Audit Integrity Questions Citigroup’s Risk Assessment
The forced rescue of Bear Stearns within days of its CEO telling stakeholders not to worry once again brings into focus the credibility of corporate leaders. Now Audit Integrity’s Jim Kaplan questions Citigroup’s judgment in measuring its risk.
Kaplan takes apart Citi’s recent move to install new risk managers. On Feb 28 the Wall Street Journal noted that Citigroup (NYSE: C) had just suffered more than $20 billion in losses from exposure to risky investments, then goes on to say:
“Like other Wall Street banks, Citigroup calculates the amount of risk its investment bank is taking every day with a metric known as value-at-risk, or VAR. It is designed to provide a ballpark estimate of how much money a bank’s traders potentially could lose on a given day. At the end of last year, Citigroup’s VAR stood at $191 million, compared with $106 million a year earlier. That is not out of line with other Wall Street firms.”
But Citigroup’s annual report noted an important caveat. The VAR figures don’t include Citigroup’s exposure to collateralized debt obligations – which were responsible for nearly $20 billion in investment-banking losses last year. The annual report said that the CDOs weren’t included in the risk tally because they are tough to value.”
Kaplan says the VAR risk valuation methodology for traded securities requires not only sophisticated modeling tools, but also substantial judgment on the part of the user. While he can’t evaluate the models Citigroup uses for its VAR testing, “I can seriously question their judgment.”
How can a lender with substantial exposure in CDO’s (approximately $40 billion-plus) come to a conclusion that it is “financially sound” when it is incapable of measuring the risk associated with its holdings?
“Unfortunately, given Citigroup’s inability to value their CDO loan exposure, I have no confidence in their ability to assess the risk stated on their balance sheet. As of December 31, Citigroup acknowledged an allowance for credit losses of $17.36 billion. What actual risk does that represent?” Kaplan asks.
In Audit Integrity ratings, Citigroup has been ranked Very Aggressive or Aggressive for aggressive accounting and governance risk since 2005. Audit According to Audit Integrity, persistently bad ratings have proven to be highly predictive of major negative events.
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