The government's $45 billion bailout of Citigroup met the goal of restoring the market's confidence in the nation's third-largest bank in the wake of the financial crisis and limited taxpayers' risk, a new watchdog report says.
The report was issued by the office of Neil Barofsky, the special inspector general for the $700 billion bailout of the financial industry and automakers. It found, however, that the government's decision to aid Citigroup in the fall of 2008 wasn't made coherently, and seemed to be based on "gut instinct" and "fear of the unknown" rather than objective criteria.
Also, the report says that by bailing out Citigroup, the government encouraged high-risk behavior by signaling that big financial institutions would be protected from failing.
The financial overhaul law enacted last summer is designed to end "too big to fail" by giving regulators the power to shut down the largest institutions if they threaten to bring down the financial system.
"The ultimate cost of bailing out Citigroup and the other `too big to fail' institutions will remain unknown until the next financial crisis occurs," the new report says.
Rep. Spencer Bachus, R-Ala., the chairman of the House Financial Services Committee, said the report confirms that the financial overhaul law doesn't end "too big to fail."
Bachus cited a statement by Treasury Secretary Timothy Geithner to Barofsky that while the law gives the government "better tools" and reduces the risk of failures, "in the future we may have to do exceptional things again" if there is another big shock to the financial system.
Treasury officials said Thursday that Geithner's statement was taken out of context in the report. He was actually referring to regulators' use of the new regulatory powers in the overhaul law, they said.
"The secretary was right. It's an exceptional thing to wind down a firm in the future, in an orderly way, at no cost to taxpayers, using the new tools provided by" the overhaul law, Treasury spokesman Steve Adamske said.
New York-based Citigroup was one of the hardest-hit banks during the credit crisis and the recession, and its bailout was one of the largest of the rescue program.
Of the $45 billion, $25 billion was converted to the government's ownership stake in the bank. Citigroup repaid the bailout. The Treasury Department says taxpayers made $12 billion on the bailout from the government's sale of its shares.
"We appreciate the report's conclusions that Treasury's investment in Citigroup was successful and ... that the government effectively limited risk to the taxpayer," Tim Massad, acting assistant Treasury secretary for financial stability, said in a statement.
Citigroup said it is a different company today.
"We have bolstered our financial strength, overhauled our risk management, reduced our risk exposures, defined a clear strategy and made Citi a more focused enterprise by returning to banking as the core of our business," the bank said in a statement.
The chairman of the House Oversight and Government Reform Committee, California Republican Darrell Issa, said "The sobering reality that the American people won't know until the next financial crisis the true effect of bailing out the `too-big-to-fail' underscores the need to ensure that the money taken by Washington is spent and well accounted for."
Issa and other Republicans, who now control the House following the November elections, have promised to conduct extensive investigations into how well the financial rescue and other federal programs are working.
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