July 2010, Week 5


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Fri, 30 Jul 2010 22:47:54 -0400
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Where Are the Prosecutions? SEC Lets Citi Execs Go Free
After $40 Billion Subprime Lie

By Zach Carter
July 30, 2010 - 3:55pm ET

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

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

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.


Portside aims to provide material of interest
to people on the left that will help them to
interpret the world and to change it.

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