Citigroup cut its fourth quarter and full year 2013 estimates today due to problems in Mexico, specially involvement in fraudulent loans. The fraud cuts Citigroup’s profit by $235 million after it was revealed the loans were made to a company that had phony collateral. Citigroup’s credit analysts appeared to not even know the company was in danger of being prevented from having access to the government contracts it was claiming would create the revenue to payback the loan with.
Get ready for a painfully ridiculous public statement.
Citigroup Chief Executive Michael Corbat called the incident a “despicable crime” and said the bank believes it was an isolated episode.
The bad loans were made to Mexican oil services company Oceanografia, a contractor for the nation’s state-owned oil company, Pemex. Oceanografia borrowed from Citigroup’s Mexican unit, Banco Nacional de Mexico or Banamex, using expected payments from Pemex as collateral.
Isolated episode? This is the same bank that was caught laundering Mexican drug cartel money.
Of course given that Oceanografia is unable to secure government contracts it would not receive any of the payments that were its collateral. Once a public announcement was made earlier this month that Oceangrafia was suspended from receiving those government contracts Citigroup’s Mexican unit finally did the due diligence it should have done initially and found that Oceanografia had used falsified invoices to show revenue coming from Pemex – revenue that helped present a credit picture that secured the loans. Citigroup then wrote down “about $400 million of loans backed by the bogus invoices.”
On February 11, Oceanografia was suspended by Pemex’s internal control group from receiving any government contracts for 21 months and 12 days, a serious blow for a company that receives about 97 percent of its revenue from Pemex. Citigroup said it began looking at its exposure to Oceanografia after the suspension…
Citigroup has about $1.9 trillion of assets on its balance sheet, and so far the bank has found just $400 million of loans in Mexico that it has trouble with.
Yes, you read that correctly, Citigroup started doing a credit analysis after making $400 million of loans. What is the point of allowing private Too Big To Fail banks whose sole responsibility is risk management if they won’t manage risk?
And more to the point, Oceanografia’s primary customer was a state oil company – one phone call to ask for proof of Oceanografia’s revenue numbers and Citigroup/Banamex executive would have learned the numbers were phony. Then again, did any Citigroup executive really want to know the truth given their bonuses are calculated based on how many loans they push?
I fear for the rest of that trillion dollars.
Photo by JSquish under Creative Commons license.