The big question on Wall Street during the financial crises: who knew what when, and what did they disclose to investors? Following the crash of the financial markets and the collapse of companies like Bear Stearns and Lehman Brothers, it appears at least one of those players, Citigroup, Inc., may help shed some light.
As reported May 28, 2009, by the Wall Street Journal, Citigroup is in early negotiation early negotiation talks with the Securities and Exchange Commission (SEC) to settle an investigation over whether the bank misled investors by failing to disclose the amount of troubled mortgage assets it held when the financial markets began to plummet three years ago.
The SEC initially launched its investigation into Citigroup’s valuation and disclosure methods following the bank’s third-quarter earnings report. Specifically, two weeks prior to the actual earnings release, Citigroup had predicted a 60% decline in earnings due largely to a $1.3 billion loss on the value of its subprime-related assets and other leveraged loans.
On Oct. 15, 2007, Citigroup said its third-quarter profit fell 57%, with higher losses of $1.83 billion on the same category of mortgage assets and leveraged loans. On Nov. 4, 2009 following a second mortgage-asset downgrade by Standard & Poor’s, Citigroup revealed that it faced new fourth-quarter losses of $8 billion to $11 billion on its subprime-mortgage exposure, according to the Wall Street Journal.
Citigroup further disclosed - for the first time - that it held subprime mortgage assets totaling $55 billion, including $43 billion that had never been mentioned in the company’s Oct. 15, 2009 report. The larger-than-expected losses came as a shock to investors and Citigroup executives alike, and ultimately prompted the resignation of Citigroup’s CEO Charles Prince.
Over the course of the next five quarters, Citigroup reported about $50 billion in losses, mostly related to mortgage-related assets.
Citigroup, who in October of 2008 was the recipient of $25 billion in bailout money from the federal government, got an additional $20 billion, bringing the total amount of funds received under the government’s Troubled Asset Relief Program (TARP) to $45 billion. In February 2009, the bankl agreed to convert a portion of the TARP investment from preferred stock to common stock. In addition to Citigroup, the SEC has opened inquiries into the valuation and disclosure methods at Merrill Lynch and Lehman Brothers, as well as other investment firms.
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