Donald R. Van Deventer, Ph.D.

Don founded Kamakura Corporation in April 1990 and currently serves as Co-Chair, Center for Applied Quantitative Finance, Risk Research and Quantitative Solutions at SAS. Don’s focus at SAS is quantitative finance, credit risk, asset and liability management, and portfolio management for the most sophisticated financial services firms in the world.

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Case Studies in Liquidity Risk: Citigroup

06/06/2011 10:22 AM

Today’s blog focuses on the funding shortfall that took place at Citigroup during the period from February 8, 2008 to March 16, 2009. Today’s blog confirms that Citigroup, like Morgan Stanley, experienced a greater amount of liquidity risk and funding shortfall than Lehman Brothers, but by the time of Citigroup’s peak borrowings on March 5, 2009, the unspoken definition of who is too big to fail had moved in its favor.

This is the eighth case study in liquidity risk, following earlier blogs on AIG, Bank of America, Countrywide Financial, Merrill Lynch, a consolidation of the latter three firms, Lehman Brothers, and Morgan Stanley.

Under the Dodd-Frank Act of 2010, the Board of Governors of the Federal Reserve was required to disclose the identities and relevant amounts for borrowers under various credit facilities during the 2007-2010 financial crisis.  These credit facilities provide perhaps the best source of data about liquidity risk and funding shortfalls of the last century.  This data is available for purchase from Kamakura Corporation and is taken from the Kamakura Risk Information Services Credit Crisis Liquidity Risk data base. We use this data to determine to what extent there was a funding shortfall at Citigroup during the credit crisis.

The data used for Citigroup in this analysis is described in more detail below. The data consists of every transaction reported by the Federal Reserve as constituting a “primary, secondary, or other extension of credit” by the Fed. Included in this definition are normal borrowings from the Fed, the primary dealer credit facility, and the asset backed commercial paper program. Capital injections under the Troubled Asset Relief Program and purchases of commercial paper under the Commercial Paper Funding Facility are not included in this definition put forth by the Federal Reserve.

A detailed chronology of the credit crisis through February 28, 2008 is given in this recent blog post:

van Deventer, Donald R. “A Credit Crisis Chronology Part 1 Through February 2008: This Time Isn’t Different,” Kamakura blog, www.kamakuraco.com, May 13, 2011.

The key dates in the chronology relevant to Citigroup are summarized below.  The “Levin Report” refers to the bi-partisan study of the root causes of the credit crisis submitted to the U.S. Congress1  on April 13, 2011:

October 15, 2007
Citigroup and Bank of America announce “CP rescue fund” (source: Bloomberg)
October 16, 2007
Citigroup announces $3 billion in write-offs on subprime mortgages (Source: www.ft.com)
November 5, 2007
Citigroup CEO Prince resigns after announcement that Citigroup may have to write down as much as $11 billion in bad debt from subprime loans. (Source: Bloomberg)
November 6, 2007
Citigroup structured investment vehicles get emergency funding (source: Bloomberg)
November 9, 2007
Citigroup predicts industry losses of $64 billion on CDOs (source: Reuters)
November 27, 2007
Citigroup raises $7.5 billion in convertible securities from Abu Dhabi Investment Authority (Source: www.ft.com)
December 14, 2007
Citigroup adds $49 billion to its balance sheet after consolidating struggling off-balance sheet structured investment vehicles (Source: www.ft.com)
January 15, 2008
Citigroup reports a $9.83 loss in the fourth quarter after taking $18.1 billion in write-downs on subprime mortgage-related exposure. The firm also announced it would raise $12.5 billion in new capital, including $6.88 billion from the Government of Singapore Investment Corporation. (Source: www.ft.com)
September 15, 2008
Lehman Brothers bankruptcy (Source: Levin report, page 47).
September 15, 2008
Merrill Lynch announces sale to Bank of America (Source: Levin report, page 47).
September 16, 2008
Federal Reserve offers $85 billion credit line to AIG; Reserve Primary Money Fund NAV falls below $1 (Source: Levin report, page 47).
October 3, 2008
Congress and President Bush establish Troubled Asset Relief Program (Source: Levin report, page 47).
October 28, 2008
U.S. uses TARP to buy $125 billion in preferred stock at 9 banks (Source: Levin report, page 47).

This blog reports on “primary, secondary, or other extensions of credit” by the Federal Reserve to Citigroup during the period February 8, 2008 to March 16, 2009. Citigroup’s borrowings from the Federal Reserve can be summarized as follows:

Borrowing dates:
First borrowing $500 million on March 18, 2008,
with borrowings continuously outstanding from
September 15, 2008, peaking initially at $22.6 billion
on December 1, then continuing to rise and fall until
March 16, 2009, with a second peak of $24.2 billion
on March 5, 2009.
Average from
2/8/2008 to 3/16/2009
$6.7 billion
Average when Drawn
$12.5 billion
Maximum Drawn
$24.2 billion on March 5, 2009
Number of Days with
Outstanding Borrowings

The graph below shows the Citigroup 1 month (yellow line) and 1 year default probabilities (blue line) for the Jarrow-Chava version 5.0 default probability models from Kamakura Risk Information Services. Note that the default probabilities for Citigroup continued to rise through March 2009, well after the September 14, 2008 bankruptcy filing by Lehman Brothers. Ultimately the 1 month default probability for Citigroup peaked at just under 40%.

Citigroup’s first borrowing from the Federal Reserve was $500 million on March 18, 2008. Citigroup borrowed on 28 days during March and April 2008 with a peak borrowing during that time of $8.4 billion on April 17, 2008. Borrowings began again on September 15, 2008 with a draw of $2.75 billion, rising erratically until hitting $22.6 billion on December 1. The increase in funding needs continued even though Citigroup received a capital injection of $25 billion under the Capital Purchase Program on October 28, 2008 (Source: Office of the Special Inspector General for the Troubled Asset Relief Program, “Emergency Capital Injections Provided to Support the Viability of Bank of America, Other Major Banks, and the U.S. Financial System,” October 5, 2009, page 20-22.)  We also know that Citigroup began borrowing under the Commercial Paper Funding Facility as shown below.  As noted in the time line, Citigroup also turned to private investors for capital on two of occasions.

In the chart below, we compare Citigroup’s funding short fall to those firms whose liquidity risk we have previously analyzed in this series.  Citigroup’s average drawn borrowing of $12.5 billion ranks fifth among the firms analyzed so far, just ahead of Lehman Brothers.

If one ranks the same firms by largest outstanding borrowing on a single day, Citigroup ranks sixth, with a peak borrowing of $24.2 billion, almost double that of Bank of America when Countrywide and Merrill Lynch-related borrowings are excluded.

Citigroup began borrowing under the Commercial Paper Funding Facility on November 3, 2008 and did a total of 10 transactions which are listed here:

Implications of Funding Shortfall Data

Citigroup’s peak funding need of $24.2 billion was less than the $28 billion funding shortfall at Lehman Brothers on September 15, 2008, the day after Lehman Brothers filed for bankruptcy. When one considers, however, that Citigroup’s peak borrowing came on March 5, 2009, Citigroup had already received a TARP capital injection of $25 billion on October 28, 2008. With this in mind, it is clear that Citigroup’s financial distress was nearly double that of Lehman on the day after its bankruptcy filing. As noted in our May 31, 2008 blog on Lehman, it is clear that the U.S. government dramatically revised its decision making on which firms were too big to fail in the aftermath of the Lehman Brothers bankruptcy.  If the definition of “too big to fail” that was in place on September 14, 2008 had remained unchanged, it is very likely that Citigroup would have failed as well.

Background on the Federal Reserve Data

A summary of the Federal Reserve programs that were put into place and summary statistics are available from the Federal Reserve at this web page:


Today’s blog focuses on one set of disclosures by the Federal Reserve: primary, secondary and other extensions of credit by the Fed.  This includes direct, traditional borrowings from the Federal Reserve, the primary dealer credit facilities, and the asset backed commercial paper program described at the link above.  These borrowings do not include commercial paper purchased under the Commercial Paper Funding Facility nor do they include the equity stakes taken by the U.S. government under the Troubled Asset Relief Program.

Kamakura took the following steps to consolidate the primary, secondary and other extensions of credit:

  • From www.twitter.com/zerohedge Kamakura downloaded the daily reports, in PDF format, from the Federal Reserve on primary, secondary and other extensions of credit from February 8, 2008 until March 16, 2009, approximately 250 reports in total
  • Kamakura converted each report to spreadsheet form
  • These spreadsheets were aggregated into a single data base giving the origination date of the borrowing, the name of the borrower, the Federal Reserve District of the borrower, the nature of the borrowing (ABCP, PDCF, or normal), the maturity date of the borrowing, and (in the case of Primary Dealer Credit Facility) the name of the institution holding the collateral.
  • Consistency in naming conventions was imposed, i.e. while the Fed listed two firms as “Morgan Stanley” and “M S Co” Kamakura recognized to the maximum extent possible that they are the same institution and used a consistent name
  • To the maximum extent possible, the name of the ultimate parent was used in order to best understand the consolidated extension of credit by the Fed to that firm.

For information regarding the Kamakura Credit Crisis Liquidity Risk data base, please contact us at info@kamakuraco.com.  Please use the same e-mail address to contact the risk management experts at Kamakura regarding how to simulate realistic liquidity risk events in the Kamakura Risk Manager enterprise-wide risk management system.

Donald R. van Deventer
Kamakura Corporation
Honolulu, Hawaii
June 6, 2011

© Copyright 2011 by Donald R. van Deventer, All Rights Reserved.

1 Majority and Minority Staff Report, Permanent Subcommittee on Investigations, United States Senate, “Wall Street and the Financial Crisis: Anatomy of a Financial Collapse,” Aprill 13, 2011


Donald R. Van Deventer, Ph.D.

Don founded Kamakura Corporation in April 1990 and currently serves as Co-Chair, Center for Applied Quantitative Finance, Risk Research and Quantitative Solutions at SAS. Don’s focus at SAS is quantitative finance, credit risk, asset and liability management, and portfolio management for the most sophisticated financial services firms in the world.

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