Archive for the ‘Citibank’ Category
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.
Why do we allow this sort of raw falsehood in our so-called “financial reporting”?
Citibank and, I presume Bank of America (I have to go through the BAC release to know for sure, but the market seems to think this is true) is back to its old tricks when it comes to “earnings”: They’re reporting the decrease in certain values as earnings. Specifically, the deterioration in their own bond spread is counted as earnings and Citi also released more loss reserves, although claims their lates deteriorated. So how do you square releasing loss reserves with a deteriorating late picture? Well, you don’t.
Second, this “CVA” game brings back memories of the outright deceptive treatment of “capitalized interest” that WaMu was running in the first part of 2007 and which, in fact, was why I started this blog. In WaMu’s case they were going a step further and paying out this fictional money in dividends, which of course are real money and really gone, while the fictional “earnings” from capitalized interest (negative amortization balance increases) never materialized.
Now this is legal, I might add, but the problem with this accounting treatment is that it makes the reported results meaningless. In the case of bonds spreads the firm is on the hook for par at the time of maturity, so either these “earnings” will be recaptured (that is, they’ll be a loss down the road) or the company will default in which case this entire discussion is academic.
Why, more than four years after this crap started in 2007, these practices continued to be allowed is beyond comprehension. The market, for its part, is seeing through these sorts of games almost-instantly — this morning BAC’s stock spiked instantly on the release but as soon as people started reading the earnings release that spike immediately reversed. A few years ago the “hopium” from this sort of aggressive accounting treatment might have lasted days or even weeks and in fact led to some tremendous shorting opportunities in the financials. Today, not so much as the market has gotten wise to the games.
Incidentally this distortion will ultimately lead to people talking about S&P “earnings” and claiming that they are “ok” with this “contribution” added in. Don’t buy it for a second – these sorts of “CVA” adjustments are temporary games that will come back out in subsequent quarters; mathematically they simply have to. The simpleton will buy on these figures, seeing a “divergence” between value and price that does not exist, and get his or her clock cleaned.
This crap ought to have been stopped after the 2000 tech wreck, and certainly after 2007. If there’s one good thing to say about these schemes it’s this: The market no longer believes it, and is punishing the firms that run this crap; the financials got hammered hard yesterday, and it looks like nobody’s buying into the BAC hopium this morning either.
The image of banks locking their doors to keep customers from making withdrawals during a bank run is what immediately came to mind when we heard that Citigroup was telling customers it has the right to prevent any withdrawals from checking accounts for seven days.
“Effective April 1, 2010, we reserve the right to require (7) days advance notice before permitting a withdrawal from all checking accounts. While we do not currently exercise this right and have not exercised it in the past, we are required by law to notify you of this change,” Citigroup said on statements received by customers all over the country.
What’s going on? It seems that this is something of an error. The seven day notice policy only applies to customers in Texas, Ira Stoll reports at The Future of Capitalism. It was accidentally included on customer statements nationwide.
“Whatever the explanation, it doesn’t exactly inspire confidence in Citi,” Stoll writes. “But it’s hard to believe a bank would be sending out a notice like that on its statements.”
* Thank you to reader, J.R. for sending this in.
Dec. 17 (Bloomberg) — Citigroup Inc.,
the last of the four largest U.S. banks to seek funds to exit a
taxpayer bailout, raised $17 billion by selling stock for a price so
low that the U.S. delayed plans to shrink its one-third stake in the
Citigroup sold 5.4 billion shares at
$3.15 apiece, less than the $3.25 the government paid when it acquired
its stake in September. The New York-based bank said the Treasury won’t
sell any of its shares for at least 90 days.
Investors demanded a bigger discount from Citigroup than Bank of America Corp. or Wells Fargo & Co.,
which together raised more than $31 billion this month to exit the
Troubled Asset Relief Program. Wells Fargo, which trumped Citigroup’s
bid to buy Wachovia Corp. last year, leapfrogged its rival by
completing a $12.25 billion share sale Dec. 15. JPMorgan Chase &
Co. repaid $25 billion in June.
“The market cast its vote and they’re low down on the ballot,” said Douglas Ciocca,
a managing director at Renaissance Financial Corp. in Leawood, Kansas.
“Citigroup needs to show steps to reinstall the quality of the brand.”
the sale, Citigroup’s common shares outstanding increased to 28.3
billion. That’s up from 22.9 billion as of Sept. 30 and 5 billion at
the end of 2007.
“More shares outstanding means less value per share,” said Edward Najarian,
an analyst at International Strategy and Investment Group in New York,
who has a “hold” rating on the shares. “The whole structure of their
deal to pay back TARP wasn’t very good for common shareholders and that
is being reflected in the pricing.”
one of the most important points are being missed. Most of these banks
swore that they didn’t need TARP. Despite this, in order to return it,
they must go back out to the capital markets. Why do you have to hit
the market to return a loan that you said you didn’t need, unless you
needed it? This obvious lie has went unchallenged.
worse. Citi is diluting the hell out of it shareholders, as well as all
of the other TARP banks that are selling shares. Some may even be
taking on debt. They are doing this primarily to gain the freedom to
declare bonuses at higher rates despite uncertain credit condition
surrounding the toxic assets that caused the problem in the first
place. Why in the world would any lender or shareholder agree to
dilution and/or higher debt service “primarily” to pay higher bonuses
to employees in the highest compensated (as a percent of net revenue)
industry in the world???
Imagine if you ran this business, you
have rocky times during a recession with revenues in nearly all aspects
of your business down save the blatant risk taking of trading, and you
go to your bank and say I need a big loan so I can pay myself a $20
million bonus increase.
Do you think Citibank would give you this
loan? They expect it from their shareholders. The same goes for
Goldman, JPM, BAC, etc.
Also from Bloomberg: Weak Banks Should Face Curbs on Bonuses, Dividends, Basel Regulator Says
Dec. 17 (Bloomberg) — Global regulators urged national
authorities to limit bonus and dividend payments by banks with
weakened capital safety nets as part of proposals to reduce
risks to the financial system.
Banks should increase the quality of the capital they hold
to cope with losses, the Basel Committee on Banking Supervision
said in a report on bank capital and liquidity published today.
Banks with depleted capital buffers shouldn’t use predictions of
recovery to justify generous dividends to investors and
employees, the committee said.
Global regulators have been wrestling with plans to
increase supervision of banks following the worst economic
crisis since World War II. The Group of 20 Nations agreed in
April that banks should be required to hold more and better
quality capital to reduce risks to the financial system.
“It’s not acceptable for banks which have depleted their
capital buffers to try and use the distribution of capital as a
way to signal their financial strength,” the committee’s
statement said. “The proposed framework will reduce the
discretion of banks which have depleted their capital buffers to
further reduce them through generous distributions of
It’s amazing that this even needs to be said.