Citigroup: Systemic Risk and Moral Hazard

04/15/2015 04:54 pm ET | Updated Jun 15, 2015

No one needs to remind us of the cataclysmic U.S. economic crisis and resulting great recession beginning in 2008, primarily caused by excessive speculation in housing mortgage financing and the leveraging of exotic financial instruments, including derivatives. Large bank and non-bank financial institutions early in the twenty-first century convinced Congress and the president to deregulate the securities industry, including the elimination of the Glass-Steagall Act which prohibited banks from being engaged in non-banking activities, such as insurance and underwriting or trading securities.

When the economy cratered, Congress passed the Emergency Economic Stabilization Act, providing $700 billion to purchase troubled assets and inject capital into over 700 firms. One of the corporations, Citigroup, alone, received over $476.2 billion in taxpayer bailouts. The bank later paid out billions of dollars in fines, penalties, and litigation expenses, including the payment of over $7 billion, the largest civil fraud penalty ever levied by the DOJ, to settle an investigation into the bank's mortgage securitization programs.

According to The Financial Crisis Inquiry Report of 2011, the causes of the 2008 financial crisis included the failure of financial regulation and supervision; the failure of corporate governance; excessive borrowing; risky investments; lack of transparency; collapsing securitization; the creation and trading of over-the-counter derivatives; failures of credit rating agencies, and a systemic breakdown in accountability and ethics. Citigroup was at the center of the crisis and engaged in numerous illicit and illegal activities.

As a shareholder of Citigroup, I filed several resolutions at the bank in an effort to respond to egregious management behavior resulting in serious financial losses, not the least of which was corporate management ignoring potential conflicts of interest, reputational and systemic risk, relating to the fact that directors were risking bank capital, ultimately backstopped by the taxpayer, as the economic fabric of the U.S. economy unraveled. In other words, the directors protected by indemnity and a battery of stockholder-paid attorneys, avoided personal liable when risking bank capital backstopped by taxpayer capital.

In late 2014, I filed a resolution raising the issue of "moral hazard" which occurs when directors are more likely to take actions creating greater risk to society because they do not face proportionate downside risks compared to the risks to the U.S. economy. While the financial crisis resulted in financial penalties and legislative efforts, systemic risk posed by Citigroup's actions were not addressed.

Citigroup opposed my resolution which simply requested a company report, assessing whether current policies and procedures were adequate to prevent management from making business decisions maximizing short-term profits by externalizing long-term risks to the U.S. economy and society.

After negotiating with corporate general counsel, I was able to get the company to agree to amend their Business Practices Committee charter to require the committee to "... identify, assess and resolve potential conflicts of interest and other reputational, franchise and systemic risk issues that may arise, even when business practices fall within the 'letter of the law'."

I withdrew my resolution based upon the above adopted amendment. While this does not guarantee compliance, it does take the first step in institutionalizing acceptance of the corporation's responsibility to stakeholders and American society when it comes to "systemic risk" and "moral hazard."