The state of Citi

I have one word for those who advocate for a new and broader regulatory framework to protect us from the kind of financial threats doing so much damage today.

Citigroup.

The emergence of a shadow banking system - brokers, mortgage companies, and investment banks all funded by supposedly sophisticated investors around the world - should take a good deal of the blame for the current calamity in capital markets. The damage that the virtually unregulated system has wrought on the economy itself, especially the housing market, demands a new kind of oversight.

But Citigroup, among the nation's very largest financial institutions, never operated in any shadows. It is a famous banking company with a federal charter that comes with lots of government regulators responsible for monitoring the business and raising red flags when they see something wrong.

Obviously, there were some seriously wrong things going on. But Citi is considered too big to fail, and so it won't even be allowed to come close. Federal officials stepped up over the weekend with more money and asset guarantees to keep the institution safe.

Citi should come up prominently in debate about new regulatory structures that would supposedly make all of us and the economy safer. The structure and legal purview of regulation don't matter if regulators on the ground fail.

Citi's huge, balkanized operation may have undermined regulation by dividing it among several government agencies. But it's hard to escape the conclusion that regulation failed at Citi.

"Why didn't what we already have work?" asks Con Hurley, director of the Morin Center for Banking and Financial Law at Boston University. "The debate now seems to be about how we need more regulation. You have to make sure what you've got works."

The problems at Citi are hardly brand new. But the situation became dire last week when Citi shares plunged more than 50 percent, shaking confidence in the banking giant.

Citi executives traveled to Washington in search of a deal Friday. They arrived just after the nation's top three bailout-seeking auto CEOs rode their private jets back to Detroit without a dime of the $25 billion they wanted.

But Citi came away with a deal that gives you, the taxpayer, a bigger financial interest in the troubled banking company in return for $20 billion more in cash and ultimate responsibility for a $300 billion pile of assets. Don't trust anyone who claims to know what they're really worth.

That's where Citi is now. How it got there is a long story that involves more absurdly complicated debt securities no one cares to own any longer. A very good story in The New York Times on Sunday painted a detailed picture of ambition and greed overtaking internal controls and common sense inside a giant institution. It particularly focused on the role of Citi director and former US Treasury secretary Robert Rubin, whose proteges are filling so many top financial positions in the new Obama administration.

Exactly what banking regulators thought or did while Citigroup was building an increasingly risky business involving debt securities isn't obvious. Apparently, they wrote a nasty letter to Citi officials about their lax internal controls after the fact.

Another unknown about the company's federal regulators: What were they thinking when they got behind Citi's deal to acquire sinking giant Wachovia Corp. in September? That deal was originally described as a government-engineered rescue.

Two months later, Citi itself has to be rescued. Can you imagine what would have happened if they really did get together? Thankfully, Wells Fargo & Co. arrived with a better offer, but Citi was still fighting over the pieces in court as recently as last month.

The debate about financial regulation will get lots of attention in Congress over the winter. We certainly need a better system that can measure and, if necessary, rein in excesses that pose a real threat to the economy.

That means regulation that isn't rigidly divided into branches covering industry silos like banking and the brokerage business. It needs to take into account more kinds of new businesses that make money by moving money. It should be more flexible to adapt to changes in the future.

But it shouldn't forget the lesson of Citi.

Steven Syre is a Globe columnist. He can be reached at syre@globe.com.