Citigroup Under Fire Over Disclosure

Citigroup 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.

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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 $50 billion in losses during the crisis, largely due to writedowns on CDOs, prompting the US government to launch a $45 billion 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 $11 billion 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 investigate. 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 weaknesses”.

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 Commission.

Robert Willens, an accountancy expert, said Citi might have been technically correct but added that the “spirit of the law” argued for full disclosure.