Questionable Citibank & MTA Bond Deal

Citibank’s name has been in the headlines quite often of late during this current economic recession. One of the reasons for this is the complaint filed by the Securities and Exchange Commission (SEC) against one of the company’s subsidiaries, Citigroup Global Markets. The complaint alleges that the company went through with marketing & bringing more bonds into a market they knew was extremely stressed. Unfortunately one of the investors who was caught in the middle of all of this was the MTA. The agency issued $430 million worth of bonds in November 2007 but the deal soured almost instantly. William Neuman of the New York Times has more in this report:

In August 2007, an official at Citigroup sent an e-mail message to a colleague warning of trouble in an obscure corner of the financial world: the $330 billion market for auction-rate securities.

“There are definitely cracks forming in the market,” read the e-mail message, which is cited in a complaint filed last month by the Securities and Exchange Commission against a Citigroup subsidiary, Citigroup Global Markets. “Inventories are starting to creep higher in the market and failed auction frequency is at an all-time high.”

In the following weeks, the problems in the market, which state and local governments across the country relied on to raise money for public projects, became more acute. So did the alarm at Citigroup.

But that did not stop the bank from peddling the securities to investors and working with government agencies — including the Metropolitan Transportation Authority, which runs New York’s sprawling subway, bus and commuter rail system — to bring more bonds into the already stressed market. With Citigroup Global Markets as one of its underwriters, the authority issued $430 million of auction-rate bonds on Nov. 7, 2007.

Almost immediately the deal soured. Interest rates on the bonds, set in weekly auctions, began to climb, to 4 percent from about 3 percent, and finally, by February, to 8 percent. By then, the entire auction-rate market had collapsed as panicked investors worried that they could not get access to their money.

Stunned by the soaring rates, which were costing it up to $560,000 a week, the authority redeemed the securities in March. To do so, it issued a new round of bonds, outside the auction system and at more favorable interest rates. But the move came with a cost: about $5.6 million in fees to bankers, lawyers and others, including the state, according to data provided by the authority.

All told, Citigroup earned more than half a million dollars on the two sales; Goldman Sachs, the authority’s financial adviser, which counseled in favor of the auction-rate sale, made $929,500 for its work on both.

Click here for the complete report.

At times when it rains it pours when it comes to the MTA. I think the best part of this is how calm MTA CFO Gary J. Dellaverson was about the entire ordeal. No matter what sort of bad deal goes down involving the MTA’s finances, Gary is sure to be calm about it in terms of his reaction to the media & general public. I do not know if this is foolish bravado or a planned public stance. Either way, I have to question if the authority was mislead by Citibank. He feels that the agency was not mislead but looking at the evidence, one has to question if that is really the case. I happen to agree with the statement made by MTA Board member Doreen M. Frasca:

I think there was a very surprising lack of foresight in reading the handwriting that was on the wall

Regardless of whether you believe the MTA & other agencies were mislead, Doreen’s point comes across as making a lot of sense. Over the last few years, I have seen so many examples of obvious financial mistakes made by people who are paid big bucks to avoid such pitfalls. Lets hope the MTA does not suffer any more financial setbacks from questionable deals although I doubt this will be the last one.

xoxo Transit Blogger

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[…] about MTA bonds was in February when a deal between Citigroup Global Markets & the MTA was questioned. Once again MTA bonds have made headlines as Moody’s Investors Services warned that the […]

[…] financial assets. This is the same agency that made almost $300,000 when advising the MTA on a questionable bond deal at a time when the market was extremely stressed. The other agency involved in the deal, was […]

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