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The Billion Dollar Fiasco!

In April, as the corona virus crisis deepened, Revlon, a huge MNC in the cosmetics industry was running low on funds and did not have any support from the existing creditors to repay a lot of debt it had undertaken, which could lead it to being bankrupt. On the other hand, the loan could have allowed Revlon to repurchase certain or all of the assets it owed from the specified lenders.

What actually happened was that payments needed to be sent within the specified time frame, and were scheduled every month. A Citi employee who was supposed to manually adjust the amount of the loan, failed to select the correct system options in Citi’s software, allowing the loan, $900 million, to be paid in full with interest from the bank's account itself instead of from Revlon's account. What's all the more surprising is that the Citibank's senior officials who were supposed to safeguard the entire transaction process, themselves failed to catch the error.

Note: As a matter of fact, Citi's loan operation software came into existence as early as 1997, but in order to revamp it's loan transaction journey the bank decided to upgrade the system last year itself. That transition is still incomplete!

Rightly put, Citi's $900 Million "Clerical Error" is the worst Wall Street Bugle in a long time!

Having realized this huge mistake, Citi Bank officials apologized and asked the lenders to return the money. However this wayward transfer has now plunged the bank into a battle between the Perelman empire and a corps of sharp-edged investment funds that have become its impatient creditors. What's more surprising was that though some of the lenders agreed to transfer back the funds, there were many who refused to do so as they liked the surprise payment, finding a fortune on the sidewalk.

Let us now see what triggered this trouble? Was it a mistake or was it not?

  • To begin with, there was an increasingly ugly battle between Revlon and a group of lenders who sued the cosmetics company and demanded immediate repayment of a term loan that had come due in 2023.

  • The lenders, including Brigade Capital Management, Symphony Asset Management and HPS Investment Partners resorted to a court order that ensured the return of the collateral, which includes brand trademarks.

  • The administrator who was responsible for the loan transaction was supposed to resign from the agent role but was included as a defendant in the lawsuit filled by the bank.

  • This is where the story behind $900 million blunder began: around the same time the lawsuit was filed, an amount equal to the full principal value of the loan, plus accrued interest — landed in the lenders’ bank accounts.

  • Strangely so, Brigade, Symphony and HPS are among those who refused to hand the cash back. In order to get to the core of the matter, Citi Bank did launch an internal investigation.

  • The company's statement indicated that these group of lenders repeatedly resorted to baseless accusations in an attempt to enrich themselves and hurt Revlon by blocking the company from exercising its contractual rights to secure the financing necessary to execute their turnaround strategy and navigate the Covid-19 crisis.

Why is the entire scenario still perplexing? Let's decode!

Why is Citigroup Inc. portraying a human error for its $900 million mistaken payment to Revlon Inc.’s lenders? Merely because it is a straightforward explanation for their fiasco. It rules out the possibility that there could be any system deficiencies.

Isn't it a bit absurd that a bank with a $2.2 trillion balance sheet makes such a public confession that the person who processed the transfer “did not manually select the correct system options” after some lenders had been paid part of the loan?Instead of paying just the interest, the bank reports that the very individual failed to prevent the entire principal on the loan from being repaid, landing the lenders with 100 times what they were due to receive.

Of course, after having acknowledged this as an operational error, the bank might get the remaining funds back from the lenders associated with the Revlon payment, however regulators and shareholders must keep pressing for a clearer explanation of what went wrong.

So, Is it a mistake?

Is it not?

That is, quite literally, the million-dollar question.

What do you think?

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