Letter from Washington — From the April 2015 issue

Saving the Whale, Again

The catastrophic incompetence of Citigroup

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In the late fall of 1970, a forty-five-foot sperm whale beached itself on the Oregon coast and expired. Local authorities, puzzling over how best to dispose of the huge rotting carcass, decided to blow it up, trusting that seabirds and other scavengers would consume any remains not carried out to sea. A half-ton of dynamite was accordingly packed around the whale and detonated, but things did not go as planned. Instead of the intended tidy dissolution, huge chunks of decaying blubber rained down far and wide, destroying property and inflicting a noxious stench throughout the landscape.

That fiasco, a financial-industry lobbyist suggested to me recently, was the perfect metaphor for Citigroup, the megabank described by one leading Wall Street analyst as “the Zelig of financial recklessness,” involved in every speculative catastrophe of the past few decades. Here, after all, was another beached leviathan perpetually threatening to die, leaving a nondisposable corpse, unless the rest of us keep it alive by pouring water over it.

Illustration by Ross MacDonald

Illustration by Ross MacDonald

Back in 2008, this potent threat elicited hurried bailouts in the trillions of dollars to save Citigroup from its latest debacle. The bank had placed enormous bets on risky derivatives that had gone very, very wrong — a prime cause, many argued, of the overall crash. In hopes of warding off a repeat disaster, Congress passed the Dodd–Frank Act, in 2010, which, among other corrective measures, banned taxpayer-insured banks from trading the more toxic varieties of derivatives, notably credit-default swaps. The law stipulated that such trades should be “pushed out” to uninsured affiliates, thereby forcing the firms to assume the risk themselves.

All the major banks chafed at this restriction, but Citigroup took the lead in overturning it. Its eagerness is best explained by the fact that while the other Wall Street behemoths are currently tapering their derivatives trading, Citi has been expanding its own. As of September 2014, its portfolio of potentially lethal financial instruments had a notional value of $70 trillion.1 So as Congress rushed to vote on a “must-pass” spending bill a few months ago, Citigroup lobbyists enlisted a pliable legislator to insert a provision eliminating the push-out rule.

1 Notional value is the “face amount” of the contract. For example, ABC Company might purchase a credit-default swap that will pay $100 million if XYZ Company defaults on its debt. The notional value of the swap is $100 million, even if the instrument itself is trading at a fraction of that amount.

Dennis Kelleher, of the financial-reform group Better Markets, pithily summarized the issue for me. “The push-out rule said you can do all the derivatives trading you want,” he noted. “You just can’t shift your losses to the American people.” By inserting its stealth provision, the banking giant ensured that “taxpayers are now on the hook for high-risk derivatives trading. That’s why Citigroup drafted it, that’s why Citigroup spent a fortune on lawyers and lobbyists and campaign contributions to make it happen.”

Congressional leaders in both parties made sure that Citigroup got its way. Republicans, with the exception of a dwindling band of Tea Party stalwarts, were enthusiastic in their support. Democrats were more sheepish, with the president himself publicly decrying the measure even as he lobbied Congress to pass the spending bill itself. Even so, the megabank’s maneuvers generated widespread outrage, and Elizabeth Warren seized the moment.

“Enough is enough!” she declared in an impassioned speech on the Senate floor, denouncing Citigroup’s coup. Comparing the bank’s power to that of the Democratic and Republican parties, she highlighted Citigroup’s “unprecedented” grip on the Obama Administration, citing seven current or recent high-level policymakers with close ties to the firm. Her roll call included Jacob Lew, a former chairman of the Office of Management and Budget — “also a Citi alum,” said Warren, “but I’m double-counting here, because now he’s the Secretary of the Treasury.”

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is the Washington editor of Harper’s Magazine and the author of Kill Chain (Henry Holt), which was published last month.

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