In the run-up to the global financial collapse, Citigroupās bankers worked feverishly to create complex securities. In just one year, 2007, Citi marketed more than $20 billion worth of deals backed by home mortgages to investors around the world, most of which failed spectacularly. Subsequent lawsuits and investigations turned up evidence that the bank knew that some of the products were low quality and, in some instances, had even bet they would fail.
The bank says it has settled all of its potential liability to a key regulator ā the Securities and Exchange Commission ā with a $285 million payment that covers a single transaction, Class V Funding III. ProPublica first raised questions about the deal [1] in August 2010. In announcing a case, the SEC said it had identified one low-level employee, Brian Stoker, as responsible for the bankās misconduct.
Oh, I see. Another "rogue trader". The old "just a few rotten apples" canard.
It made no mention of the dozens of similar collateralized debt obligations, or CDOs, Citi sold to investors before the crash.
A bank spokesman said the SEC would not be examining any of those deals. āThis means that the SEC has completed its CDO investigation(s) of Citi,āā the spokesman asserted in an e mail.
āThe $285 million settlement resolves only the Class V Funding III CDO, and we will not hesitate to bring further charges where we determine that there has been unlawful conduct,ā an SEC spokesman said.
Did Citi get a sweet deal? Some observers think so.
āCitibank arranged countless CDOs that were built to fail, but the SEC apparently limited its case to a single CDO where they had particularly vivid and powerful proof,ā says Stephen Ascher, a securities litigator at Jenner & Block, which has sued Citibank on various structured finance transactions.
āThis represents extreme caution, at best ā and a failure to grapple with the magnitude and harmfulness of the misconduct, at worst.ā [...]
If Class V Funding III was some outlier, the SECās action might make more sense. But it wasnāt. Ā Citigroupās CDO operation churned out at least 18 CDOs around the same period. Often they were large CDOs, created with credit default swaps, effectively a bet that a given bond will rise or fall. Most of the CDOs included recycled Citi assets that the bank couldnāt sell. By purchasing pieces of its older deals, Citigroup could complete deals and keep the prices for CDO assets higher than they otherwise would be. Some investors helped picked the assets and then bet against them, facts that Citi didnāt clearly disclose to other investors in the deals.
Closing the book on Citiās CDO business means the public may never know the true story of Citigroupās, and Wall Streetās, actions during the financial crisis. One of the largest victims of the CDOs was the bond insurer Ambac. The now-bankrupt firm settled with Citi in 2010, long before it got to the root of the problems with securities Citi convinced it to insure. A shareholder class action lawsuit that is wending its way through the courts has the potential to reveal some details, but often such cases are settled with evidence then sealed from public view. [+]
Occupy. Or they will get away with it. Again.