Citigroup Still Rolls the Dice on Mortgage Bonds

Anna Raytcheva’s bets on mortgage bonds for Citigroup lost billions of dollars in value as the financial crisis raged. Now, thanks to an exemption in rules meant to curb risk-taking by banks, Raytcheva is gambling with Citigroup’s money again. This year, Citigroup put Raytcheva in charge of a four-person team to wager on government-backed mortgage bonds. The group manages more than $1 billion and does not work with the bank’s clients, according to a person with direct knowledge of the unit who declined to be named because the information is not public.

In writing the Volcker Rule, part of the 2010 Dodd-Frank Act, regulators sought to curb banks’ proprietary trading—that is, making speculative short-term investments with their own money. The law makes an exception for trading in government securities, including more than $5 trillion of “agency” mortgage bonds guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae. Lawmakers created the exemption to make sure there would be an active market for government debt, according to Barney Frank, who as a Democratic congressman from Massachusetts helped draft the Dodd-Frank Act, and because the bonds are guaranteed not to default. “To the extent the instruments being traded are completely secure, some of the rationale for the rule disappears,” Frank says.