Citigroup, the nation's third-largest bank by assets, was on the verge of being closed by regulators the week of Nov. 24, 2008 as depositors rapidly withdrew money and the bank's counterparties declined to provide it credit, according to a government report released Thursday.

The new findings shed light on the degree to which Citigroup, the financial services behemoth with a long history of finding itself in trouble and receiving government support, was actually in danger of failing during the fall of 2008. Until now, few were aware that Citi was perilously close to being shut down.

"We were on the verge of having to close this institution because it can't meet its liquidity Monday morning," said Sheila Bair, chairman of the Federal Deposit Insurance Corporation, during a meeting the previous Sunday night, according to the report by the Special Inspector General for the Troubled Asset Relief Program.

"Without substantial government intervention," said another FDIC official, bank regulators and Citigroup "project that Citibank will be unable to pay obligations or meet expected deposit outflows next week," according to the report.

Yet while policy makers unanimously agreed that Citigroup needed additional help -- this was after the megabank had already received $25 billion in TARP funds -- the "strikingly ad hoc" nature of the response was troubling, notes the inspector general, known as SIGTARP.

Citigroup's problems were well known to regulators. In May 2008 -- six months before the second multi-billion dollar infusion of taxpayer cash into the lender -- regulators at Geithner's New York Fed forced the bank to create a plan to strengthen its risk-monitoring practices so it could better judge the bank's exposures.

A month later, bank overseers at the Office of the Comptroller of the Currency compelled the bank to enter into another agreement, this time requiring upgrades to the firm's risk management. That agreement is still in effect today, according to SIGTARP's report.

Even so, the consensus to give Citigroup more taxpayer cash "appeared to be based as much on gut instinct and fear of the unknown as on objective criteria," according to the report. One FDIC official told SIGTARP that policy makers "made a judgment call" on the degree of Citigroup's importance to the entire fabric of the financial system.

More than three years later, such judgment calls persist. Treasury Secretary Timothy Geithner, who effectively oversaw Citigroup as the then-president of the Federal Reserve Bank of New York, told SIGTARP during an interview last month that it's not possible to create effective, objective criteria for evaluating the risk a financial firm poses to the system.

"It depends too much on the state of the world at the time," Geithner said Dec. 21. "You won't be able to make a judgment about what's systemic and what's not until you know the nature of the shock."

Geithner added that lenders would simply "migrate around" whatever objective criteria policy makers developed in advance.

Taxpayers may once again have to support failing financial firms based on gut instinct alone.

"In the future we may have to do exceptional things again if we face a shock that large," Geithner said, according to the report. "You just don't know what's systemic and what's not until you know the nature of the shock."

The 2010 law overhauling financial regulation, known as Dodd-Frank, gives policy makers "better tools," Geithner said, "but you have to know the nature of the shock."

Given the ambiguity, SIGTARP notes that taxpayers likely won't know the extent to which they'd be on the hook for future shocks to the system until the next crisis.

Despite the concerns about how regulators acted and how they might do so in the future, the report cautiously called the taxpayer rescue a success. Citigroup didn't fail, the financial system largely stabilized, and taxpayers turned a profit on their investment.

"We appreciate the report's conclusion that Treasury's investment in Citigroup was successful and that our efforts 'achieved the primary goal of restoring market confidence' during a time of unprecedented turmoil," Tim Massad, the Treasury official now overseeing the taxpayer bailout, said in an e-mailed statement.

As for Citigroup, despite a Feb. 22, 2009, e-mail from Bair stating that the bank needed management changes "at the top of the house," much of its senior managers remain, including its chief executive, Vikram Pandit.

In addition, the internal auditor at another government agency, the Securities and Exchange Commission, is probing whether the SEC's top enforcement official, Robert Khuzami, gave preferential treatment to Citigroup executives in the agency's $75 million settlement with the firm last year over its alleged failure to adequately disclose crisis-era risks to investors, reports Bloomberg News.

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