Settlement Talk Sign of Citi's Reduced D.C. Clout

American Banker (subscription required) ^ | September 9, 2002 | Rob Garver

[Dems_R_Losers]

WASHINGTON - For Citigroup Inc., this town is not what it used to be.

Federal and state investigations of its investment banking practices and talks with the Federal Trade Commission to settle predatory lending charges for millions of dollars show that the company is no longer politically untouchable.

There was a time when a phone call from Citigroup's chairman, Sandy Weill, at a critical moment could be the difference between legislation dying and becoming law. Such a call in late 1999, when Mr. Weill persuaded then-President Clinton to compromise with Republican lawmakers, saved what would become the Gramm-Leach-Bliley Act from going the way of other failed efforts at financial reform.

Citi has always been able to make things happen.

When nobody else was able to combine banking and insurance underwriting, Citigroup led the way to the new world of giant financial conglomerates in 1998, when it persuaded the Federal Reserve Board to allow Citicorp to merge with Travelers Group.

Many believe that the Fed, though its approval was not required for Citi to acquire Associates First Capital Corp. in 2000, could have used its authority as a regulator of financial holding companies to step in and examine the allegations of predatory practices that surrounded the California-based subprime lender.

The Fed did not, and the deal went through in 73 days, smoothed by promises that Citi would drag Associates away from its questionable activities and into line with industry best practices.

But recent scandals, such as probes of the special financing vehicles that it established for Enron Corp. and of dubious behavior by its securities analysts, have cost Citi dearly, both in market capitalization and in its standing with lawmakers and regulators. This suggests that the financial services giant's road will get rockier in coming years, especially if its appetite for mergers and acquisitions remains unsatisfied.

That the bloom is fading from Citi's rose has been apparent for some time now, as the Fed has begun taking an ever-more-exacting look at its merger applications.

However, the company's reputation suffered another blow Friday, when The Wall Street Journal reported that it was in negotiations with the FTC to pay $200 million to settle charges that Associates engaged in predatory practices in the years before Citi bought it.

The Fed, which has not yet decided whether to allow Citi to buy the San Francisco-based Golden State Bancorp, has been asking company officials very pointed questions about the current practices of its subprime lending unit, CitiFinancial, into which Associates was merged. Such questions would likely get tougher after a major settlement.

"If some regulator goes after them and they settle," banking regulators could be "required to consider things related to the management of that function" when assessing a merger application, said Oliver Ireland, a former Fed associate general counsel, now an attorney with Morrison & Foerster in Washington.

L. William Seidman, a former chairman of the Federal Deposit Insurance Corp., agreed with that assessment. "It certainly means regulators will be tougher on them if they are getting into something that is not standard issue, if you will, such as options trading or other subprime business," he said.

Asked if the company is concerned that a settlement with the FTC might cause regulators to look unfavorably on future deals, a Citigroup spokeswoman said it was not, noting that the case involves the past practices of an acquired company. She also noted that over the last 18 months the company has been implementing a series of initiatives, developed with regulatory input, aimed at addressing concerns raised about Associates' lending practices. She said the company continues to review its progress on these issues with regulators.

Others said the fact that Citi is having a tougher time with regulators may just be a leading indicator of a tougher government stance toward business.

Karen Shaw Petrou, the managing partner of the Washington-based Federal Financial Analytics, said: "You can see it in utilities and in telecom, and I think financial services is going to be next. Citi is just the biggest and most high-profile of the financial services firms, so they are the first. They also have their hand in the cookie jar at a very inopportune moment, with the Golden State deal."

Mr. Seidman put it bluntly: "Whenever there is a problem, the regulators are always there on the battlefield to shoot the wounded."

[Dems_R_Losers]

Hehehehe. What goes around, comes around.

[Deuce]

But recent scandals, such as probes of the special financing vehicles that it established for Enron Corp. and of dubious behavior by its securities analysts, have cost Citi dearly, both in market capitalization and in its standing with lawmakers and regulators. This suggests that the financial services giant's road will get rockier in coming years, especially if its appetite for mergers and acquisitions remains unsatisfied.

Just because Citigroup may not be able to get away with bloody murder does not mean that it has ceased to be a specially privileged organization which would be hopelessly insolvent (along with all the other money-center banks) but for those special privileges.