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2004: Citigroup and the blow from Dr. Evil

Five sorcerer-apprentices, which alone would have lost a part of Citigroup’s reputation, and a few hundred million of market in the next few years…

Article also available in : English EN | français FR

The Goldman Sachs affair in Greece indirectly pointed out a previous incident: Citigroup’s Dr. Evil affair in 2004.

Five sorcerer-apprentices, which alone would have lost a part of Citigroup’s reputation, and a few hundred million of market in the next few years

On August 2, 2004, markets had fallen into total confusion following an unusually heavy volume on the MTS platform. Citigroup had sold 12.9 billion pounds in two minutes, before repurchasing them for 3.8 billion, after the value of the futures had fallen sharply and that traders had covered their positions. The five trader’s strategy had been named “Dr. Evil” from the character in Austin Powers, according to internal e-mails that circulated among traders and that had been recovered during the investigation. The strategy – to flood the European bond market and then buy them back at a lower price – had brought to mind another bold precedent: once when the brains of Enron had used special vehicles known as “Deathstar” and “Ricochet” to take advantage of blackouts in California and win on the movement of energy prices.

In Citigroup’s case, immediately after seeing the anomalies, MTS had imposed temporary limitations on the value and volume that any trader could inject into the system at a time. MTS had also suspended Citigroup from trading on its bond market for one month after discovering that the London based bank had not complied with certain market rules. Yet in the hours that followed, there was no indication that the bank had violated any rules, even though rumors were circulating.

The FSA had finally launched an investigation and imposed a fine of 13.9 million pounds. It was the second highest sanction of the supervisory authority of the City, behind the 17 million pounds inflicted on Royal Dutch Shell at about the same time for irregularities in its reports on reserve oil and gas.

This sanction, decided a year later, was seen as a relief for Citigroup, too pleased according to its spokesperson to have “escaped the more serious charge of market manipulation, which would have resulted in a higher fine.”

The five traders had recovered their posts a year later, after being suspended for several months. Their leader, Spiros Skordos, co-director of the European government bonds trading desk, had retained his post without any penalties, while according to one observer, “it is clear that the strategy had been approved by at least two managers of Citigroup, who wanted to increase profits because of unsatisfactory performance.”

Citigroup had paid a high price for this affair. Two years later, the bank was moved from 3rd to 14th rank of investment banks in European privatization, and only participated in 2.3% of the 155 billion euros of debt sold by the government. Against 10.1% in 2003…

The top management responded quickly. In the following hours, Charles Prince had acknowledged that these transactions were “useless” even though they had earned Citigroup nearly 10 million pounds in profit. The CEO and president had sent a letter to every level in the Empire City to recall in five points the need to be more “united” in conduct, “more responsible”. “We must put Citigroup on an approach of long-term interests and not of short-term gains.”

Among the surprising changes, an “ethics hotline” had been established where staff could provide anonymous information about their colleagues. The employees had also been required to watch the documentary “The Story of Citigroup” together, which was supposed to remind them of the values and culture of the group.

Prince said that managers would be better evaluated, internal controls strengthened to “minimize errors and ensure that when they do occur they are appropriately handled”, bonuses and salary directed more towards the team rather than a trader.

Other incidents have occurred in previous months, such as in Japan, where the regulator had ordered Citi to close its entire private banking operations because it hadn’t complied with the country’s financial rules causing the departure of two leaders in the bank.

JH June 2010

Article also available in : English EN | français FR



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