Resisting Corporate Corruption, 3rd Edition

Case 6Admission of Material Omission? Citigroup’s SIVs and Subprime Exposure

Citibank is already ‘half-pregnant’ on subprime mortgage exposure. If I sign off on this language for 3Q 2007, am I guaranteeing myself an SEC lawsuit?

GARY CRITTENDEN, CFO OF CITIBANK, looked again at the draft text sent to him by Investor Relations (IR). It was late September, 2007. Teams inside Citibank (Citi) had been working for weeks to tabulate the losses from subprime mortgage instruments. Reasonable estimates were now available and the news wasn’t good. It looked like Citi was going to have to take a $1 billion 3rd quarter write-down on its subprime assets.¹

This news was going to shock the market. For months Citi had been issuing reassuring statements about its subprime exposure. Events in the third quarter had, however, undermined that posture. In July, two Bear Stearns hedge funds, both heavily invested in subprime assets, had gone into liquidation. Around the same time, Standard & Poor’s (S&P) and Moody’s started downgrading outstanding issues of subprime Residential Mortgage-Backed Securities (RMBS) and Collateralized Debt Obligations (CDOs). Trading in these instruments immediately dried up. Market prices plummeted. This meant Citi would record large losses on the subprime RMBS/CDOs held on its balance sheet. The wolf was now at the door. There was no getting around reporting this ugly news to investors.

To prepare the market for bad news, IR had persuaded Citi management to issue a pre-announcement. ...