The War to End All Wall Street Wars

July 14, 2014

Pursuant to a $7 billion settlement, on July 14, 2014, the United States Department of Justice announced that it had resolved federal and state civil claims related to Citigroup's packaging, securitization, marketing, sale and issuance of residential mortgage-backed securities ("RMBS") prior to Jan. 1, 2009.  $2.5 billion is to be paid out as consumer relief, including loan modification, refinancing, homebuyers' assistance, and donations for community redevelopment and low-income housing. $4.5 billion is earmarked to settle federal/state civil claims of which:

  • $4 billion will be paid as a civil penalty to the Department of Justice;
  • $208.25 million to settle Federal Deposit Insurance Corporation ("FDIC") state/federal securities claims;
  • $102.7 million to settle State of California claims;
  • $92 million to settle State of New York claims;
  • $44 million to settle State of Illinois claims;
  • $45.7  million to settle Commonwealth of Massachusetts claims; and
  • $7.35 million to settle State of Delaware claims.

The announced settlement does not extend to any possible civil charges that may be brought against the firm or its employees.

Attorney General Eric Holder believes that 

the size and scope of this resolution goes beyond what could be considered the mere cost of doing business.  Citi is not the first financial institution to be held accountable by this Justice Department, and it will certainly not be the last.

Bill Singer's Comment

Woe be it for me to rain on anyone's parade. If our gaggle of federal and state prosecutors and regulators think that announcing each month the largest and greatest fine in the history of mankind from the beginning of recorded and unrecorded time until today is effective regulation, god bless 'em, one and all.

Weighing in for the dissent, I see very little in the way of deterrence and far too much in the way of expediency in this checkbook diplomacy approach to regulating the financial services community.  I also see a formidable moral hazard that weighs the purported magnitude of misconduct in one scale, and that attempts to counter-balance that harm by dropping coins into the other scale. That all smacks of cynicism and a bankrupt approach to regulation -- I mean, seriously, if simply adding more zeros to the amount of fines worked, you'd sort of think that, by now, the banks and brokerage firms would have gotten the message. Unfortunately, the industry's regulators fail to differentiate between sending a message and the recipient processing that same message.

In the end, follow the money!  Who is truly going to pay this gynormous fine? In reality, the shareholders of Citigroup.  It's like slapping a fine on a teenager for speeding and driving under the influence but allowing the parents to pay the bill.  Similarly, at least with a teenager who wrecks the family car, mom and dad will ground the kid and impose a curfew. Y'all see the name of a single Citigroup executive who has been grounded?  You see any restrictions on the ability of the firm to package an Initial Public Offering, to participate in the mortgage market, or to expand its network of branches?  No . . . I don't either. 

Then there is the truly enervating realization that the bulk of the fines will likely wind up in the coffers of the federal and various state governments. Oh great!  Now there's a recipe to ensure that the dollars sucked out of our economy by Citigroup will find a productive way back into our economy.  Someone want to tell me if Citigroup's massive financial waste even remotely measures up to the waste of taxpayer dollars through corruption, cronyism, nepotism, mismanagement, and pork barrel that occurs in all levels of federal and state government? As such, I will respectfully disagree with Attorney General Holder. This all seems another cost -- albeit an astounding one -- of doing business on Wall Street and in the international financial community.  It also smacks of an undeserved windfall to politicians in Congress and the statehouse -- which largely guarantees that few of those dollars will ever find their way back into the pockets of the American taxpayer.

To me, it's all little more than another July 4th fireworks spectacular. Each year they tell us that there are more rockets, brighter colors, and louder bangs. As far as I can tell, each year is bigger. On the other hand, what we get is little more than exploding colors and noisy bangs. Once it's over, there's little left to remember beyond the gray mist that soon dissipates. Just remember that when you read about the next biggest fine in the history of the Universe and how it's going to be the War to End All Wall Street Wars. Attorney General Holder is likely right when he says that Citi is not the first financial institution to be held accountable by this Justice Department, and it will certainly not be the last.  This is one film that will be replaying at theaters near you for many, many, many years to come.