Citigroup’s Asset Guarantees to Be Audited by TARP

By Bradley Keoun and Mark Pittman

Aug. 19 (Bloomberg) -- Citigroup Inc.’s $301 billion of federal asset guarantees, extended by the U.S. last year to help save the bank from collapse, will be audited to calculate losses and determine whether taxpayers got a fair deal.

Neil Barofsky, inspector general of the U.S. Treasury Department’s $700 billion Troubled Asset Relief Program, agreed in an Aug. 3 letter to audit the program after a request by U.S. Representative Alan Grayson. Barofsky will examine why the guarantees were given, how they were structured and whether the bank’s risk controls are adequate to prevent government losses.

The Treasury, Federal Deposit Insurance Corp. and Federal Reserve provided the guarantees last November, when a plunge in Citigroup’s stock below $5 sparked concern that a run on the bank might rock global markets and impede an economic recovery. New York-based Citigroup paid the government $7.3 billion in preferred stock in return for the guarantees.

“What kind of toxic assets did the Federal Reserve guarantee, and what off-balance-sheet liabilities have been pinned on us?” Grayson, a Florida Democrat who sits on the House Financial Services Committee, wrote yesterday in an e- mailed response to questions on the audit. “How much money have the taxpayers already lost? We need to know.”

Citigroup’s guarantees are among $23.7 trillion of total potential government support stemming from programs set up since 2007 to ease the financial crisis, according to a report last month by Barofsky’s office. The “total downside risk” from Citigroup’s asset guarantees is about $230 billion to the Federal Reserve alone, Grayson said in a June 24 letter to Barofsky requesting the audit.

TARP Money

Citigroup’s guarantees came on top of $45 billion of bailout funds obtained last year through the TARP program. Bank of America Corp., which also got $45 billion of TARP funds, initially agreed to take guarantees on $118 billion and later decided not to sign the accord.

The pool of Citigroup assets included $154.1 billion of mortgages, $16.2 billion of auto loans, $21.3 billion of “other consumer loans,” $12.4 billion of commercial-real-estate loans and $13.4 billion of corporate loans, Citigroup Chief Executive Officer Vikram Pandit said in a Jan. 27 presentation. The assets also included $31.9 billion of distressed securities and $51.5 billion of off-balance-sheet lending commitments.

Under the terms of the guarantees, Citigroup must absorb the first $39.5 billion of losses on the assets, plus 10 percent of the remaining losses. Through June 30, losses on the pool totaled $5.3 billion, Citigroup said in its second-quarter earnings report.

Citigroup’s Cooperation

“We are working closely with the government on the implementation of the loss-sharing agreement, and of course, we will cooperate with the special inspector general for TARP in any review,” Citigroup spokesman Stephen Cohen said.

The bank’s share price fell 1 cent to $4.13 as of 4 p.m. in New York Stock Exchange composite trading. At that price, the shares are almost 10 percent above the $3.77 level they reached last November, when the guarantees were announced.

One question is whether Citigroup’s loans and securities were adequately written down before being put into the covered pool, Joseph Stiglitz, a Columbia University economist who won the Nobel Prize in 2001, said in an interview today.

“If they picked a high price, the losses could be a major exposure for the taxpayer,” Stiglitz said.

In his letter, Barofsky said he “will begin to assemble a team to audit the Citigroup guarantees.”

“We anticipate finalizing the audit plan and issuing a formal audit announcement shortly,” he wrote.

Selecting Loans

The audit will address “the basis on which the decision was made” as well as the “process for selecting loans to be guaranteed,” according to Barofsky’s letter. The inspector general also will assess “the risk-management and internal controls and related oversight processes and procedures to mitigate risks to the government.”

The audit will take several months and a deadline hasn’t been set, said Kris Belisle, a spokeswoman for Barofsky.

The Treasury, FDIC and Fed said in a joint statement on Nov. 23 that they agreed to the plan to support “financial market stability, which is a prerequisite to restoring vigorous economic growth.” They promised to “exercise prudent stewardship of taxpayer resources.”

The following month, the Federal Reserve Bank of New York hired New York-based money manager BlackRock Inc. under a $12 million contract to spend two months providing an independent valuation of Citigroup’s guaranteed assets. The New York Fed paid another $5 million to $10 million to PricewaterhouseCoopers LLP to assess Citigroup’s own methods of valuing the assets, according to a copy of the contract posted on the Federal Reserve Bank’s Web site.

To contact the reporters on this story: Bradley Keoun in New York at bkeoun@bloomberg.net; Mark Pittman in New York at mpittman@bloomberg.net.