Home Madrid Economy Citi’s $900 million loan mistake is puzzling

Citi’s $900 million loan mistake is puzzling

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You can understand why Citigroup Inc. is blaming human error for its mistaken US$900 million payment to Revlon Inc. lenders. That’s a simple explanation for an embarrassing cock-up. Presumably, the company wants to give the impression that those responsible can be dealt with quickly in the hope that the unrest will subside.

Well, not so fast. When a simple human failure like this can cause such a problem, it suggests that there may also be systemic deficiencies. Where were the checks? The US banking giant was also criticized not so long ago by UK regulators for shortcomings in its governance and controls.

As it seeks in court to recover the wrong payment from Revlon, Citi – a bank with a balance sheet of US$2.2 trillion – claims the person who processed the transfer “did not manually select the correct system options” after certain lenders have been paid part of a loan. Instead of paying interest only, it says the individual did not prevent repayment of the entire principal of the loan, which earned lenders 100 times what they were due to receive.

According to Citi’s latest court filing on the matter, “manual checks” also failed to catch the initial error. A third-party vendor was also involved, according to a person familiar with the deal. Unfortunately for the Wall Street firm, this raises more questions about the robustness of its system. As my colleague Chris Hughes wrote last week, when those controls don’t work, it’s institutional failure. The bank separately acknowledged that it is upgrading its lending operations platform.

Citi investors may wonder what these additional controls are. Were alerts triggered and if so, how and why were they ignored? And how did Citi’s equity end up being transferred to Revlon’s lenders? The bank was only the “administrative agent” of the loan, according to its own description, and the cosmetics company had, on August 11, remitted the interest amount to Citigroup for transfer, not the principal.

Will the new lending platform ensure this won’t happen again, or has the upgrade itself somehow made the problem worse? It is not uncommon for glitches to occur when technology changes.

Citi declined to comment beyond its legal documents and statements, as did an attorney for the lenders. Regardless of the legal ins and outs of the case – a hedge fund lender sees reason to keep the money to offset its exposure to Revlon, while another group of creditors say the cosmetics company was in any way default on the loan – regulators will surely be looking closely at the details of what went wrong too.

In the who’s who of payment errors, Citi isn’t the worst. Deutsche Bank AG inadvertently transferred €21 billion ($25 billion) as collateral for an OTC derivatives transaction in 2014 and made a payment error of €28 billion in 2018. German bank also blamed the first mistake on an individual and the failure of a system that requires two pairs of eyes to review transactions.

Citi’s mistake isn’t its only recent oversight problem. In December, a UK regulator fined the bank $57 million for misreporting the capital and cash it held locally, identifying dysfunctional systems, governance and controls. The Bank of England’s Prudential Regulation Authority said the lender’s top management and governance committees did not have a full understanding of what was required and which of their managers were in charge.

Of course, these are two separate incidents. Citi may recover the remaining funds from the Revlon payment (some lenders have already repaid). He acknowledged that “an operational error of this nature is unacceptable”. But regulators and shareholders should continue to push for a clearer explanation of what went wrong.

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Elisa Martinuzzi is a Bloomberg Opinion columnist covering finance. She is a former European Finance Editor at Bloomberg News.