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THE MADNESS
business. “Earnings and profitability growth have taken precedence over risk man-
agement and internal control,” the OCC told the company in January . An-
other document from that year stated, “The findings of this examination are
disappointing, in that the business grew far in excess of management’s underlying in-
frastructure and control processes.” In May , a review undertaken by peers at
the other Federal Reserve banks was critical of the New York Fed—then headed by
the current treasury secretary, Timothy Geithner—for its oversight of Citigroup. The
review concluded that the Fed’s on-site Citigroup team appeared to have “insufficient
resources to conduct continuous supervisory activities in a consistent manner. At
Citi, much of the limited team’s energy is absorbed by topical supervisory issues that
detract from the team’s continuous supervision objectives . . . the level of the staffing
within the Citi team has not kept pace with the magnitude of supervisory issues that
the institution has realized.” That the Fed’s examination of Citigroup did not
raise the concerns expressed that same year by the OCC may illustrate these prob-
lems. Four years later, the next peer review would again find substantial weaknesses
in the New York Fed’s oversight of Citigroup.
In April , the Fed raised the holding company’s supervisory rating from the
previous year’s “fair” to “satisfactory.” It lifted the ban on new mergers imposed the
previous year in response to Citigroup’s many regulatory problems. The Fed and
OCC examiners concurred that the company had made “substantial progress” in im-
plementing CEO Charles Prince’s plan to overhaul risk management. The Fed de-
clared: “The company has . . . completed improvements necessary to bring the
company into substantial compliance with two existing Federal Reserve enforcement
actions related to the execution of highly structured transactions and controls.” The
following year, Citigroup’s board would allude to Prince’s successful resolution of its
regulatory compliance problems in justifying his compensation increase.
The OCC noted in retrospect that the lifting of supervisory constraints in
had been a key turning point. “After regulatory restraints against significant acquisi-
tions were lifted, Citigroup embarked on an aggressive acquisition program,” the OCC
wrote to Vikram Pandit, Prince’s replacement, in early . “Additionally, with the re-
moval of formal and informal agreements, the previous focus on risk and compliance
gave way to business expansion and profits.” Meanwhile, risk managers granted excep-
tions to limits, and increased exposure limits, instead of keeping business units in
check as they had told the regulators. Well after Citigroup sustained large losses on
its CDOs, the Fed would criticize the firm for using its commercial bank to support its
investment banking activities. “Senior management allowed business lines largely un-
challenged access to the balance sheet to pursue revenue growth,” the Fed wrote in an
April letter to Pandit. “Citigroup attained significant market share across numer-
ous products, including leveraged finance and structured credit trading, utilizing bal-
ance sheet for its ‘originate to distribute’ strategy. Senior management did not
appropriately consider the potential balance sheet implications of this strategy in the
case of market disruptions. Further, they did not adequately access the potential nega-
tive impact of earnings volatility of these businesses on the firm’s capital position.” 
