Busted: Bankers and The Global Economy

July 31, 2010

SEC Lets Citi Execs Go Free After $40 Billion Subprime Lie

The following news analysis was written by AlterNet.org’s economics editor Zach Carter.

What is the penalty for bankers who tell $40 billion lies? Somewhere between nothing and a rounding-error on your bonus.

The SEC just hit two Citigroup executives with fines for concealing $40 billion in subprime mortgage debt from investors back in 2007. The biggest fine is going to Citi CFO Gary Crittenden, who will pay $100,000 to settle allegations that he screwed over his own investors. The year of the alleged wrongdoing, Crittenden took home $19.4 million. That’s right. Crittenden will lose one-half of one percent of his income from the year he hid a quagmire of bailout-inducing insanity from his own investors. That’s it. No indictment. No prison time. Crittenden doesn’t even have to formally acknowledge any wrongdoing.

In 2007, as financial markets were freaking out about the subprime situation, Citi repeatedly told its investors that it owned just $13 billion in subprime mortgage debt. It was true – if you didn’t count an additional $40 billion in subprime debt that the company was also holding onto.

Citi’s CEO at the time, Chuck Prince, has not been charged with anything. As Yves Smith emphasizes, all of the top financial officers of every major corporation are responsible for the accuracy of their quarterly financial statements. Lying on those statements is a federal crime. This is the sort of thing that securities fraud cases are built around.

The SEC’s own statements about what went on at Citi are damning. If the agency can make this kind of information public, they ought to be pursuing criminal prosecutions. The SEC says that senior Citi management had been collecting information about the company’s subprime situation as early as April 2007, but repeatedly cited the $13 billion figure to investors over the next six months, waiting to acknowledge the additional $40 billion in subprime debt until November 2007. The SEC also says that Crittenden knew the “full extent” of Citi’s subprime situation by September at the latest, but the company continued to cite $13 billion in earnings reports through October.

Citi’s subprime shenanigans had consequences for taxpayers, pushing the company to the brink of total collapse and prompting one of the biggest bailouts of 2008.

Phil Angelides and the Financial Crisis Inquiry Commission deserve a lot of credit for highlighting the absurdity of Citi’s actions in a hearing on April 7 of this year (the key passage starts on page 368 of this pdf transcript). Angelides’ line of questioning revealed that even Citi’s board knew that the subprime exposure was much greater than what the company was claiming in public. Citi’s board at the time included Robert Rubin, former Treasury Secretary and architect of much of the deregulation that lead to the current crisis who took home $120 million for his work at Citi.

Either the SEC or the Justice Department could be pursuing criminal cases against Citi executives. What does it take to get the Justice Department’s attention on a financial fraud case? You have to launder $380 billion in drug money, and even then, DOJ lets you off with a slap on the wrist. The DOJ caught Wachovia doing just that, and the bank is getting off with a minor fine that won’t even make a dent in it’s second-quarter profits.

The Citi settlement is worse than a get-out-of-jail free card for Crittenden, Prince and their cohorts. The SEC actually fined Citi’s shareholders $75 million for the alleged wrongdoing of their executives. For some varieties of corporate misconduct, like Wachovia’s drug money laundering, hitting shareholders with the fine is appropriate. Wachovia’s money laundering operations directly enriched the company and its shareholders. This was not the case with Citi’s subprime scandal. Citi’s executives were hurting their own shareholders. Instead of meting out serious punishment to those executives, the SEC is fining Citi’s shareholders, the very people wronged in the incident.

This deference to the elites who wrecked the economy just keeps playing out. When Bank of America lied to its shareholders about billions of dollars in bonus payments it was about to make, the SEC decided to fine BofA shareholders and let the firm’s executives off the hook. The decision-makers at Wachovia, who allowed the firm to funnel drug money despite repeated warnings by whistleblowers, have not been indicted. Nobody at Washington Mutual has been indicted despite clear evidence of rampant mortgage fraud at the firm. Lehman Brothers’ repo 105 accounting scam is going unpunished, as are similar schemes at other banks including Bank of America. After much public relations flogging, the SEC let Goldman Sachs off easy.

More than 1,100 bankers went to jail in the aftermath of the savings and loan crisis. Massive financial crises simply do not occur without widespread fraud. The failure to prosecute that fraud poses systemic risks for the global economy. With too-big-to-fail behemoths dominating the financial landscape, the prospect of prison is the only serious check on executives interested in cannibalizing the economy for personal gain. If the SEC and the Department of Justice continue to let executives get away with outrageous acts without even taking the case to court, our financial system is doomed to repeat the same excesses and abuses we’ve seen over the past decade. If Crittenden did what the SEC claims he did, he screwed over his own investors and scored a huge bonus in the process. Everybody on Wall Street understands the implications: breaking the law is a great way to make a lot of money. When a class of elites can thumb its nose at the law with impunity, the result is not only a threat to the efficiency of our economy, but a threat to the basic functioning of our democracy.

You can read Mr. Carter’s news analysis in context here: blogs.alternet.org/speakeasy/2010/07/30/where-are-the-prosecutions-sec-lets-citi-execs-go-free-after-40-billion-subprime-lie/ Mr. Carter is a fellow at Campaign for America’s Future, and a frequent contributed to The Nation magazine.

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September 24, 2008

Power: The Truths behind the Meltdown

massive bailout

massive bailout

Americans should feel some value in the fact that the FBI is now investigating toxic firms that have been central to the U.S. financial meltdown. For some time 26 firms have been under intense scrutiny by the FBI. The media has been highlighting investigation of the 4 firms that have collapsed: Fannie Mae, Freddie Mac, AIG and Lehman Brothers.

The mortgage twins, Fannie and Freddie, have already been under investigation for years based on varying problems with financial irregularities and leadership issues. The investigations will focus on the financial firms and the individuals that ran them. Hopefully, middle management will also be scrutinized and judged. The truth is that the FBI needs to find the perpetrators of the fraud rather than single out top dog scapegoats.

financial storm

financial storm

Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke made the joint unilateral decision last week that the only way to stop the U.S. financial carnage was to deal with the root cause of all the troubles by rooting out billions of dollars of bad mortgage debt sitting on the books of major financial firms. This debt has triggered the worst credit crisis in decades, “causing” credit markets to freeze up despite the fact that the Fed joined with major central banks around the world to pump billions of dollars of reserves into the financial system. The billions of dollars pumped into the global economy are creating a crisis of stagflation themselves, a nasty round of inflation coupled with the current economic recession and malaise. The results of those actions cannot be undone and are being ignored by panicked authorities.

The reality behind the liquidity lock down that the Bush administration and U.S. Treasury Secretary are panicking about revolves around interbank lending, a problem that has been noticed publicly for at least a year. Why is there a problem? The crisis boils down to an issue of trust. Bankers know that they cannot trust one another and are unwilling to take the fall for the fraud of other bankers. In other words, the bankers know they have been harpooned by the securities that were supposed to make them wealthy. Bankers have put the thumbscrews on lending to protect their solvency.

selling Wall Street

selling Wall Street

The Bush adminstration has its game face on. President Bush says he expects Congress to pass “a robust plan” that deals with the nation’s economic problems. The word robust has become another favorite public watchword that should garner your prompt attention. Robust implies a broad emcompassing scope along with complex provisions that could very well be the downfall of any attempts to band-aid the current situation. Currently, an estimate is that 1 of 254 mortgages is actually in some measure of foreclosure. This is a very small percentage to cause a crisis. What the American press and government is acknowleging is merely the tip of the iceberg. The main problem with securitized loans is that when they were developed and created, a system was not developed to track reality. An internal processing scandal within the process of issuing of these securities is implied. However, government has not been eager to breach this area of the mortgage crisis beyond specifying that the regulations and concepts in the entire financial system are dated and ineffective. Somehow, this idea is supposed to get government, regulators and bankers off the hook.

taxpayer crisis

taxpayer crisis

What should be done to resolve the current foreclosure crisis? Not a soul has bothered to shift gears in addressing the real problem regarding predatory financing and usury in place. Each known problem loan triggered by payment issues needs to be evaluated regarding the current real value of the home. If evaluation of home value is an issue because of a weak market, then half the real value of home should be the mortgage value. This action would assist in correcting inflated home prices and counter price inflation. Any failure of the past verification process through bankers or qualification of the homeowner should be ignored as long as the homeowner is gainfully employed and can make the payments on the new loan. The government then needs to reissue a safe government-backed assumable loan that will allow the buyer to stay in the home at a low interest rate. Ultimately, the goal would be for every loan to be converted to a non-predatory government loan with low interest. Loans would not be securitized or bundled for resale as government securities. Banks would not bundle loans into any internal or banking instruments. Bankers would simply make money from compound interest and providing basic banking services. The bailout needs to be on the side of the taxpayer, the basis and stock of capital and wealth, rather than on the side of corporate interests that often pay few taxes in the real world beyond payroll.

losing the Dream

losing the Dream

If push came to shove, the nation would be better off giving mortgages away than bailing out the endless debt and failure created by Wall Street and the system in place. Americans would then own their homes fair and square with a new national beginning. Trillions in debt would be eliminated overnight. This idea seems radical and expensive, but is assuredly no more expensive than a long-term bailout of government and corporate fraud. The American population would benefit directly from the bailout, as should always be the case. The main problem is that such an action would destabilize the power structure in place. However, the ideas presented here are no less sane than what is being proposed by the Federal Reserve and the U.S. Treasury in the name of the Bush administration. We are a nation of double standards that bolsters government and corporate power at the expense of the populace, a fascist notion. That needs to change.

The FBI has been in various stages of investigation regarding the mortgage debacle since March of 2007, even before most Americans were aware of a scandal. This proves that the Bush administration has been aware of mortgage fraud and scandal before the nation began to see the sign in the summer of 2007. As far back as the summer of 2004, President Bush beamed with pride about the creativity of the banking and mortgage industry, the single force that had maintained the illusion of national prosperity during the last three political administrations, originating from the Clinton administration.

Where are the people that are being investigated and implicated in fraudulent activities? Is the FBI keeping tabs on the movements of those may be involved in the scandal? What Americans should be concerned about is whether the U.S. government is allowing people that are tied directly into these firms to leave the country if they haven’t left already. ~ E. Manning

September 16, 2008

U.S. Banking Decline to Impact Euro

On the list of projections with the financial collapse of Lehman Brother is the resulting decline of the Euro in the European economy. However, European monetary experts are not publicly expecting a decline in European banking. They expect a weakening of growth in the European economy instead.

An ongoing debate has ensued for years about the coupling or decoupling of the U.S. economy from other economies. ‘We already have a tendency towards a worsening of the economy and this can be further enhanced by the current developments… We cannot fully decouple,” said European Central Bank Governing Councilman Ewald Nowotny.

The fear is that the U.S. economy will further move the Euro and the European Bloc into a recession. Strangely, the U.S. authorities still continue to deny a U.S. recession. By implication, even European bankers and economists recognize the reality and the truth of what resides in this nation.

European analysts are growing increasingly concerned that the European economy is now heading towards a ‘technical’ recession, or put more plainly, two consecutive quarters of contraction. Meanwhile, central bankers have already put protection mechanisms into place to protect both their investments and gold on hand at central banks. ~ E. Manning

September 15, 2008

No Wall Street Government Bailout, Sort of

With steely resolve, Henry Paulson, former Goldman Sachs investment banker has declined to cave in to pressure. There will be no investment banking bailout by Big Government today. Henry Paulson is prepared to let Lehman Brothers die on the vine, a sacrificial warning to bankers.

national banking snuggy?

national banking snuggy?

However, the Federal Reserve and the U.S. Treasury have designed a way to take some pressure from Wall Street investment firms as we clearly answer the question to yesterday’s post. Wall Street is awash in debt that previously could not be used for collateral. Starting tomorrow, the Federal Reserve will accept “investment-grade debt securities” as collateral in the Term Securities Lending Facility (TSLF) auctions and has expanded securities for the Primary Credit Dealer Facility (PCDF) based on what national clearing banks have on hand.

In essence, the Federal Reserve is accepting less secure banking instruments that bankers have in ample supply. This is subject, of course, to various conditions to “promote safety and soundness,” all good through January 30 of next year. It is hoped that this move will prevent any panic in the markets as authorities continue to dumb the system down. The investment banking system has been in worse shape than authorities have been willing to previously acknowledge. Outsiders have often assumed otherwise.

Former Fed Chairman Alan Greenspan said the market is the worst he has ever witnessed and predicted another major bank would close soon. Meanwhile, inflation is rising, real wages are declining, and the problems in the housing market persist.

~ E. Manning

September 13, 2008

Investment Bankers Fear Panic and Unrest

Paulson's Grand Staircase?

Paulson at the Grand Staircase?

With the shakeout of Fannie Mae and Freddie Mac, Lehman Brothers almost seems an afterthought these days. The firm is clearly looking for salvation, but Big Government doesn’t seem so eager for a Bear Stearns type bailout. The problem is that the panic on Wall Street doesn’t affect only the plight of Lehman Brothers, but has the ability to touch the entire scope of Wall Street resulting in economic ripples and collateral damage throughout the U.S. economy.

Are the U.S. Treasury and the Federal Reserve in such fear that no solution is evident or is the weakness of banking institutions creating a problem in an effort to support failing Lehman Brothers? It doesn’t take a rocket scientist to discern that the nation is in the midst of another economic crossroads. However, the national and investor confidence doesn’t ring true with the “optimism” suggested by the press last Monday with Fannie and Freddie in the stock market.

In the past, the god of confidence has been the mainstay of U.S. economic policy. Confidence can only be harmed by allowing failing Wall Street to collapse. Yet, if decline and collapse what were to happen, that is exactly what should happen. The federal government has put themselves in the business of shoring business up instead of allowing for the consequences of business risk or business failures as a result of banking abuse. The reluctance of U.S. authorities to shore up the perception of a crumbling system indicates other more severe economic issues at hand behind the scenes. Wall Street stress is just the tip of the iceberg.
~ E. Manning

June 7, 2008

Wall Street: Distractions and Insecurity

The media is once again focusing on the insecurity of Wall Street. The insecurity has never really left. Only the distraction of profits and money to be made has given Wall Street any relief from the feeling of doom.

Many investors thought the financial sector bottomed-out in March when JPMorgan Chase rescued Bear Stearns from the brink of collapse. Now there are worries that Lehman Brothers Holdings Inc. is facing a serious cash shortage.

What is new about this? Rumors have circulated about Lehman Brothers and other investment bankers on Wall Street at the same time that Bear Stearns saw its demise. Bear Stearns fell first.

Like Bear Stearns, Lehman says that it has plenty of money, but claims to be looking for more capitalization. The vernacular of “capitalization” is the new keyword of the U.S. financial crisis. Increasingly, strapped banking institutions are seeking more and more capitalization as the fruit of their old banking standards comes to rest.

This is tantamount to the admission of trouble. Not a single human being alive really has a clue as to where the bottom really is. Anyone that does is engaging in fanciful thinking.

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