The Mistake That Led To Citi's Infamous $900M "Fat Finger" Has Finally Been Exposed

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Weeks have passed since a New York State judge surprised investors, corporate borrowers and the bulge-bracket banking community when Judge Jesse Furman, a judge for the Southern District of New York, ruled that he was bound by precedent to allow a group of asset managers to keep some $500MM accidentally transferred by Citigroup.

When they first surfaced last summer, reports that Citigroup had accidentally transferred $900MM to creditors of the ailing cosmetics company Revlon (the cornerstone of investor Ron Perelman's business empire), the public reaction initially focused on the pitfalls of working from home (maybe a dog hit the keyboard?), before the conversation shifted to what this means for the market, and finally, what, exactly, happened in Citi's back office that led to the loan?

Well, after weeks of reporting, Bloomberg's Businessweek has finally gotten to the bottom of what precipitated the "fat finger" transfer. As one of the biggest arrangers of corporate loans, Citi routinely distributes interest payments. Bloomberg described the business as one that doesn't generate "meaningful revenue", but is considered a critical part of the relationship-building that leads to deals. But a "quirk" in the Revlon deal made managing this loan a little more complicated for the bank's back office.

As the team struggled to pay out one creditor who had exchanged its stake in the loan for a stake in a different Revlon loan deal, the team accidentally sent the entire principal - $894MM - to its creditors using the bank's own money. Ultimately, the failure to check two boxes in Citi's proprietary loan-management software led to the fateful transfer. Transfers of that size must be approved by three people at the bank, but nobody handling the transfer was made aware of the situation until it was too late.

A quirk made the Revlon transaction less routine. One of the investment firms that owned a portion of the loan had agreed to exchange its stake for a chunk of a different Revlon loan and needed to be paid interest that had accrued up to that point. It wasn’t a maneuver that Citigroup’s systems were designed to handle, but the bank had a workaround. It involved moving the principal of the loan temporarily into one of the bank’s own accounts and then recreating the loan to reflect that the creditor would no longer own a piece of it.

What the employees didn’t realize that Tuesday evening was that by failing to check two boxes in the byzantine software Citigroup uses to execute payments, they’d authorized the entire principal on the loan - about $894 million - to be paid to the creditors with the bank’s own money. Wire transfers of that size require the approval of three people, but no one handling the Revlon payment became aware of the mistake until hours after it had been distributed. “Bad news,” the Citigroup manager in Delaware wrote in a Skype chat to his superior the next morning. “Principal out the door when it was supposed to be sent to wash for Revlon structure."

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