And here we have Prime #1 example (well, ok, maybe not “Prime #1”, but certainly A Prime example)
The SEC alleges that Citigroup Global Markets structured and marketed a CDO called Class V Funding III and exercised significant influence over the selection of $500 million of the assets included in the CDO portfolio. Citigroup then took a proprietary short position against those mortgage-related assets from which it would profit if the assets declined in value. Citigroup did not disclose to investors its role in the asset selection process or that it took a short position against the assets it helped select.
Citigroup has agreed to settle the SEC’s charges by paying a total of $285 million, which will be returned to investors.
To recap, this is what happened:
- Citigroup put together a CDO (a debt obligation) in which it selected “assets” to put into the transaction specifically for their crappiness. That is, they chose assets that they expected would decline in value.
- The company then shorted the instrument it created, a position that would lose money if the CDO performed as expected and marketed to investors. They could only make money if the investor lost their shirt.
- They did not disclose either their selection of the assets in the CDO or that they took the short to the people who were buying it!
As expected and designed the CDO blew up. The “investors” took a 100% loss; what they bought was valueless as it was a levered instrument and the valuation loss of the underlying assets was sufficient to wipe out their investment. Citigroup made a lot of money. The instrument performed exactly as Citigroup intended but they did not tell the people who were buying this thing that they expected they would lose every penny they put in up front. In fact they intentionally concealed their role in selecting the assets and that they had taken a short position against them!
Now the SEC steps in and they agree to “settle” this case with what amounts to a fine.
In fact the SEC press release claims that Citigroup knew damn well what they were “selling” was fraudulently misrepresented to the customers:
According to the SEC’s complaints, the Class V III transaction closed on Feb. 28, 2007. One experienced CDO trader characterized the Class V III portfolio in an e-mail as “dogsh!t” and “possibly the best short EVER!” An experienced collateral manager commented that “the portfolio is horrible.” On Nov. 7, 2007, a credit rating agency downgraded every tranche of Class V III, and on Nov. 19, 2007, Class V III was declared to be in an Event of Default. The approximately 15 investors in the Class V III transaction lost virtually their entire investments while Citigroup received fees of approximately $34 million for structuring and marketing the transaction and additionally realized net profits of at least $126 million from its short position.
Where are the handcuffs for the obvious false statements? This “transaction” was a clear (and successful) attempt to simply rob people.
If you or I do something like this through some fraudulent edifice we go to prison. But when a big national bank does it, we simply order them to a pay a fine when they get caught.
This makes stealing a simple business proposition: Since you will not get caught all of the time, there is no reason not to steal. Any time you do not get caught you get to keep all the loot. When you get caught you negotiate to return some of the loot.
AND WE WONDER WHY INSTITUTION ENGAGE IN THIS SORT OF BLATANT RIPOFF?
Ps: Oh yeah, there’s this pesky statute of limitations problem too. Anyone note the dates? Just draw it out until you can’t prosecute – on purpose. This is nothing more or less than an organized looting operation with the full participation of the government in stealing from the victims.