Citigroup will split to cut risk

Pandit said to the Congressional Oversight Panel, which is monitoring the use of federal bailout money. “We are breaking it up.”

Pandit used his testimony to blunt criticism from committee members who held up Citigroup as the quintessential too-big-to-fail bank. The members also suggested that a government guarantee implied by the bailouts might encourage the bank to make imprudent bets.

Pandit acknowledged that more than $45 billion in government assistance had helped the bank build “a bridge over the crisis to a sound footing.” He added that “Citi owes a large debt of gratitude to American taxpayers.” The oversight panel has held more than a dozen hearings since it was formed to monitor the progress of the Troubled Asset Relief Program (TRP) that bailed out financial firms. But the committee has also delved into a broad range of issues, from mortgage modifications to government guarantees of bank debt.

In his testimony, Pandit advocated tougher federal supervision and called for broader powers to allow for the orderly unwinding of large financial companies that fail. Banks, he added, should not use their capital for speculative trading.

“I do believe that banks should be banks,” Mr. Pandit said, stopping short of endorsing the so-called Volcker Rule, which would bar companies that accept customer deposits from sponsoring hedge funds, private equity funds or engaging in proprietary trading.
Citigroup has been trying to sell many of its remaining alternative investment funds, and has disbanded certain proprietary trading units amid heavy regulatory pressure.

Although Citigroup began disengaging from the government in December, taxpayers still have more than $25 billion in the bank and hold 27 percent of the company. Herbert M. Allison, the assistant Treasury secretary for financial stability, who also testified, said the government would turn a profit on its Citigroup investment as well as on the overall bank rescue program.

While Pandit and Allison agreed on most points, they appeared to diverge on the reason that Citigroup needed billions of dollars of federal aid.

Pandit had asserted that Citigroup was “healthy” when it sought a second bailout in November 2008. He said Citigroup’s stock collapsed under pressure from short-sellers — not bad assets — although he eventually acknowledged that the bank’s weak financial position made it a target.

Under harsh questioning, Allison went to great lengths to avoid saying that Citigroup would have failed without receiving assistance. But he eventually conceded that Citigroup was in such fragile shape in November 2008 that bank executives feared “they could have difficulty funding themselves” as their borrowing costs soared and investor confidence evaporated. He said that Citigroup management had notified federal officials that “they were facing a serious situation.”

Allison’s remarks came after a frosty exchange with Silvers, who suggested that he also had not adequately responded to questions about Citigroup’s collapse. “I don’t understand why the U.S. government can’t admit what everyone in the world knows: that during that week Citigroup was a failing institution,” Silvers said.

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