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

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.