TARP watchdog: Citigroup bailout based on ‘gut instinct and fear’

The group credited the Treasury in its Thursday report for handling the Citigroup bailout in a way that saved the company and ultimately turned a profit of more than $12 billion for the American taxpayer. However, it noted that the decision to step in — that the firm was crucial to the entire financial system — was not based purely on objective criteria. That subjectivity raises questions about the criteria used to deem a firm systemically significant, and SIGTARP called for a more objective road map be put in place before the next crisis.

However, Geithner told SIGTARP that a purely objective plan was impossible, saying, “it depends too much on the state of the world at the time.

“You won’t be able to make a judgment about what’s systemic and what’s not until you know the nature of the shock,” he added.

Geithner’s claim was immediately jumped on by the House’s top GOP watchdog, Rep. Darrell Issa (R-Calif.), chairman of the House Oversight Committee.

“Secretary Geithner’s candid acknowledgement that it is not possible to measure what’s ‘systemic’ and SIGTARP’s findings that the actions of the government has contributed to increased moral hazard and the further institutionalizing ‘too-big-to-fail’ is concerning in the face of Dodd-Frank,” he said. “The sobering reality that the American people won’t know until the next financial crisis the true effect of bailing out the ‘too-big-to-fail’ underscores the need to ensure that the money taken by Washington is spent and well accounted for.”

While airing concern about the subjectivity of the government’s decision, SIGTARP also recognized that given the extreme circumstances of the financial crisis, the lack of an objective roadmap was understandable, and that there is no evidence that the decision to save Citigroup was the wrong one.

It also applauded the Treasury for driving a hard bargain with Citigroup, giving a “take-it-or-leave-it offer” that left Citigroup insiders grumbling about the terms. That negotiation helped limit the risk of government loss on the bailout, SIGTARP said.

The Treasury focused on those highlights in its response to the report.

“We appreciate the report’s conclusion that Treasury’s investment in Citigroup was successful and that our efforts ‘achieved the primary goal of restoring market confidence’ during a time of unprecedented turmoil. We also appreciate the report’s finding that the government effectively limited risk to the taxpayer. As a result of these and other actions, taxpayers did not lose a dime on the government’s assistance to Citigroup, but instead saw profits of $12 billion,” said the Treasury’s Tim Massad, acting assistant secretary for financial stability. “The Dodd-Frank Act puts in place necessary protections for taxpayers that ends bailouts and reduces the potential for moral hazard.”

The decision to step in and save Citigroup was made under former Treasury Secretary Henry Paulson, while Geithner contributed as head of the New York Federal Reserve Bank.

This post updated at 6:11 pm.