • jdmckay0 says:

          Or, in plain English, the Fed didn’t want Lehman and other SDIs to sell their toxic assets because the sales prices would reveal that the values Lehman (and all the other SDIs) placed on their toxic assets (the “marks”) were inflated with worthless hot air.

          This wasn’t unique to Lehman BTW… the entire mortgage bond machine was doing the exact-same-thing: rating services, nation (and global) wide web of “retail” marketing arms for these things, AIG’s “book” looking only @ margins for services while (literally) uninterested in valuations underlying assets they “re-insured”.

          On retail end, GS also did exact same thing. They’ve managed to spin this by claiming they “hedged”. But their “hedges” were paper tigers which they knew full well had no assets to back up their “bets”. So in a courtroom they had (arguably, if FED had not interceded) some legal claim, they similarly ignored everything… *everything* along the way w/in US economic environment which was shouting loudly these things were going to crash.

          GS also had the WH connection of course…

          When William says this all reminds of Enron, I have same thoughts as I watch things almost daily. Specifically, 2 common characteristics they shared:

          a) hid their debt in one way or another… massive debt. PRETEND it’s not there, and use legal/accounting mumbo jumbo to separate themselves from responsibility for that debt. This stuff differed from previous similar endeavors in scope/volume, and in much greater disparity between real vs. claimed value.

          b) planned plunder… ENRON planned it. Their big profit scheme that send them under was a, literally, explicit plan to take California under and scoop up the spoils. WRT these mortgage bonds, exact same thing: most of ’em knew by (at latest) mid ’05 their valuations were way off, and headed down given huge volume of ARM resets pending. Yet, they continued to lend/package/sell as AAA right until the wheels came off… JUST LIKE ENRON. Conscious plunder.

          The big lie is perversion of intent/action in both adding true value by lieing about it. We (people I worked w/for years, especially in 80/90’s) used to describe “value” in terms of “principles of contribution”. EG. an meaningful addition to the environment in which one interacts w/their work.

          This changed w/these guys: there was no contribution, only takings. Massive, massive takings.

          By masking these valuations (as your quote describes), there obviously were conscious decisions made on high (both by BushCo, but BO later as his continuity w/bailouts shows) to both…

          a) conspire to lie about/mask valuations, (from what I gathered) hoping upon hope for a housing rebound… something fundamentally impossible in our current econ environment.
          b) ignore the fraud… massive takings, w/working assumption same “financial system” which executed said fraud would, w/taxpayer refunding, lead nation to “recovery”.

          This is my single largest source of disgust w/BO… he knew what happened, he knew nuts & bolts of this “crisis”. And he had good advise from a lot of smart people to reconstitute the “system” in one of several ways which greatly diminished direction setting roles of WS crooks. Instead, BO made his bed w/them.

          We’re all paying for that now in a really, really big way.

          • thatvisionthing says:

            Hi JD, I dropped macroeconomics in college when the TA mocked me in lecture class when I asked the stupid question, “Where does money come from?” So I kinda come at it scattershot and hope that someday I’ll really get it. I probably look at the same thing three different ways before I realize that it is the same thing and not three different ones. Agh.

            A ways back Joe Klein (or as EW said, Joke Line) got into a public whinespat with Glenn Greenwald that was pretty funny, had several chapters, and it spawned one of the best comments ever, posted on Klein’s own blog:

            26. The reading today is from the Book of Klein, chapter 73, beginning at the 13th verse:
            And there were those who muttered against Klein, for there was discontent in the Land of Bafflegab, and the Centrists were discomforted. And there arose a mighty man of valor, that was named Greenwald. And around him were acolytes, many and pathetic, and they did say many unkind things, even unto publishing alarmingly accurate reports of things said at picnics, which did mightily enrage Klein, so that the blood rushed to his head and the steam out of his ears. And Klein took up his word-processor to smite them. Vast was the word-processor, of sounding brass and luminous silicon, and the length of it was seven bull-sh*ts, and the width of it was three. And the prophet Hoekstra blessed Klein and anointed him with his own manly juicings, and Klein went forth to battle. And as he issued from the Gate of Broder, through which a camel may not fit, the face of Klein was terrible, and his chariots numberless as the secret WMD sites of Iraq. And Klein came down unto the Plain of Fisa, and confronted Greenwald, who was a stripling youth, armed only with a sling…..

            August 31, 2009

            “and the length of it was seven bull-sh*ts, and the width of it was three” — still tickles me.

            I never really did learn where money comes from, but it seems to me they pull it out of their ass and measure it in units of bull-sh*t. Citigroup couldn’t value its assets, neither could Lehman, neither could AIG, and Greenspan and Paulson and Geithner just keep madly juggling those bubbles to try to keep them from popping, which they surely would if they ever touched earth. It’s kind of a different picture than Atlas Shrugged, but OMG THE WORLD DEPENDS ON ATLAS!

            Now I think I have an idea of something of the mechanics of what was going on, in terms my TA could understand — after the crash there was an article on Wired about David Li’s failed Gaussian copula — in February 2009 it looked like it could be blamed for everything — a mathematical model that supposedly could calculate risk, widely used/misused to value CDSs, which begat CDOs, which begat CDO-squareds…

            In 2000, while working at JPMorgan Chase, Li published a paper in The Journal of Fixed Income titled “On Default Correlation: A Copula Function Approach.” (In statistics, a copula is used to couple the behavior of two or more variables.) Using some relatively simple math—by Wall Street standards, anyway—Li came up with an ingenious way to model default correlation without even looking at historical default data. Instead, he used market data about the prices of instruments known as credit default swaps.

            If you’re an investor, you have a choice these days: You can either lend directly to borrowers or sell investors credit default swaps, insurance against those same borrowers defaulting. Either way, you get a regular income stream—interest payments or insurance payments—and either way, if the borrower defaults, you lose a lot of money. The returns on both strategies are nearly identical, but because an unlimited number of credit default swaps can be sold against each borrower, the supply of swaps isn’t constrained the way the supply of bonds is, so the CDS market managed to grow extremely rapidly. Though credit default swaps were relatively new when Li’s paper came out, they soon became a bigger and more liquid market than the bonds on which they were based.

            …Li wrote a model that used price rather than real-world default data as a shortcut (making an implicit assumption that financial markets in general, and CDS markets in particular, can price default risk correctly)…

            …and the egg begat the chicken and the chicken begat the egg… and it was all units of bull-sh*t numberless as the secret WMD sites of Iraq.

            Speaking as an econ 101 dropout, I can see that these compounding Atlases need to lay off the bubble pipe, just stop stop stop!!! Yesterday even!!! But Obama blows warm air their way and sends them out to beget more, more, more, and sticks us with the bill because after all that’s OUR job. It’s crazy. Me, I wish they would spin off and form their own feed loop and pay themselves their ever more fabulous compensations and bonuses with their units of bullsh*t.

  3. earlofhuntingdon says:

    Difference of opinion, nothing more. Not. But the auditor’s letter was a sufficient insurance policy that Citi hasn’t yet had to call upon. Never mind that the OCC letter put management on actual notice of its faulty systems, which made their disclosure statements knowing falsehoods. The shit hasn’t really hit the fan yet, since those practices remain uncorrected and poorly valued assets remain on the books at wildly inflated prices.

    One can only imagine the difference in management practices if we were to go back in time to when bonuses were dependent on internal controls actually working, on staff actually catching errors, outlandish uncovered risks, and so on. Wall Street and the TBTF banks succeeded in creating management reward mechanisms that do the opposite. Our vaunted federal regulators, hoping to sashay through the revolving door apparently, haven’t said “Boo” about it.