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April 22, 2010
Resolution on Derivatives Wins Strong Support at CitiGroup Shareowner Meeting
    by Robert Kropp

Submitted by members of the Interfaith Center on Corporate Responsibility, the resolution, which requests a report on CitiGroup’s derivatives policy, wins 30% of vote.


Much of the recent effort to craft meaningful financial reform has centered on the regulation of derivatives, unregulated financial products that had a significant role in the financial crisis. Last week, the Securities and Exchange Commission (SEC) charged Goldman Sachs and one of its vice presidents with defrauding investors about such a product linked to subprime mortgages. Legislative efforts at reform showed gains in support this week, when the Senate Agricultural Committee voted to approve a bill that would impose rules on derivatives trading.

President Obama has been an outspoken advocate for financial reform since the crisis erupted during the Presidential election campaign. In an excerpt from a speech he is scheduled to deliver at Cooper Union, near Wall Street in New York City, Obama said, “I believe in a strong financial sector that helps people to raise capital and get loans and invest their savings, but a free market was never meant to be a free license to take whatever you can get, however you can get it.”

Meanwhile this week, both Goldman Sachs and CitiGroup reported record earnings for the first quarter of 2010.

In a concerted effort to pressure financial institutions to improve transparency regarding their involvement in derivatives, members of the Interfaith Center on Corporate Responsibility (ICCR) have introduced shareowner resolutions at four of the five financial institutions accounting for a reported 96% of all derivatives trading in the US: Bank of America, CitiGroup, Goldman Sachs, and JP Morgan Chase.

CitiGroup’s annual general meeting was held yesterday. According to ICCR members who reported on the meeting in a webinar that followed, 30% of shares were cast for their proxy resolution urging more disclosure of derivatives practices at the firm.  

On a more disappointing note, the US government, which controls 27% of Citigroup as a result of the bank bailouts, failed to fully support the resolution, according to ICCR members.

Noting that “assets of the largest financial institutions were leveraged at the rate of over 30 to 1” in the period leading up to the financial crisis, the resolution requests that CitiGroup’s board report on “the firm’s policy concerning the use of initial and variance margin (collateral) on all over the counter derivatives trades and its procedures to ensure that the collateral is maintained in segregated accounts and is not rehypothecated.”

Rehypothecation refers to the practice by financial institutions of taking in collateral as guarantees on derivatives trades, and then using it as collateral for their own transactions.

Despite the impressive support shown for a first-year resolution, ICCR members expressed disappointment in the failure of the US government to vote its shares in favor of the resolution.

Sr. Barbara Aires, coordinator of Corporate Responsibility at the
Sisters of Charity of St. Elizabeth, NJ, said, “We were deeply disappointed that the US government failed to fully vote its 27% shares in favor of the derivatives resolution. With the support of the Obama administration, we could have won a majority of the vote.”

“Today, the administration sent a mixed message to Wall Street,” she continued.

ICCR Board Member Rev. Seamus Finn, the director of Justice, Peace & Integrity of Creation at the
Missionary Oblates of Mary Immaculate, focused on the better-than-expected support for the resolution.

“It was a great victory at the Citigroup annual meeting this morning. We want to applaud Citigroup’s management for paying attention to a risk management overhaul.”

“Our concerns have always been about the risks that large institutions present to the global financial system,” he continued. “There’s been way too much untested innovation in the financial services industry.”

Kate Walsh, associate director of the
Tri-State Coalition for Responsible Investment, said, “Shareholders need to take their ownership role seriously.  The series of proxy votes on derivatives disclosure that started today at Citigroup is a perfect opportunity for the owners of America’s largest financial institutions to speak out and be heard.   The alternative – turning a blind eye to problem practices – is something that we now know from painful experience is an entirely unacceptable way to proceed.”

ICCR executive director Laura Berry provided a historical perspective to the shareowner action, saying, “We are delighted with the clear support for the principles reflected in the apparent high level of shareholder support for this resolution. Given the history of ICCR attempts to bring these issues to the attention of our fellow shareholders, long before the crisis and bailouts began, the administration’s decision to vote with management is mystifying and inconsistent.  The SEC’s recent ruling, allowing these resolutions to move forward, and the administration’s oft-stated commitment to financial reform and transparency led us to imagine the full support of our government in their stewardship of the shares they hold on behalf of U.S. taxpayers.”

The similar resolutions submitted at Bank of America, Goldman Sachs, and JP Morgan Chase will be voted on at their annual meetings during the next few weeks.

 

 
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