Citigroup displays contrition over deal

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The disclosure of an internal Citigroup memo, in which the bank makes an astonishing admission of regret about the transaction that rocked the European sovereign bond market, should go some way to placating angry governments, regulators and counterparty banks.

Copies of the memo, addressed to 40,000 staff, quickly also reached the hands of other banks and the debt management offices of European treasuries.

It is the debt managers who are the most important group. They issue the sovereign bonds that are auctioned, syndicated and traded by banks such as Citigroup.

"Citigroup is having a difficult time at the moment," said the head of one European debt management office. "Everyone is criticising them and this is testimony to what they are going through."

Debt sales bring much business to banks. So far this year Citigroup has earned $18m from European governments out of a total of $349m earned by all banks, according to Dealogic. In addition the trade on August 2 was believed to have netted Citigroup ?15m.

But in the testosterone-fuelled market for international bonds it will not have been easy for the bank to display contrition.

When news of the deal, which involved the sale of more than 100 government bonds worth ?11bn and the almost immediate repurchase of ?4bn worth, emerged early last month, Citigroup was quick to point out that it had done nothing illegal.

And even while it acknowledged that it had "failed to fully consider its impact" in the internal memo, Citigroup made a point of insisting that the transaction was "innovative" and that "a willingness to commit capital . . . and thinking creatively" had been important factors in the bank's success.

The bond market is not the only area of financial activity where the emergence of a handful of superbanks has led to a concentration of financial fire-power in a few hands.

Governments employ the banks extensively in privatisation deals, both as advisers and as underwriters for share placements.

In the non-government sphere, corporate restructurings and equity block trades are increasingly dominated by the large players, which are often willing to risk losses to help gain long-term market dominance.

But it is the issue of government bond markets that most concerns the regulators, who are also the effective addressees of the Citigroup memo.

The UK Financial Services Authority last month opened a formal investigation into the bank's "unusual trading activity" on the MTS electronic platform, while other European regulators are reviewing it too.

A public statement of contrition may go some way to placating the regulators, although it could backfire if the widespread circulation of an ostensibly internal memo is seen as manipulative. The FSA declined to comment yesterday.

However, coupled with the decision last Friday by the Italian-based MTS to lift the restrictions imposed on trading in the wake of the Citigroup deal, the memo could take some heat out of the debate.

The European debt management head said trading in his country's sovereign debt had not been affected on the day and was continuing normally. He did point out, though, that MTS was not the only platform used to trade his country's debt.

Nicolas Galmiche, head of European government bonds at JP Morgan, said: "The most important thing is for the markets to stay liquid and transparent. The trade itself was unimportant; what we are watching carefully is its consequences."

Another senior bond market practitioner said the furore over the Citigroup trade was part of the maturing of the eurozone bond market, which had grown rapidly over the past five years.

"Participants must observe the norms but the market must move on and get rid of constraints on trading," he said.

The eurozone market in sovereign debt needed to develop the depth and flexibility of the US Treasury and derivatives markets, he noted.

Debt management agencies, operating as the ESC Working Group on Government Bonds and Bills, meet next Wednesday in Brussels to agree a joint position on possible market reform.

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