Tag Archives: Citigroup

Ethics and Financial Service Company Executives

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In the interest of keeping it real, company executives have three primary interests. One is to do what it takes to keep their jobs. The second is to move-up in their companies to positions of increasing prestige and power. And, third is to maximize their personal income.

Guess what? There is one answer for all three interests – maximize the amount of “revenue” they generate from their clients’ assets. Companies do not fire executives that produce a lot of revenue. In fact, they promote them so they can increase the productivity of other company employees. And, the more revenue they produce, the more money they make.

This is the culture of the typical Wall Street company. The only variable is the companies’ ethical treatment of clients. Based on recent headlines, the needs of clients are a distant second to the production of revenue at companies like Goldman Sachs and Citigroup.

Make no mistake this is a cultural issue that is deeply imbedded in Wall Street business practices. The only way this culture will change is new regulations. That is not gong happen. Wall Street bought the politicians who control the regulations a long time ago.

You cannot afford to assume companies are ethical because they are big. It is safer to assume someone is paying for the opulent offices, company jets, and private country clubs. Just make sure it is not you.

Some Version of the Truth!

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In the romantic comedy, Something’s Gotta Give, Jack Nicholson said to Diane Keaton, “I have always told you some version of the truth”. I believe the SEC is also telling the public some version of the truth.

The court system is currently reviewing a $285 million fine and settlement that was agreed to by the SEC and Citigroup when it sold toxic mortgage securities to investors. Citigroup told investors the mortgages were safe investments. Then the company bet money this mortgage pool would fail. If this sounds familiar, Goldman Sachs perpetrated the same scam. Citigroup made $160 million and investors lost hundreds of millions of dollars.

Judge Jed Rakoff rejected the settlement because it did not include an admission of wrongdoing by Citigroup. He wants this case to go to trial. The SEC and Citigroup are fighting his decision.

Why are the SEC and Citigroup on the same side? One should be the prosecutor and one should be the defendant.

In my opinion, the Rakoff decison interrupted a long running scam that damages the public. It is somehow legal for financial service companies to rip-off investors. If they are caught, they are allowed to pay a fine without admitting guilt. Because they do not admit guilt, no crime was committed.

This travesty of justice has two consequences. First, fines are a cost of doing business for companies and most of the fines are offset by profits that were generated by the scams. Second, no company executives are prosecuted for committing fraud. These are the executives at Citigroup who approved the sale of toxic assets and then bet the mortgage product would decline in value. This fraud was committed by high level executives at Citigroup.

The SEC is telling investors some version of the truth when it says the public interest is being served by the payment of fines. If that was true, why aren’t the fines more of a deterrent? The real truth is executives are using company resources to stay out of jail and the SEC lets the get away with it.

Why Do Wall Street Companies Pay Fines Without Admitting Guilt?

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If Wall Street companies admitted guilt, they would lose a large number of investor lawsuits.

For example, Citigroup sold investors $1 billion of a CDO that contained toxic subprime mortgages. Investors lost $700 million. Citigroup made $160 million from fees and bets that the CDO would fail. Citigroup agreed to pay a $285 million fine without admitting guilt. If you deduct the $160 million, the net cost to Citigroup is $125 million, a fraction of the $700 million of investor losses.

If Citigroup admitted guilt they would still have to pay the fine and no doubt face a class action lawsuit from the investors who incurred the massive losses. Because they admitted guilt they would be in a very difficult position to defend their actions.

New laws should establish a fiduciary standard for all companies that sell investments to investors. The standard already exists for Registered Investment Advisors, but does not cover brokerage firms and stockbrokers.

Guess which type of company is ripping off investors on a regular basis? That’s right the broker/dealers.

Wall Street spends a lot money fighting a fiduciary standard for its brokerage activities.

Unfortunately, politicians have to fix this problem. That is not going to happen. They are paid large sums of money by Wall Street companies to maintain current regulations that protect companies at the expense of investors.

It is also unfortunate that investors do not have an organization that is strong enough to convince politicians to change the regulations.

Investors Have Short-Term Memories

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Wall Street companies cheat investors to maximize earnings, share prices, and executive bonuses.

When they are caught, companies pay fines to make the problem go away.

The latest example is Citigroup’s agreement to pay a $285 million fine to settle an SEC action that stated it sold investors $1 billion of a CDO then bet against the performance of the CDO. Investors lost $700 million and Citigroup made $160 million.

Citigroup is one of the biggest financial institutions in the world. If you can’t trust Citigroup, who can you trust?

Citigroup agreed to pay the fine without admitting guilt. If they didn’t do anything wrong why did they agree to pay the fine?

First of all, fines are a cost of doing business for Wall Street firms. They probably have a contingency fund to pay fines.

Second, they want the “problem” to go away as quickly as possible to minimize adverse publicity.

Third, Wall Street knows investors have very short-term memories. Very shortly, Citigroup’s alleged fraud will be yesterday’s news and it will be business as usual. I bet not one investor pulled their Citigroup accounts because the “problem” did not impact them.

What about the investors who lost the $700 million? Can they still afford to retire when they want to? Can they maintain their desired standard of living during retirement?

What about the executives who made millions from their decisions to package toxic assets and sell them to investors?

What about the fiduciary responsibility to always put investor interests first? I know the answer to this one. Brokerage firms are not held to fiduciary standards. Shame on FINRA and the SEC.

SEC Position Bad for Investors

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I have been blogging for months about the SEC’s practice of letting Wall Street companies pay fines for committing fraudulent acts.

Finally, Jed Rakoff, a U.S. District Court judge rejected a $285 million settlement between Citigroup and the SEC. Citigroup was accused of mortgage fraud – in this case, a $1 billion CDO that cost investors $700 million.

The SEC claims it does not have the staff or resources to prove Citigroup committed fraud in a prolonged court battle because Citigroup has deep pockets and a lot of attorneys.

I have two problems with this position. Apparently big Wall Street companies can commit fraud and get away with it because they employ a lot of high powered attorneys. Second, companies don’t commit fraud, the executives who run the companies commit fraud.

These executives make millions from fraudulent acts and IF they are caught their companies pay fines to regulatory agencies that do not want to take them on in lengthy court battles.

What a crock. The SEC claims a company committed fraud, but does not prove its claim. The company pays a fine, that is small percentage of its profits, without admitting it did anything wrong – after all investors only lost 70% of their money in a short time period. I guess the SEC protects investors from bad guys if they have limited resources to pay attorneys.

Something stinks here. When something smells this bad I believe politicians are involved. Dig a little deeper and I bet the SEC’s position is a result of pressure that is exerted by politicians to protect the executives who run Wall Street companies. These companies bought protection by spending more than $300 million per year on lobbyists.

You can trust Wall Street when executives start going to jail.

Wall Street Executives Avoid Jail Again!

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Citigroup is paying a $285 million fine for cheating investors. Wall Street companies pay billions of dollars of fines without admitting quilt. This cozy relationship with regulators allow executives to commit acts of fraud with no risk of going to jail. Key executives make millions, investors lose millions, and no one goes to jail. This is heads I win, tails you lose played at level where billions of dollars are at stake.

The Revolving Door

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As head of the Office of Management and Budget, Peter Orszag played a powerful and key role in shaping public policies such as the first stimulus package and the recent health-care reform legislation. Recently he has stepped down as OMB director to accept a senior position in the investment banking arm at Citigroup, an institution that received massive infusions of taxpayers’ dollars.

In his new role at Citigroup, Mr. Orszag’s annual salary alone has been ball-parked in the millions of dollars. This ability to effortlessly glide through the revolving door between Washington and Wall Street seems improper in the very least and demonstrates the potential for corruption and abuse. Do you wonder why the recent financial reform that was suppose to rein in reckless risk-taking by the very same institutions that brought this country to the brink of collapse, lacks teeth? Do you wonder why a law that was suppose to do away with “Too-big-to-fail” has had little effect? Why did our politicians accept such lax financial reform when a staggering majority of Americans wanted far greater and extensive measures ?

Mr. Orszag no doubt understands how the positions he takes and the policies he helps shape while in government will affect his future career options. The potential for such huge paychecks and the prospect of a big paying job on Wall Street and elsewhere undoubtedly influences government policy-makers positions on key legislation that impacts its respective industries. It’s no wonder our politicians are unable or unwilling to get any sensible legislation passed that would benefit the masses instead of a select few special interests.

Reckless Banks Resist Reform

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There is a developing proposal that requires congressional approval which is intended to limit among other things speculative trading activity at large banks that receive blanket guarantees from U.S. taxpayers through FDIC insurance and other Governmental assurances. Branded the Volcker Rule after its originator former Federal Reserve chairman Paul Volcker, it imposes tougher standards on the financial industry and risk-taking at depository institutions. This is the most sensible development in regulating risky activity at large commercial banks that received taxpayer bailouts in 2008 and 2009 that we have witnessed up to this point. And wouldn’t you know it, the banking industry opposes it. Go figure?

I would be the first to say that government should limit its involvement in private matters because I think government with its massive bureaucracies tends to be too self-serving. But in light of what has happened we need some sensible regulation. Especially since we saw large financial institutions who received access to cheap capital provided by U.S. taxpayers use that money, instead of lending it for economic expansion, to engage in the same old risky business as before allowing them to pocket record profits at the expense of U.S. citizens. The large commercial banks obviously don’t get it.

Firms Hinder Progress on Bank Reform

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Ten years ago President Clinton signed the Gramm-Leach-Bliley Act which repealed the Glass-Steagall Act giving rise to financial conglomerates that apparently are considered too big to fail, and therefore turn to taxpayer handouts when they find themselves in financial trouble. This latest round of bailouts is already putting trillions of dollars of taxpayer funds at risk.

Congress passed Glass-Steagall in 1933 after speculative activities by large US banks brought the financial system close to collapse. Sound familiar? The intent of the act was to separate investment-banking from lending and deposit-taking. The idea is that investment banking involves more speculative and complex undertakings than commercial banking, and therefore deposit taking institutions should be limited in the amount and types of risks they assume to safekeep depositors’ funds. The repeal of Glass-Steagall allowed the creation of megabanks like Citigroup; look how wonderful that experiment turned out.

The latest round of bank failures has forced mergers that have made banks larger and more concentrated in their risks. We have moved away from a diversified banking system with varied lending practices, to a more concentrated, homogeneous structure where all banks resemble one another. We are living in an economy with fewer but larger banks which constitutes a non-diversified financial ecology ripe for another crisis. Most banks are now so interrelated that when one falls, they all fall. Our banking system is now more vulnerable than ever to even the slightest hiccup.

Congress is now considering the reinstatement of Glass-Steagall. Representative Paul Kanjorski plans to offer the legislation as early as next week. Certainly the banking industry is fighting this. Rob Nichols, president of the Financial Services Forum whose lobbyists represent the largest financial institutions contends that “the U.S. needs big financial firms.” He said he’ll be “vocal and persistent in the halls of Congress.” I believe Mr. Nichols has underestimated the anger that Americans harbor for the shenanigans that have gone on in our banks. If we don’t take the opportunity to properly fix our banking system now, large US financial institutions will undoubtedly once again be laughing all the way to the bank.

Citigroup to Pay $100 Million Bonus

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A floundering taxpayer supported Citigroup is under contractual pressure to pay energy trader Andrew Hall a $100 million bonus. The real question is does Hall deserve the bonus? Is such a huge bonus fair to shareholders and taxpayers who are supporting Citigroup? And will shareholders suffer if Andrew Hall decides to leave and go elsewhere?

It’s my understanding that traders like Hall get paid the overwhelming portion of revenue they produce while shareholders get pennies even though the shareholders are the ones putting all their capital at risk and are making it possible for traders to produce large revenues exposing the owners to a major potential blow-up.

When it comes to investing in banks and publicly traded hedge funds where the managers have little of their own money at risk it seems investors have very little upside and a tremendous amount of downside. It seems the shareholders are overpaying for the services of incompetent bankers and aggressive traders ‘swinging for the fences’ with shareholder capital. In other words, investors in such dubious companies are being taken for a ride!

A couple of years of profitability is too short a time period to determine whether or not Andrew Hall is doing a great job or has just been lucky and might be exposing Citigroup to potential large losses. Given the fact that investors are receiving very little of the benefits that Hall has produced, as a taxpayer, I vote to let him walk.