Treasury's bailout overseer shifts course from 'too big to fail'

story by Washington Post
written by Renae Merle

A senior Treasury Department official overseeing the financial bailout told a congressional panel Thursday that the government is not providing a blanket guarantee that it will save institutions deemed too big to fail.

The statement marks a shift in rhetoric from a year ago, when the Obama administration sought to assure markets that it would not allow the nation's biggest financial firms to collapse.

"There is no too-big-to-fail guarantee on the part of the U.S. government," Herbert M. Allison Jr., assistant Treasury secretary for financial stability, told the Congressional Oversight Panel, which is charged by Congress with policing the $700 billion Troubled Assets Relief Program.

The panel, which was probing the Treasury Department's oversight of Citigroup, was skeptical of Allison's remarks. "The market clearly perceives that there is a too-big-to-fail guarantee, and the market is rating Citi higher because of that," said Elizabeth Warren, a Harvard law professor who chairs the panel. "That gives Citi an advantage in raising capital. That is very valuable to Citi. What is Citi paying the taxpayers for that guarantee?"

The government pumped $45 billion into Citigroup over two months in 2008 and agreed to guarantee about $301 billion of its assets. So far, Citigroup has paid back $20 billion, but the government still holds a 27 percent stake in the firm.

Allison also faced pointed questions about the financial health of Citigroup, which he deflected.

Warren asked, "Are you telling me you are exercising no supervision over Citi in its financial operations today? No oversight of the financial health of this institution?"

Allison responded that Warren should ask Citigroup's leader. "We are not involved in managing Citi on a day-to-day basis. All right? And the regulators oversee Citigroup," he said.

The government is eager to sell its remaining shares in Citigroup and does not expect to have to pump more money into the firm, Allison added. "I have no reason to expect, and we have no plans whatsoever, to make any further investments in Citigroup," he said.

Vikram S. Pandit, Citigroup's chief executive, sought to assure the panel that the firm is much healthier than during the financial crisis, and he acknowledged a debt of gratitude to American taxpayers. "Today, Citi is operating on a very strong foundation and is positioned to contribute to the economic recovery and generate sustained profitability for the benefit of all our stakeholders," Pandit said. "For us, as for many other institutions, the bridge to the other side to a sound footing came from the American people."

The New York firm has reduced its risk exposure and defined a clear strategy, said Pandit. "At the end of 2009, we were one of the best-capitalized banks in the world," he said.

Asked if the firm was insolvent, Pandit said no. "We have the reserves, we have the liquidity and, by the way, we stress ourselves very often to make sure that's always the case," he said.

This isn't the first time Citigroup has received government assistance, said Warren. Its predecessor company -- National Bank -- was saved during the Great Depression, and the firm received regulatory assistance during the 1980s when it operated as Citicorp, she said.

"Citi and a number of other banks, many banks, were on the brink of failure, had the system not been underpinned by actions of the government, including the Federal Reserve as well as the U.S. Treasury," Allison said.

Allison pointed to Obama administration efforts to regulate the financial system. The House passed a bill that would allow the government to take over and wind down failing firms. The Senate is still deliberating the measure.

"We are strongly advocating financial reforms to prevent this situation from happening again by assuring that no single institution can threaten the financial system," Allison said.