Blame Someone Else? Citigroup’s “Effective” Risk Management

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As I wrote about last week, the problem of the recession was partly caused by the failure of large firms to manage risk effectively.  In taking this research further, I hoped to find specific examples of certain firm’s crisis management plans and how these corporations reacted to economic problems.  After scouring library resources and SEC filings, I found that the best way to get this information was directly from the websites of these companies and from government websites such as the Financial Crisis Inquiry Commission.

Firstly, it is important to note the stance of these large banking firms when it comes to their crisis management.  A study by Accenture found after polling executives in 21 different countries, insufficient enterprise-wide risk culture was cited by 82 percent of the respondents, while 80 percent said their companies suffered from inadequate availability of timely risk, finance and business data.  On the brighter side, 40% of these respondents said that their companies have increased or are planning to increase investments for risk management capabilities within the next 6 months.  By further analyzing these types of specific programs, I hope to better explain the crisis management (or lack of) that contributed to the economic problems.

Finding overall information on the current government policy allowed me to get a better idea of what individual firms may be doing on there own.  The government now is injecting funds from taxpayers just to keep them above water.  Some of these firms include AIG, Citigroup and the Bank of America.  From here, I began researching information on the way each of these companies have been handling the economic crisis.   For example, right now at Citibank, debt is deeply discounted for longer maturities.  The market assigns a significant probability to default after the crisis clears up.

Citigroup was one of the most affected institutions and was forced to record more than $100 billion of credit-related assets. The bank only survived because of a $45 billion bailout from taxpayers. Despite this, they refuse to take responsibility for poor risk management and blame credit rating agencies, regulators, low interest rates, over-leveraged banks and mortgage lenders.  According to an article from the TIMESonline, One Citigroup executive stated, “I’m sorry the financial crisis has had such a devastating impact for our country, I’m sorry about the millions of people, average Americans, who lost their homes. And I’m sorry that our management team, starting with me, like so many others could not see the unprecedented market collapse that lay before us.” The institution shows regret for the situation but still takes no responsibility.  He further states that, “If you look at Citi prior to the crisis, it ran a very effective, risk management capability.”  What about during the crisis when risk management was most important?

This is just one example of how these institutions handled the crisis.  Overall, according to the economic policy institute “Especially during this time of crisis, organized labor must resume its role as a balancing force in our economy.”  Crisis management is a crucial aspect of the economic downfall and I plan on looking further at resources similar to these in order to find the ways in which organizations choose to deal with high risk situations.

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11 Responses

  1. This is very similar to what I am writing my paper on. I am looking at how the lack of regulation affected the risk taking of firms. I agree with you that many of these firms did not manage risk effectively, but why do you think that is? What was their incentive to ignore risk? Was it solely greed, or was there something else? Maybe they thought they were almost invincible, that any risk would not affect them. I guess it could be a part of the too big to fail mindset. That all of these firms knew they were taking on a lot of risk, but they didn’t think that it would affect them, that they were too powerful to be affected by any change in the economy.

  2. I agree with you, Emily. I think that the “too big to fail” idea is something that contributed to the attitude of these big groups. Because of their size and influence, government support of these firms in the case of a problem was almost inevitable. However, I don’t think the idea of greed can simply be cast to the side. Large firms such as Citigroup were looking out for short term profits instead of at the long term effects of such crisis management which also contributed to the risk taking that they were involved in.

  3. I think greed is a significant factor relating to the decisions that these banks made over the past few years. The banks took on too much risk because they wanted to perform well for Wall Street and to have strong profits in the short term. In addition, I think a lot of the executives probably went along with what these companies were doing because they knew that their bonuses were tied to the profits the companies were making.

  4. Macey, it is full of typos and missing words. Can you fix them?

  5. How did you learn about Citibank’s debt program? From them? How will they know if that change has a positive effect (what would be the evidence)?

  6. How can the Citi manager say “before the crisis” they ran a good risk management program? Isn’t that exact smae set of policies and investments in risk management that allowed them to be misled about the risks they were taking on? That is like saying “our fire alarms worked well before there wa smoke and then they didn’t work.”

    I think you have really developed some good material here. I would like to know more about what scholars or other non-interested parties (as in, not the banks) say specifically about the kinds of risk management they had in place before. Is it like Enron where they subverted their own at least on paper, good risk management practices? Or were the practices inadequate?

    Related to the second possibility, how on Earth can there be inadequate data?? Aren’t we awash in data?

  7. I don’t see what organized labor has to do with your focus on what financial firms did in terms of risk management.

  8. Your Kayshap paper has this gem:
    “The failure to offload subprime risk may have been the leading symptom of
    these problems during the current episode, but they are a much more chronic and pervasive
    issue for banks—one need only to think back to previous banking troubles involving
    developing country loans, highly-leveraged transactions, and commercial real estate to
    reinforce this point. In other words, while the specific manifestations may change, the basic
    challenges of devising appropriate incentive structures and internal controls for bank
    management have long been present.”

    In other words, private incentive systems interact badly with internal controls (the same as risk management). If you drill down, you may find a lot that is very useful there.

  9. I agree with Will and think that greed had to do a lot about what happen as I mentioned in my previous post. It is amazing how companies did not see that the bubble could eventually collapse. Do you think that the government should have implemented moral hazard and let the companies fix their own problems?

  10. […] Going Green and Still Making More MoneyLou Pai: The Only Guy Who's Ever Been Lucky to Get DivorcedBlame Someone Else? Citigroup's "Effective" Risk ManagementThe Organizational Theory of Layoffs in "Office Space" and "Up In The Air"Further Research: Alan […]

  11. I learned about Citibank’s debt program through their website and company records. There is much information on what happened after the recession and the changes the organization needs to make. It is hard to determine if crisis management will be effective until after it is put into action but from the company’s reports and amount of debt it is clear that something else had to be done. I think, at least in the case of Citigroup, risk management practices were adequate yet not fully developed. They relied far too heavily on the government if something should go wrong instead of worrying about the implications. I will do more research to find out what other non-executives thought of their practices from an outside perspective.

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