Rip-Offs Were Rewarded If You Did What Citibank Did ...
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OK, listen up and I’ll tell you what happened.
Citibank is the giant consumer-banking arm of an amazingly, colossally gargantuan financial company called Citigroup.
And they don’t just make their money by charging you confusing and ridiculous fees for using your own money and by issuing credit cards with interest rates that would shame a Mafia loan shark; they also offer “investment services.” Among the investments they peddle are what are called CDOs, which is short for “Collateralized Debt Obligations.” Sounds impressive, doesn’t it?
Simply put, a CDO is a big ol’ bundle of debts. If you buy a CDO, you get paid when the debts do. If a whole bunch of the debts go into default and never get paid, neither do you.
So what Citibank did is offer a whole bunch of these CDOs to investors, telling those investors that the packages had been put together by an impressive-sounding outfit called “Credit Suisse Alternative Capital.”
How could this possibly go wrong? The people picking the investments in the bundle certainly sounded impressive; they had “Swiss” right in the name, and we all know how good the Swiss are with money, right?
Well, no. The CDOs, as it turns out, were backed by those infamous “subprime” mortgages. They were, in fact, crap. When mortgages started defaulting all over, the CDOs they were backing collapsed. Investors lost millions. Citibank, along with several other financial institutions, had to be bailed out by the U.S. government.
They did eventually pay their government loans back in full. So all’s well that ends well, right? Too bad about the people who bought all those bad CDOs, but who could have known they’d be duds?
Well, as it turns out, Citibank knew.
According to documents filed by the Securities and Exchange Commission, it wasn’t Credit Suisse that had had the major hand in picking the lousy investments that backed the CDOs; it was Citibank itself. And they knew the investments they were peddling weren’t as solid as they made them out to be.
In fact, they were so dubious about the products they were selling that, in essence, they took what are called “short positions” on them in other financial markets. In essence, they bet on their own investments to fail. And when they did, Citibank got paid anyway. In the immortal words of Jerry Reed, Citibank got the gold mine while its customers got the shaft.
Now, imagine if you will that I’d sold you some impressive-looking papers that I swore were bonds that were going to make you wealthy. I even brought out a bearded guy with a tweed coat and a pipe who told you he was a famous economist and that he’d pronounced the investments sound.
But the so-called “bonds” were actually just something I’d printed up on my computer, backed up by a lot of junk from my storage shed. The “economist” was some old dude I’d paid to say any nonsense I told him to. Meanwhile, I’d gone and placed a bet that I could bankrupt you.
For you and me, that sort of con game would be a felony. No one from Citibank, however, is going to jail. The company, without admitting any wrongdoing whatsoever, agreed to pay a fine of $285 million. This seems like a lot of money, until you consider that Citibank reported, according to its own website, net income of $3.8 billion [with a “b”] in the third quarter of 2011 alone.
And that, my friends, is one very big reason why people are in the streets, not only on Wall Street and in Times Square, but across the world. They’re sick of the fact that no one, whoever’s in power, seems to be willing to hold these mega-banks to the same standards as you or me when they rip people off.
And yes, I include the Obama administration in that. While they’ve made some attempts at financial reform, they haven’t been nearly as vigorous about it as I’d like. Of course, “as vigorous as I’d like” would include public floggings and the placing of bank executives into the stocks to be pelted with offal, so I don’t think I’ll ever be completely happy with anyone.
But the point is this: If reading about Citibank’s shenanigans and the resultant slap on the wrist ticks you off, then you may have more in common with the “Occupy Wall Street” movement than you think.
Dusty Rhoades lives, writes and practices law in Carthage. Contact him at dustyr@nc.rr.com.
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Comments
BigE 1 year, 6 months ago
Mandatory reading for all Americans: The Big Short by Michael Lewis (Yes, the same author of Moneyball and The Blind Side.)
And another thing... for you deregulation types. Read anything about the Volcker Rule lately? You know, the one originally proposed by former United States Federal Reserve Chairman Paul Volcker. These same 'honorable" institutions have taken a three pronged approach to fighting its implementation- 1) delay it by lobbying against the new rules, 2) negotiate and water down the language, and 3) complain that the resulting form is now too complicated to adhere to! (Sounds like a typical lawyering strategy, sorry Dusty.) Can you imagine the gall? The regulation was originally designed "to restrict United States banks from making certain kinds of speculative investments that do not benefit their customers" and is now a behemoth sized document because of these selfless patriots. Once again those of us getting screwed are being asked to support them in fighting the big bad anti-profit government. (The same one governing during this period of record profits and more importantly, cash flow.) I am not blindly against corporations, capitalism, or the rich, but anyone who thinks these guys on Wall Street care about us or that we'd be better off without any regulations, well... excuse me while I kneel in front of my toilet and lose my breakfast.
bigD 1 year, 6 months ago
Dusty-
I knew we would find some common ground sooner or later. This is a great article and a simple explanation of the CDO market. Part of the problem is that stockbrokers are agents of their firms and not fiduciaries to their clients. Fiduciaries are required to control investment costs, eliminate conflicts of interest (no self dealing) and act in the best interest of the client (not the firm). I'm sure I don’t have to explain the agency relationship to you.
I am waiting for an occupy Wall Streeter to carry a sign that says "eliminate 12b-1 fees" or "Make my broker a fiduciary". Perhaps a "401k fee transparency" or "make my 401k provider a fiduciary"
dustyrhoades 1 year, 6 months ago
I am waiting for an occupy Wall Streeter to carry a sign that says "eliminate 12b-1 fees" or "Make my broker a fiduciary". Perhaps a "401k fee transparency" or "make my 401k provider a fiduciary"
Lacks a certain zing.
But I totally agree.
dustyrhoades 1 year, 6 months ago
Interesting article here:
http://www.washingtonpost.com/national/for-tea-party-and-occupy-wall-street-movements-some-common-ground/2011/10/18/gIQAkIg07L_story.html
Bigguy 1 year, 6 months ago
Great write up Dusty! What I can see about OWS protesters is that they are fed-up with these un-fair practices that Wall Street Firms got away with and are still doing. Not to mention that these Firms recieved all this bail-out money and still gave out huge bonuses, while the people who got taken lost life savings and homes. Seems more reasonable to protest this, than the idots who wanted to take are "Country Back".
DaveyNC 1 year, 6 months ago
Well done, Dusty. I read an excellent suggestion the other day that the big Wall Street investment firms (Goldman, Morgan Stanley, etc.) should be forced to become partnerships once again and that that would cause them to be a bit more cautious about their activities. Already they are considering dropping their bank status so as to avoid having to comply with the Volcker Rule. We have a problem that has developed over the years that the Volcker Rule may only increase in that we now have a shadow banking system that has developed. That is where the CDO's are traded as well as CDS' (credit default swaps). Estimates place the size of this system at $27 trillion, nearly twice the size of the US's GDP. http://en.wikipedia.org/wiki/Credit_d...
Warren Buffet famously described CDOs and CDS' as "weapons of mass financial destruction" back before the crash. He got that right. Unwinding these markets is more or less impossible.
Toda 1 year, 6 months ago
Dusty I wouldn't separate Citibank from the biggest loathes in banking ~ Bank of America! After receiving their tax-funded windfall they purchased not one but two new Lear Jets for the corporate brass to fly in style to receive their handouts.
DaveyNC 1 year, 6 months ago
Question: Has the "Reply" option been disabled by The Pilot?
boomer 1 year, 6 months ago
Dusty,that was a "very" good article.Well explained to the lay person. I always enjoy your columns!!
dustyrhoades 1 year, 6 months ago
Thanks, all.
AmericanModerator 1 year, 6 months ago
Well said. Especially "They’re sick of the fact that no one, whoever’s in power, seems to be willing to hold these mega-banks to the same standards as you or me when they rip people off." We need to wake up and smell the coffee. Why hasn't Congress had hearing on this? Because of the lobbying Dusty mentions. We also need campaign finance reform so this flush of big money stops having the overpowering influence is has. All we have to do is vote out our incumbent members of Congress to remind them who has the real power. I won't hold my breath, though, as long as the numbers of people who actually vote are so low.
Courseaire 1 year, 6 months ago
Darn Dusty, I hate it when I have to agree with you. It's really a shame that the Fraudsters were not prosecuted. Well done!, Wingnut Courseaire
moonchild7 1 year, 6 months ago
How many of you guys grew up playing Monopoly? Of course that was before video games but back in those "old" days it was a lot of fun. One thing that it taught me, at a very young age though, was to NEVER TRUST the BANKER! It almost always seemed that the BANKER(no matter who the banker was)tended to win the the game and that the BANKER always had more money than the rest of us. I guess I was never agressive enough to be the BANKER very often so of course I was on the lesser end of times I won the game. Anyway, that lesson learned early, I've never liked BANKS, I always thought they were corrupt and have had my "Money Accounts" at a Credit Union. They seem to be a little less EVIL than Banks but I'm not the biggest fan of them either. The BANKS need to be broken up and or taken over by the Government. I read that the US is probably going to get another Downgrade, which is a joke, after the US Government saved their you know whats and made them all the RICHER for it. Those at OWS have the right message and the right answers. We should support them if we are the 99%. And I am.
TOYTIME 1 year, 6 months ago
Dusty, good article. Going forward banks should require substantial down payment in order to provide a mortgage. My wife and I have good credit and it was always understood that 20% would be needed to get a mortgage for any house that we bought. This acts as a buffer for the bank and for the homeowner against unforseen depreciation. Two thirds of all mortgage backed homes in Nevada I hear are in a negative equity status. If more sane borrowing and lending practices were in place I'm sure alot of forclosures and draw dropping losses would have been lessoned. This does not excuse the banks for shorting the market on assets they were promoting at the same time.
geoffcutler 1 year, 6 months ago
Good article, Dusty. And it does tick you off. But it doesn't put us on any common ground with the Wall Street anarchists, Communists, and the other odd collection of radicals. It might, though, if you mass produced it and sent it to them as a press release. Then, at least, they'd have some clue what they were mad about. :) See Matt Labash piece in latest Weekly Standard.
moonchild7 1 year, 6 months ago
Geoff, the protestors of OWS know why they're there, why don't you? The Weekly Standard is RIGHT-WING Propaganda. Here are messages that were on two signs at last weeks protests. First one from a Telecommunication worker CWA Local 1101: "I'm Union, I vote, I work, I pay taxes, I'm pissed, I'm here". And one other: "We bailed out Wall Street and all I got was this lousey sign." Surely you understand those messages, they are short after all.
dustyrhoades 1 year, 6 months ago
Wall Street anarchists, Communists, and the other odd collection of radicals
Like these guys? http://www.washingtonsblog.com/2011/10/veterans-support-wall-street-protests.html
Also: http://tinyurl.com/3dw6bc2
greentara13 1 year, 6 months ago
Great article Dusty! These big banks make me mad! I am actually changing my banks as a result. I cut up my credit cards two years ago, because all they wanted to do is let me borrow more money. I just wanted to get on top of things, not buy more stuff I didn't need. Also something funny happened about 3 years ago to customer service. I no longer would get an American customer service representative. I would get someone in India, I would receive pleasant service, but absolutely no follow through on the issues I was having. So not only are they crooks, they have taken jobs away from American citizens! They should pay back the money and be tried for treason! Shame on them! Occupy the banks!
OldPilot 1 year, 6 months ago
"Wall Street anarchists, Communists, and the other odd collection of radicals"? Complete, utter, stubborn stupidity!
JER 1 year, 6 months ago
Maybe if the OWS protesters dressed up in old time costumes and had things on strings dangling from their hats, Mr. Cutler would take them more seriously.
geoffcutler 1 year, 6 months ago
Old Pilot...you sound mad. Are you mad? Rage at the tea partiers and rage at critics of these protesters. Hypocritical? Maybe just a little bit.
OldPilot 1 year, 6 months ago
Not mad much less angry, just frustrated because everyone knows it isn't the "Wall Street anarchists, Communists and the other odd collection of radicals" who are the backbone of the "Occupy Wall Street". It's the Klingons, Romulans, Borg and that guy from Alpha Centuri, but I'm betting that the Vulcans will bring some logic and order to the movement.
Hembloche 1 year, 6 months ago
Lol @ OldPilot. I may have to rethink my support of OWS now that i know it's a bunch of trekkies in charge... In all seriousness though, i hate star trek so much. So much.
geoffcutler 1 year, 6 months ago
Good one! I laughed.
justmyopinion 1 year, 6 months ago
How hypocritical of DR to cast financial shame on someone. Call him or any lawyer and ask them what they charge. I think people should protest lawyers if they are dumb enough to protest wall st. In fact, where is the outcry against athlete salaries, tv and movie celebrity salaries, entertainers, doctors, dentists, CPA's???
Courseaire 1 year, 6 months ago
JMO - DR never brought up the subject of salaries. He was referring to the fraud perpetrated by the Bank Execs. Just as Milken went to jail for his junk bond fraud, Madoff for his Pyramid scheme, lay for Enron, so should these guys for their bond & paper investment fraud.
Bflat 1 year, 6 months ago
Yawn...zzzzzz....just another "first, we kill all the lawyers" and anyone else that is successful with the same ole worn out excoriating , insulting label. Think of who will be helping you if that attitude is presented to your dentist, Dr, and a lawyer when you really need legal counsel. The subject at hand is when people are knowingly ripped off by the investment fraud perpetrated by Citi Bank. For that, folks should be hiring lawyers and getting the ball rolling to prevent that type thing from happening ever again.
justmyopinion 1 year, 6 months ago
Courseaire - the idea of fees from lawyers and such that I was talking about was the result of DR's comment about ridiculous fees.
"And they don’t just make their money by charging you confusing and ridiculous fees for using your own money and by issuing credit cards with interest rates that would shame a Mafia loan shark; they also offer “investment services.”
I was in NY a couple weeks ago on business and talked to several of the OWS people, Not one of them mentioned anything to do with Wall Street unless you want to consider "corporate corruptions" (which by the way, no specific example could be stated.) The overwhelming topic of concern was the gap in the difference between the rich and the poor NOT Wall Street.
Courseaire 1 year, 6 months ago
The problem with the 1% (the haves) and the 99% (the have-nots), taking out jealousy, is that 95-99% of 1% got there legitimately and thru hard work, the other 1-5% did it thru greed and corruption and give all the others a bad rap.
justmyopinion 1 year, 6 months ago
So true Courseaire
moonchild7 1 year, 6 months ago
Those 1-5% of the 1% were so bad, corrupt and greedy that the country was brought to it's knees. It hasn't really gotten up yet as the Wall Streeters are at it again, making $$$$ from $$$$ or just plain ole' thin air. No INVESTMENT in our country and all of it's people, INVESTING only into their own personal gain. It's unethical, evil and UNAMERICAN. The American Dream that many people hope to obtain one day isn't nearly as obtainable as it once was. The condemnation and radical calls against our GOVERNMENT by Ronald Reagan and others in the 80's has been a constant tide of nasty water eating away at what's been left of the US Government. America and it's government should be celebrated and respected but it's become a self-serving pile of you know what. The majority(31%) of the 1% are Financial Executives/Managers outside of Wall Street, Financial Services Professionals on Wall Street make up 14% and DOCTORS make up the next 16%. That FACT right there(this was a CNN report)is extremely disturbing and is one of the main reason our Health Care System is BROKE. The banks need to be broken up and Doctors should be salaried. They are NOT supposed to getting rich from their profession(A Doctor told me that).
geoffcutler 1 year, 6 months ago
And she's off...hang on to your hats!