Citigroup Coughs Up $285 Million To Settle Fraud Claims Over Derivatives and Real Estate Case

Citigroup, one of the banks bailed out under the TARP program, has settled a civil suit with the SEC for $285 million. The suit contended that Citigroup misled investors in a $1 billion derivatives deal tied to the United States housing market, then bet against the investors as the housing market began to show signs of distress.

The securities fraud complaint was similar to one the S.E.C. brought against Goldman Sachs last year, with one significant difference. Goldman Sachs was accused of misleading investors about who was picking the investments in a mortgage-related derivative.

It told investors that the bonds would be chosen by an independent manager, when in fact many of them were chosen by John A. Paulson, a hedge fund manager who chose assets that he believed were most likely to lose value, according to the S.E.C.’s complaint in that case. Goldman later settled the case by paying $550 million.

In the Citigroup case, however, it was the bank itself that chose assets for the portfolio that it then bet against. Investors were not told of its role or that Citigroup had an interest that was adverse to the interests of investors.

“The securities laws demand that investors receive more care and candor than Citigroup provided to these C.D.O. investors,” said Robert Khuzami, director of the S.E.C.’s division of enforcement. “Investors were not informed that Citigroup had decided to bet against them and had helped choose the assets that would determine who won or lost.”

The S.E.C. said that the $285 million would be returned to investors in the deal, a collateralized debt obligation known as Class V Funding III. The commission said that Citigroup exercised significant influence over the selection of $500 million of assets in the deal’s portfolio.

Citigroup then took a short position against those mortgage-related assets, an investment in which Citigroup would profit if the assets declined in value. The company did not disclose to the investors to whom it sold the collateralized debt obligation that it had helped to select the assets or that it was betting against them.

Essentially, the bank put together a security, touted it to its investors, and then took a contrary position and bet against the investors who just bought into the investment Citigroup touted.

It's yet another reason for regulatory actions to insure transparency so that investment houses don't tout securities or other paper and then bet against those same securities. Trying to profit from either way a security swings is something everyone would like to do - but these investors weren't told that Citi, the one providing the security, was doing it to them.

Treasury Seeks Power To Seize Failing Companies

Despite the repeated failings of Treasury Secretary Tim Geithner to produce a coherent policy for months on how to deal with the credit markets and the Obama Administration's inability to find qualified people to even nominate for the Treasury Department to assist Geithner in his duties, the Treasury Department is now demanding the authority to seize companies that are failing?

The Obama administration is renewing calls for Congress to provide new authority to take over financial institutions in distress, expanding its existing powers to include insurance companies and other less-regulated market players.

“The United States government does not have the legal means today to manage the orderly restructuring of a large, complex non-bank financial institution that poses a threat to the stability of our financial system,” the Treasury secretary, Timothy F. Geithner said in a statement prepared for delivery before the House Financial Services Committee.

The proposal could help deflect some criticism of the government’s handling of A.I.G., which is not a bank but an insurance company, including allowing the company to pay big bonuses to executives after receiving government financing as part of the bailout of financial institutions.

Had the Treasury Department had the expanded authority last fall, administration officials have said, the government could have seized A.I.G. and more efficiently wound down its operations in a less-costly manner. At the hearing, Ben S. Bernanke, the chairman of the Fed, said that he had wanted to sue A.I.G. to prevent the bonus payments but was talked out of it by lawyers who warned that if the lawsuit failed, the government might have to pay double or triple damages in addition to the bonus.

Wait a second? You mean to tell everyone that AIG should have been shut down, not fed hundreds of billions, including billions as a conduit to avoid the TARP limitations? If AIG should have been shut down, why did it getting the bailout in the first place (although the AIG lobbyists and those politicians receiving lobbyist dollars goes a long way to explaining that)? Why not demand that it liquidate its assets via bankruptcy? Why isn't the new CEO, which the government demanded, not taking the necessary steps to liquidate the company and instead operating AIG as though it will eventually recover?

Why is the government demanding that AIG come under government control for the liquidation process when bankruptcy courts handle such liquidations on a regular basis? The size may be large, but this isn't the first large entity to face bankruptcy before.

There is absolutely no reason for Congress to extend this power to Treasury when there are already mechanisms in place to provide for the orderly liquidation of companies that are failing. This is a ticking fiscal time bomb and the Obama Administration is demanding it obtain the power to decide which companies live or die, even though there are repeated examples of how the government has failed to adequately figure out what these companies are worth.

Does everyone have such a short memory to forget that the government sought to push Wachovia into Citigroup's open arms despite Wells Fargo valuing Wachovia billions more than the government did? Does anyone remember that days after the feds tried that maneuver, Citigroup revealed that it was in serious financial trouble and required a bailout of its own?

Does anyone remember that the government forced the marriage of Washington Mutual to JP Morgan Chase for a bargain basement $1.9 billion and that WaMu is now suing the feds because they believe that had the government allowed WaMu to properly and orderly liquidate its assets, the value would be billions higher?

Yet, we're told that this is absolutely necessary?

I think not.

It's only absolutely necessary if one wants to further eviscerate the financial markets and further dependency on the government for all aspects of capital creation.

UPDATE:
Hot Air has much more on this naked power grab and move towards nationalization of industries. The key graf:

However, people do not deposit cash in hedge funds or insurance companies. They invest in them, and assume certain risks when they do. The Obama administration wants to socialize the risk by placing the government as a guarantor of sorts for the investors, but that will make people less likely to invest rather than more likely. Part of the lure of investing comes from the potential reward of greater growth of funds than what can be found in bank accounts and bonds. Limiting risk means limiting gains, and we can expect investors to shield themselves further than they may have in the past under those circumstances, while government spends more money in regulatory activity and the economy sags from lack of capital investment.

Ameripundit, Stop the ACLU, Sister Toldjah, and AJ Strata also weigh in.

Also, where exactly in the US Constitution does Congress or the Administration have the right to seize companies, even ones that show signs of being at risk of defaulting or going bankrupt? One can claim that Congressional power under Article 1, Sec. 18, Clause 18 (the catchall provision that Congress relies upon to regulate interstate commerce) might apply, but the Treasury Department is part of the Executive Branch. Somehow, if Congress and the Administration want this to happen, they'll find a way to pass it regardless of whether it should pass Constitutional muster. After all, they're all too happy to find that the Constitution is a living and breathing document that means whatever it is they want it to say.

Then again, the real toxic assets that ought to be treated as such are the very members of Congress that spewed this mess in the first place with their ill-advised policies.

UPDATE:
Meanwhile, another Nobel Prize winning economist, Joseph Stiglitz has slammed Obama's toxic bailout plan.

"The Geithner plan is very badly flawed," Stiglitz told Reuters in an interview during a Credit Suisse Asian Investment Conference in Hong Kong.

U.S. Treasury Secretary Timothy Geithner's plan to wipe up to US$1 trillion in bad debt off banks' balance sheets, unveiled on Monday, offered "perverse incentives," Stiglitz said.

The U.S. government is basically using the taxpayer to guarantee against downside risk on the value of these assets, while giving the upside, or potential profits, to private investors, he said.

"Quite frankly, this amounts to robbery of the American people. I don't think it's going to work because I think there'll be a lot of anger about putting the losses so much on the shoulder of the American taxpayer."

The other Nobel Prize winning economist to come out against the plan so far? Paul Krugman.

UPDATE:
James Pethokoukis provides several reasons why the left isn't jumping on board the Obama bailout plan. Many are angry at who Obama has chosen to include in the bailouts, including hedge funds and private entities, while others think that the plan doesn't go nearly far enough, that the mess will be repeated down the road, and would rather that the industries and businesses be nationalized altogether. Of course, other economists point out that if the latest plan doesn't work, nationalization may be forthcoming in any event.

Washington Mutual Sues Feds Over Firesale

Washington Mutual's holding company is suing the FDIC over its seizure and subsequent sale to JPMorgan Chase at a bargain basement $1.9 billion. The company argues that the actual value of the company was worth far more than that had the company been properly liquidated.

I tend to agree.

It isn't the first time that the government screwed up in this arena. They tried to force the sale of Wachovia to Citigroup. Wells Fargo proffered a far higher bid ($2.2 billion versus the Wells Fargo $15.1 billion) for the company and the government sought to block the acquisition and lost. Weeks later, we came to learn that Citigroup was in dire fiscal shape and needed a bailout of its own (that came with executive compensation strings attached unlike the AIG bailout that got Congressional approval and broke out the phony outrage this past week).

The government has consistently gotten the value of these companies wrong, and attempted to force transactions that would have been bad for the taxpayer. They clearly underestimated the severity of problems at Citigroup and severely undervalued the price of Wachovia.

Taken together, and one sees clear problems with further interference in the markets by the government. They are bound to make the situation worse, not better by meddling in the markets and interfering with the market valuations of these companies.

Cost Cutting

It appears that Tiger Woods was just too costly for General Motors. The troubled automaker has canceled its multimillion dollar deal with the golf star with one year left to run on the contract.

The five-year deal, believed to be worth at least $7 million a year, was to end in 2009. Woods’ agent at IMG, Mark Steinberg, said the decision to end the endorsement one year early was “absolutely mutual.”

“It was a combination of things,” Steinberg said. “Tiger was looking to gain some more time, and certainly it was an opportunity for GM to reduce its spending with everything going on.”

GM’s vice president for North American sales, Mark LaNeve, says the separation is the result of discussions earlier in the year and is not related to the company’s campaign for $25 billion in loans from the federal government.

It might not be related to the automaker's quest to get a federal bailout, but it certainly does improve it's public relations situation slightly after the private jet fiasco last week.

Meanwhile, Citigroup, which has just gotten yet another multibillion dollar bailout from the federal government, continues to hold to its naming rights for the New York Mets new stadium that is set to open in 2009. The naming rights are worth hundreds of millions over the life of the contract; $20 million per year for 20 years.

Seems to me that the name should go. The bank can't afford it. More to the point, Citigroup can't justify the expenditure.

UPDATE:
Hot Air takes a closer look at the naming rights of stadiums and arenas around the country and notes that the bailouts are turning out to be nothing more than a public subsidy levied on top of still other public subsidies.

Citigroup Gets a Bailout

$20 billion to bail out the company.

Under the deal, the government will have the right to slash the huge pay packages and bonuses that Citi's executives had long enjoyed, and cap stockholder dividends at only 1 cent per share.

The sweeping plan is designed to stem a crisis of confidence in the once-mighty financial institution, whose stock lost 60 percent of its value last week on worries about its fiscal health.

"With these transactions, the US government is taking the actions necessary to strengthen the financial system and protect US taxpayers and the US economy," the three agencies said in a statement.

"We will continue to use all of our resources to preserve the strength of our banking institutions, and promote the process of repair and recovery, and to manage risks."

The $20 billion cash injection comes in the form of a purchase of Citigroup preferred stock by the Treasury Department.

The funds to buy the shares will come out of the $700 billion financial rescue package already in place.

The new capital infusion follows an earlier one - of $25 billion - in which the government also received an ownership stake in Citigroup.

Let's not forget that the feds thought that Citigroup was in a better position to buy Wachovia than rival Wells Fargo. Now, they're busy bailing out Citigroup.

I understand that there are good reasons that bailouts are necessary to maintain the stability of the banking system since it represents the foundation of the economy with providing credit to all other sectors for r&d, growth, business operations, etc.

If banks go under, especially those that are large, it makes it more difficult for businesses to operate and a credit squeeze will send smaller companies and those that have already tight credit over the brink into bankruptcy.

The automakers are a case where bad business decisions have saddled the domestics with huge losses and bailing them out will not address the underlying problems.

The problem is that the banks made bad business decisions that should not be rewarded with bailouts either. This mess is due largely to subprime borrowing and the repackaging of paper that hid the true risk of that paper. They have no one to blame but themselves, and Congress, for this mess.