Citi under fire over disclosure
By Francesco Guerrera in New York
Published: March 1 2011 00:29 | Last updated: March 1 2011 00:29
has come under attack from a prominent analyst and accountancy experts for
failing to disclose regulatory criticism of the bank’s valuation of troubled
securities during the financial crisis.
Newly released documents show that on February 14 2008, the
Office of the Comptroller of the
Currency, one of
Citi’s main regulators,
expressed concerns about the way Citi valued mortgage-backed securities.
In a letter sent by John Lyons, a senior OCC official, to Vikram Pandit,
Citigroup’s chief executive, the regulator said it had found “several
deficiencies that need to be addressed” in the way Citi valued illiquid
collateralised debt obligations.
Citi suffered more than $50bn in losses during the crisis, largely due to
writedowns on CDOs, prompting the US government to launch a $45bn bail-out
of the bank.
The OCC document, released by the
Financial Crisis Inquiry Commission,
a panel appointed by Congress, said “weaknesses were noted” in several
aspects of Citi’s valuation methods.
Eight days later, Mr Pandit, who had taken over as Citi’s chief executive in
December 2007 shortly after Citi had warned of a writedown of up to $11bn on
its CDOs, certified Citi’s accounts for 2007.
Under the Sarbanes-Oxley Act – passed in 2002 after the Enron and WorldCom
scandals – corporate officers have to disclose, among other things, “all
significant deficiencies in the design or the operation of internal controls
which could adversely affect [a company’s] ability to record, process,
summarise, and report financial data” and identify “any material weaknesses”
in internal controls.
In a note to clients, Mike Mayo, a CLSA bank analyst, said Citi “should have
known about internal controls problems given that others came to this
conclusion for the year 2007”. He called on Citi’s board and regulators to
Citi said it had “rigorous disclosure controls” and its certifications were
“entirely appropriate”. People close to the bank argued that it did not have
to disclose the OCC’s concerns because the letter did not identify “material
In its letter, the OCC acknowledged that Citi’s CDOs valuation was within
the market range.
“I think for Citi to argue that the OCC’s concerns should not be disclosed
because they did not mention ‘a material weakness’ is just semantics,” said
Lynn Turner, a former chief accountant at the Securities and Exchange
Robert Willens, an accountancy expert, said Citi might have been technically
correct but added that the “spirit of the law” argued for full disclosure.