“All You Need for a Financial Crisis . . .

By James Kwak

. . . are excess optimism and Citibank.”

That’s a saying that someone, probably Simon, repeated to me a few years ago. Crash of 1929, Latin American debt crisis, early 1990s real estate crash (OK, that wasn’t a financial crisis, just a crisis for Citibank), Asian financial crisis of 1997–1998, and, of course, the biggie of 2007–2009: anywhere you look, there’s Citi. Sometimes they’re just in the middle of the profit-seeking pack, but sometimes they play a leading role: for example, the Citicorp-Travelers merger was the final nail in the coffin of the Glass-Steagall Act and the immediate motivation for Gramm-Leach-Bliley.

Citigroup is also the poster child for one of the key problems with our megabanks: the fact that they are too big to manage and, on top of that, the usual mechanisms that are supposed to ensure half-decent management don’t work. Around 2009, if you were to describe the leading characters in the TBTF parade, they were JPMorgan, the last man standing (not so much anymore); Goldman, the sharks who bet on the collapse; Bank of America, the ego-driven empire-builder; and Citi, the incompetent (“I’m still dancing”) fools.

For these reasons, Art Wilmarth thinks it’s important to understand exactly what went wrong at what was, relatively recently, America’s largest bank. He has a new paper out discussing the many failings of Citigroup in the decade leading up to the financial crisis in great detail. I don’t think it contains any new facts that weren’t in the public record, but he does draw a lot of his examples from court documents (such as the Enron bankruptcy examiner’s report) that most of us haven’t read, so you will probably learn something.

The picture he paints is one of constant attempts by executives to take more risk, either by exploiting regulatory loopholes or by turning a blind eye to employees who raised red flags. From Enron and WorldCom through biased equity analysts, predatory lending, market-rigging, and Japanese private banking violations to the spectacularly late plunge into CDOs and the nutty decision to buy Vikram Pandit’s mediocre hedge fund, the only question is whether top executives encouraged lawbreaking and irrational risk-taking or whether they were too clueless to realize it was going on (Robert Rubin’s famous defense). At the same time, Citi was being aided and abetted by regulators, all the way up to New York Fed President Tim Geithner, who made little effort to ensure that the bank had appropriate risk management and compliance processes. And Wilmarth even leaves out a few, like auction-rate securities (Citigroup settled with the SEC in 2008) and LIBOR (Citigroup was the bank that hired Tom Hayes away from UBS in 2009).

Most importantly, there’s little evidence that our biggest banks are any more ably run now than they were in the past decade. The once-lauded JPMorgan is now Exhibit A (London Whale, overlooking Bernard Madoff’s Ponzi scheme, money laundering, bribing Chinese officials by hiring their relatives). People like to talk about how the financial system is safer than it was seven years ago—something I’m skeptical about. But even if it is, the too-big-to-manage problem is bad for lots of reasons other than overall stability: just ask people who bought WorldCom stock, or invested with Bernie Madoff, or took out LIBOR-linked loans, or pay inflated aluminum prices because banks are artificially limiting supply. Yet their stock prices continue to climb, because investors realize that the further the financial crisis fades into the rear-view mirror, the more easily the megabanks can find new sources of profit by exerting market power and skirting regulations.

31 thoughts on ““All You Need for a Financial Crisis . . .”

  1. Decay breads decay here, as far as banks are concerned. Are you ready for that little sit down chat yet?

  5. It’s not all that bad for a mortal human being, he lived be 94 years old, which is way more, than our average reader will ever get.

  6. Where are we to rank this news???
    http://www.thestreet.com/story/12278966/1/sheila-bair-to-banco-santander-dont-fake-outrage.html?puc=yahoo&cm_ven=YAHOO

    As Sheila Bair joins one of the biggest abusers in Europe of Credit Default Swaps??? Along side her sweetheart deal she got on a mortgage from Bank of America at the same time she was supposed to be regulating them??
    http://www.huffingtonpost.com/2010/01/21/fdic-chief-got-bank-of-am_n_431316.html

    What REALLY annoys me about this is Bair only got vocal about the capital ratios AFTER THE FACT, POST MORTEM while people who should know better (Mike Konczal, Jennifer Taub) keep singing her praises as if she is some common man’s hero.

    HEY SHEILA, YOU WANNA PROVE YOU’RE THE COMMON MAN’S HERO???? SPEAK OUT AGAINST BANKING ABUSES BEFORE THE CRISIS, NOT AFTER. BRING DOWN THE LEVEL OF BAD LOANS AND RAISE CAPITAL RATIOS AT THE SPANISH BANK YOU ARE NOW PART OF, OVER AN EXTENDED PERIOD OF TIME. DON’T SIT THERE LIKE SOME DAMNED DEAF MUTE ON THE BOARD AND THEN IN 2019 QUIETLY LEAVE AFTER YOU COLLECTED MULTIPLE PAYCHECKS AND SAY IN MUTED TONES “OH, WELL YEAH, I WAS ABOARD MEMBER OF THE BANK FOR MANY YEARS, BUT I WAS JUST ONE PERSON AND COULD DO NOTHING TO ‘CHANGE THE CULTURE’ ” FREAKING DO SOMETHING AND FREAKING SPEAK OUT IN PUBLIC FORUMS (i.e major newspapers, Bloomberg etc) WHEN THE MOST CASUAL IDIOT CAN SEE THE BALANCE SHEETS OF SANTANDER ARE F*CKED..

    As an above average intelligence, sophisticated person, with (HOPEFULLY) minimal scruples, you think you can manage that Sheila???

  7. “These are dark times for America’s most beloved industry, the political media. In three years, the country will elect a new president. As they have since 2009, reporters and readers assume that the Democratic candidate, and likeliest winner, will be Hillary Clinton. Forget about the voters—won’t anyone think of the Web traffic? Nobody wants to cover the coronation of an icon who’ll be too staffed up and confident to give real access (or leaks) to reporters.”

    “DAVID WEIGEL
    David Weigel is a Slate political reporter. You can reach him at daveweigel@gmail.com, or tweet at him @daveweigel.”

  9. Just wondering what mistake you are referring to, joining Citi to the Asian financial crisis? Pre-emptive action reduced exposures in line with Citi’s “Asian Windows on Risk” exercise.

  10. Speaking of clueless, James Kwak is allowed to teach this free form whining somewhere?

    Guess what, guy, ‘Glass-Steagall’s separation of investment and commercial banking (provisions 16 and 21 of the 1933 Banking Reform Act) are still the law. It was only the ‘affiliations’ provisions (20 and 32) that were repealed by Gramm, Leach, Blilely. But don’t let the facts get in the way of a good story.

  12. Pat you know the timer is not on your side, quit yer tower of babblin and get ready to live like Annies about too, like a dog in the woods you are.

  13. The problem is that Too Big To Manage and Too Big To Fail makes it feel like investors are never going to be in for a loss. I know what guy who was just buying Bank of America anytime he scratched together $2K or $3K and he would say to me “it’s going to go up at some point no matter what because of the government money” and so it goes. Aren’t we beyond anything to do with “the market” at this point in time?

  15. why are you even allowed to exist, anonymouse, is the question…?

    wtf ru to call anyone a dog in the woods?

    u crawled out of the jungle to the boardroom with a head on a stick – you savage

  16. The answer is to watch you suffer for your sins of the past.
    And don’t tell me their ain’t any, cause no one defends themselves so loudly, as the guilty.

  17. Some of us have been knapping for an extended period of time. Taking advantage of any and every opportunity which affords their team an upper hand at the expense of anyone, at any time, even family members are not excluded from this abuse. Further more, they truly believe they can’t be stopped by anything, and resist something fierce when approached with the truth. No price is to high once they spot an easy mark. They are very easily identified too, and an accompanying fatal flaw is too miss the mark by over estimating it’s importance. For if the mark were proved to be only a decoy, then the stalker quickly becomes the hunted duck of it’s season. Ann it was your sister, Suzie and co., yes, (stuffing her face with all those pancakes way back, as we were falling out of the trees and left for dead).

    Now one person can only burn so many trees, or houses for revenge, in vain I might add, (and could invariably end up burning the wrong one). Annie you are another one who was burned so badly by family (and/or friends) trust, (in disbelief we already know). But you must also understand that when this feller comes to town again soon, http://www.datacenterknowledge.com/archives/2009/11/09/power-grid-hacking-back-in-the-news/ , he won’t care if your ready to live in the woods or the sunny brook, he has a job to do and their will be many casualties, (some deserved, some not.)

    Then once he’s gone, you take your revenge the hard way, cause their ain’t no other way to deal with the kids who eat to many pancakes, and then later in life try to ruin your financial lives by hook or by crook. So if you play your cards right, you can take back that house your family built, or you could just burn it along with the others as revenge and simply rebuild. Around here, we can play it either way.

  19. Hey guys, I’m the developer of an app called EconNation that helps readers view The Baseline Scenario and blogs like it on their iPad or iPhone. It’s available on the App Store, and something you should definitely check out. Let me know what you think by replying back!

  21. Tell me why I should feel guilt, when you assume, you make an ass out of you, and me. Your shortcomings are no concern to me, your lack of understanding is no concern to me. People take the wrong paths all the time, they just don’t pay the consequences until the bitter end.

  23. I don’t understand, you are no kind of women to fight for, or over. I should know because I have women’s rights in mind with everything I do. Could you be following a dirty decoy of your own choice or making? Shirley any good stalker worth their salt won’t ralph over your beliefs, or even die for them. You can huff and you can puff, but you blow this house down. Did you say battle, or the chocolate house of the funanator??

  24. @anonymouse – You whacko – so why are you stalking me for YEARS on this website???!!! Guess using YOUR definition, YOU are the one not worth any salt.

  25. Perhaps only in your mind, because your definition of “stalking me” is whacko in my mind, you are always free to leave this web site and not be “stalked” by me. Your insistence to return for some verbal punishment for various reason over the years is one of your own desire and making, not mine.
    If you recall correctly, you were the one threatening to ruin me financially not to long ago. How’s that working out for ya? I suggest you should leave here, and go to another web site where you CAN talk to yourself in peace and talk yourself in circles. It’s done all the time, and you might find a like minded individual to spark up a like minded conversation and live in peaceful ignorant bliss. Certainly you won’t have a problem with that, cause if you did, you could just fight yourself to a pulp.

  26. Must be frustrating as hell for you, Anonymouse, that this is the one website where your cries for censorship are completely left unheeded.

    Thanks for the LAUGH with the psychobabble.

  28. I think that’s why we have a TV, so they don’t have to “go”, but can still see some the international games.

  29. Yeah, but “we” can’t watch the games without being assaulted by the most puerile children-of-elite “reporters” from the social media era ever assembled.to shove propaganda.

    Yeah, the “international” fans stayed away because no one wants to be used as fodder in the cross-fire between USA and “Russia” – see “secret CIA prisons” for full story on the FACT that there is no bottom – GWB still has a warrant out for his arrest for “crimes against humanity”….

    Nope, as usual, it is the EXACT OPPOSITE of the fodder coming over the teevee – it’s what the MouseAid and CIA are capable of pulling off at these OLympics…

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