Citigroup on the ‘brink of failure’ in 2008

The Treasury official in charge of bank bailout money confirmed as much during a Congressional hearing. But Citigroup boss Vikram Pandit begged to disagree.

As Thanksgiving approached in 2008, Citigroup Inc. was in deep trouble. In fact, the huge bank was on the brink of failure, according to a member of the Congressional Oversight Panel.

“In that week…Citigroup was a failing institution,” panel member Damon Silvers said during an exchange at a hearing Thursday with Assistant Treasury Secretary Herbert Allison.

Mr. Allison, who is in charge of overseeing all the bailout money doled out to financial institutions, squirmed at that idea, but after being pressed by Mr. Silvers, conceded, “Citi and a number of other banks, many banks, were on the brink of failure.”

A failure of Citi would have surely been catastrophic for economies in the U.S. and overseas. The bank had $775 billion in customer deposits at the time, of which $290 billion were in the U.S. These deposits would have been widely seen as being at risk in the event of a failure, and it would have been a monumental task for regulators to ensure the funds were protected.

That helps explain why the government decided a better alternative was to bail out Citi and provide hundreds of billions in loan guarantees. The government’s contribution was later converted into a 27% equity holding in the bank.

In his testimony at Thursday’s hearing, Chief Executive Vikram Pandit said Citi “owes a large debt of gratitude to American taxpayers.”

During a question-and-answer session with panelists, Mr. Pandit observed that Citi had suffered substantial losses in 2008. As its stock price sank after the collapse of Lehman Brothers, Citi sought additional bailout help to help restore confidence in the institution.

“We were not in a rational market,” he said. “In a market of that sort, unfortunately, stock prices can have an impact on confidence on all sorts of stakeholders. Rather than taking the risk, as we talked to the Federal Reserve and as we talked to the Treasury, the view was, ‘let’s take that issue off the table.’ That’s what happened.”

[This story first appeared in Crain’s New York Business, a sister publication of InvestmentNews.]