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MARCH TO AUGUST : SYSTEMIC RISK CONCERNS
the New York Fed led a team of international supervisors, the Senior Supervisors
Group, in evaluating of the largest firms to assess lessons learned from the finan-
cial crisis up to that point. Much of the toughest language was reserved for Citigroup.
“The firm did not have an adequate, firm-wide consolidated understanding of its risk
factor sensitivities,” the supervisors wrote in an internal November memo describ-
ing meetings with Citigroup management. “Stress tests were not designed for this
type of extreme market event. . . . Management had believed that CDOs and lever-
aged loans would be syndicated, and that the credit risk in super senior AAA CDOs
was negligible.”
In retrospect, Citigroup had two key problems: a lack of effective enterprise-wide
management to monitor and control risks and a lack of proper infrastructure and in-
ternal controls with respect to the creation of CDOs. The OCC appears to have iden-
tified some of these issues as early as but did not effectively act to rectify them.
In particular, the OCC assessed both the liquidity puts and the super-senior tranches
as part of its reviews of the bank’s compliance with the post-Enron enforcement ac-
tion, but it did not examine the risks of these exposures. As for the issues it did spot,
the OCC failed to take forceful steps to require mandatory corrective action, and it
relied on management’s assurances in that the executives would strive to meet
the OCC’s goals for improving risk management.
In contrast, documents obtained by the FCIC from the New York Fed give no in-
dication that its examination staff had any independent knowledge of those two core
problems. An evaluation of the New York Fed’s supervision of Citigroup, conducted
by examiners from other Reserve Banks (the December Operations Review of
the New York Fed, which covered the previous four years), concluded:
The supervision program for Citigroup has been less than effective. Al-
though the dedicated supervisory team is well qualified and generally
has sound knowledge of the organization, there have been significant
weaknesses in the execution of the supervisory program. The team has
not been proactive in making changes to the regulatory ratings of the
firm, as evidenced by the double downgrades in the firm’s financial
component and related subcomponents at year-end . Additionally,
the supervisory program has lacked the appropriate level of focus on the
firm’s risk oversight and internal audit functions. As a result, there is
currently significant work to be done in both of these areas. Moreover,
the team has lacked a disciplined and proactive approach in assessing
and validating actions taken by the firm to address supervisory issues.
Timothy Geithner, secretary of the Treasury and former president of the Federal
Reserve Bank of New York, reflected on the Fed’s oversight of Citigroup, telling the
Commission, “I do not think we did enough as an institution with the authority we
had to help contain the risks that ultimately emerged in that institution.”
In January , an OCC review of the breakdown in the CDO business noted
that the risk in the unit had grown rapidly since , after the OCC’s and Fed’s
