Citigroup Filing Raises Volcker Questions: Street Whispers

NEW YORK ( TheStreet) -- Citigroup ( C) filed an 8-K Wednesday offering a window into a pair of proprietary funds in which the bank's employees are invested, though the filing mostly serves as a reminder that the bank's disclosure of its investments in such funds leaves a lot to be desired.

The filing disclosed that newly appointed co-Presidents Manuel Medina-Mora and James Forese will receive a total of about $1.2 million between them via distributions from a pair of proprietary investment funds: Citigroup Employee Fund of Funds I, L.P. and Citigroup Capital Partners II, L.P.

Citigroup contributes twice whatever employees invest in these funds in the form of a loan. In other words, if an employee invests $1 million in the fund, Citigroup will lend the employee another $2 million which gets invested in the fund at 0.75% above LIBOR--or roughly 1.65% for a year at today's rates. If the fund loses money, at least half of the loan is Citigroup's problem. These loans aren't available to executive officers, however, so any loans received by Medina-Mora and Forese would have had to have come before they reached that status.

Due to a controversial piece of the 2010 Dodd Frank financial reform legislation known as the Volcker Rule which places limits on proprietary investments by banks, Citigroup and its peers have sold off many of their investments in hedge funds and private equity funds. Regulators have not yet implemented the rule.

Despite the sales of the private equity and hedge funds by Citigroup, a look at the bank's latest annual report shows it still had substantial investment in private equity and hedge funds at the end of 2011. In the "risk factors" section of the report, for example, Citigroup warns that the Volcker Rule could force the bank to sell its investments, possibly resulting in "substantial discounts" to the values at which they are currently reflected on the balance sheet. A company spokeswoman declined to say how much the bank has invested in private equity.

Why won't Citigroup disclose these investments? Not that the bank is alone in its refusal to do so. A story published by Bloomberg News this week shines a light on the existence of a unit of Goldman Sachs ( GS) that continues to invest $1 billion of the company's own capital despite the fact that Chairman and CEO Lloyd Blankfein said publicly in July that Goldman had "shut off that activity." .Another article in The Atlantic magazine notes that even Wells Fargo ( WFC)--thought to be the most boring of the largest U.S. banks by a mile--acknowledges exposure of $60 billion in potential losses to opaque off balance sheet vehicles called variable-interest entities that had total assets of $1.46 trillion.

Citigroup is under new management, following the ouster of CEO Vikram Pandit last year. Sweeping changes are expected--so much so that longtime bears such as CLSA analyst Mike Mayo have turned bullish on the stock. But the kind of changes required to make relatively routine filings like the one on Wednesday comprehensible are at least one more crisis away.

-- Written by Dan Freed in New York.

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