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.

September 9, 2008

Investor Confidence: History of Short Rallies

Since the current mortgage crisis has been officially publicly documented around July of 2007, investor profitaking has barraged the stock market under the pretense of confidence after each bailout. Each time the bailout grows larger. The market scores big gains followed by a drop “as reality takes hold.” The media circus and investors appeared to rejoice upon the bailout of Fannie Mae and Freddie Mac, but the joy has proved to be short-lived.

bailout fever

bailout fever

The federal government seems to enjoy playing the same game, now using Sundays as a day of economic rescue and salvation. Traders are in agony as they mourn the loss of another fall downward in the markets. Why can’t we just get the problems over with so we can get back to making money like we used to? That is the essence of Wall Street’s attitude about the economy, an attitude of frustration. These self-centered expressions are expected in a market that has no moral compass beyond profit.

investor dunce award

investor dunce award

Self-absorbed traders and profiteers shouldn’t need to ask. The bailout of Fannie and Freddie, like the bailout of Bear Stearns has prevented a complete meltdown of the economy, certainly saving the plight of every investor from the jaws of bankruptcy today. Considering the short-term mentality of investors, the bailout is good when you consider that investors can come to play another day.

~ E. Manning

September 8, 2008

Billions Lost: Bailing Out U.S. Mortgages

The Freddie Mac and Fannie Mae bailout has effectively destroyed the paper value of all investments in those institutions, effectively cleaning the slate in a modified sort of bankruptcy for the mortgage twins as the federal government steps in. Billions of dollars have been lost by the banking community that was invested through common and preferred stock. The mouthpiece and supporter of the federal government, the Federal Reserve, points out hopefully that only some smaller banking institutions have stock holdings that threaten their existence.

With that in mind, the Federal Reserve Board, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision are prepared to work with these institutions to develop capital-restoration plans to keep the system operating. The Federal Reserve will buy the stock holdings at fair market value before the bail out. The banks holding the stock must report holdings as available for sale and deducted from bank capital to complete the bailout.

In the minds of politicians and bankers, due diligence has been done. However, confidence will likely be shaken on many levels and a stock market effect is likely to be seen in a big way tomorrow as the economy adjusts to the new emotional and fiscal reality. How to restore confidence?

To make the boo-boo all better the Federal Reserve and Ben Bernanke has stepped up to the financial altar to make the following statement:

“I strongly endorse both the decision by FHFA Director Lockhart to place Fannie Mae and Freddie Mac into conservatorship and the actions taken by Treasury Secretary Paulson to ensure the financial soundness of those two companies. These necessary steps will help to strengthen the U.S. housing market and promote stability in our financial markets. I also welcome the introduction of the Treasury’s new purchase facility for mortgage-backed securities, which will provide critical support for mortgage markets in this period of unusual credit-market uncertainty.”

The appearance is that the “Treasury’s new purchase facility” will be through the Federal Reserve. Whether that is the ultimate truth or not, the Federal Reserve will finance it because the United States doesn’t have the cash or credit for the bailout. The federal government is bailing out Fannie Mae and Freddie Mac as well as the bankers that have invested. The taxpayer is securing all the debt for the bailout which has been predicted to run up as high as $65 billion. That is likely a conservative figure to bail out the entire mortgage and banking system. Authorities claim that the U.S. taxpayer will profit from the move. The word profit can be used in a number of ways. Doubtless, the American taxpayer will profit in regards to the current status quo. The public will be much more comfortable with the lastest plans versus total collapse of the economy because of a failed banking system. The future success of the nation depends on the future success of Fannie Mae and Freddie Mac. Too bad they didn’t see fit to rename the companies with a clean sweep, but perhaps that move was considered as too bold. 

The interesting truth is that a temporary effect of the bailout is likely to be instability rather than stability based on the old demon of fear and lack of confidence. Later today we will discover the pulse of the nation. ~ E. Manning

August 5, 2008

Economic Confidence and the Art of Maybe

Captain Henry Paulson

Captain Henry Paulson

In a measure of “prudent preparedness”, U.S. Treasury Secretary Henry Paulson has retained Wall Street’s Morgan Stanley to advise the government on shoring up the props for ailing government mortgage twins Fannie Mae and Freddie Mac.

Paulson, emboldened with new authority, has hired Morgan Stanley to assist the Treasury in the event it needs to expand the government’s line of credit or buy stock in the companies or at least that is what the public line is. The reality is that where money and credit are concerned, Paulsen has the Federal Reserve attached to his right hip. It isn’t about the need for more money as such.

Morgan Stanley knows how investment bankers think, how banking instruments work behind the scenes along with associated tricks of the trade from an insider perspective. He’s an old hand himself, a Goldman Sachs man, just a little out of perfect practice. He needs a sounding board. In essence, the government has an old con man hiring the equivalent of group of con men to help beat what con men have designed for their own ends. That’s the story. The action by Paulson is beautiful in its simplicity. It’s a deal that gives Morgan Stanley plenty of reputation collateral since the money the firm is making is largely symbolic. Desperate times require desperate measures.

Where would America be without confidence?

Where would America be without confidence?

Paulson has 18 months to cover his bases in legislation that George Bush recently signed. Even so, supporters and critics of the plan are worried that taxpayers will be stuck holding the ball for the massive debt with the danger of bankrupting the country in a truly profound sense.

Paulson says that his action is all about confidence. He believes that having special powers in place may boost confidence in the mortgage twins enough to keep the U.S. Treasury from bailing them out.

That is what the whole study is about: the Art of Confidence. Maybe Paulson can boost confidence since investors and citizens know that the U.S. Treasury has its firm hand in place with the assistance of a qualified investment banking insider. That is the hope. Securing that hope cost the government a mere $95,000 for expenses on the surface.

Authorities range a bailout of Fannie and Freddie between $25 and $100 million dollars depending on who is doing the talking. An extra note of confidence with Captain Paulson at the helm may just steer us clear of the icebergs. May be.

July 29, 2008

Foreclosure: Minefield of Saving Your Skin

The provisions touted by government lawmakers is projected to be a real help for honest home buyers throughout the United States. Clearly, the rules do not assist speculators or business investors. Still, the “home buyer bailout” may not help as many American citizens or prevent as many foreclosures as government authorities claim.

Qualified borrowers must live in their homes with loans issued between January 2005 and June 2007, while spending at least 31% of their gross monthly income on mortgage debt. If you qualify on these standards, you can note two check marks.

Further, home buyers must prove that they cannot or will not be able to keep paying their existing mortgage while signify that they are not deliberately defaulting on their home loan to obtain lower payments. Whether a home buyer is in a current state of default doesn’t matter. Proving circumstances does. If you qualify on these standards, you can note another two check marks.

Home equity lines of credit must be retired. If you qualify, make another check mark.

Total loan debt cannot exceed (more…)

July 10, 2008

Foreclosures Threaten to Consume Economy

Lately, it has been a cruel world for home buyers and banker types alike. The grim cloud of foreclosure hangs in the air like a dark panic. Today, politicians, Wall Street and media pundits spoke about what would happen if Fannie Mae and Freddie Mac were to collapse, revealing the fact that they are already effectively bankrupt. The fact that the president is openly discussing the plight shows the seriousness of the matter, even though he suggests that the potential of such a collapse is remote at best. The administration suggested that avoiding a collapse through the necessity of bailing out the government mortgage houses would create a U.S. (more…)

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