Cit­i­group’s ‘Too big to fail’ penalty is too small for some

The Washington Times Weekly - - National - BY PHILLIP SWARTS

The Obama ad­min­is­tra­tion hailed last week’s $7 bil­lion set­tle­ment with Cit­i­group as a sign that it’s pur­su­ing those re­spon­si­ble for the 2008 eco­nomic col­lapse, but an­a­lysts said the penalty won’t hurt one of the coun­try’s largest banks and won’t help many who were dev­as­tated.

Few bank em­ploy­ees, ex­ec­u­tives or work­ers have been con­victed of any crimes con­nected to the risky sub­prime mort­gages that spurred the col­lapse that led to the Great Re­ces­sion.

“In the con­text of the dam­age done, the dam­age even de­scribed by the at­tor­ney gen­eral, we’re not even in the same ball­park,” said Bartlett Nay­lor, a fi­nan­cial an­a­lyst for Pub­lic Cit­i­zen, a non­profit that rep­re­sents con­sumer in­ter­ests.

In­deed, Cit­i­group shares seemed to ab­sorb the set­tle­ment with­out so much as a bump. The fi­nan­cial cor­po­ra­tion, whose net worth is es­ti­mated to be at least $120 bil­lion, closed with its stocks up 3 per­cent on the day, af­ter an­nounc­ing bet­ter-than-ex­pected sec­ond-quar­ter prof­its.

At­tor­ney Gen­eral Eric H. Holder Jr. said the agree­ment, which holds Cit­i­group ac­count­able for its man­age­ment of sub­prime mort­gages, shows that the ad­min­is­tra­tion is work­ing ag­gres­sively on be­half of tax­pay­ers.

“Citi is not the first fi­nan­cial in­sti­tu­tion to be held ac­count­able by this Jus­tice Depart­ment, and it will cer­tainly not be the last,” Mr. Holder said at a press con­fer­ence Mon­day morn­ing.

“We be­lieve that this set­tle­ment is in the best in­ter­ests of our share­hold­ers, and al­lows us to move for­ward and to fo­cus on the fu­ture, not the past,” Cit­i­group CEO Michael Cor­bat said in a state­ment.

Mr. Holder said the agree­ment, in which Cit­i­group ad­mits to a pat­tern of de­cep­tion, does not pre­clude the pos­si­bil­ity of crim­i­nal pros­e­cu­tions for the bank or its em­ploy­ees.

Of Cit­i­group’s $7 bil­lion set­tle­ment, a $4 bil­lion civil penalty will go to the govern­ment — the largest of its kind un­der the Jus­tice Depart­ment’s eco­nomic en­force­ment. An­other $500 mil­lion will go to set­tle claims in dif­fer­ent states and to the Federal De­posit In­sur­ance Corp.

The re­main­ing $2.5 bil­lion is to go to con­sumers to help those who have lost their homes to fore­clo­sures.

Some an­a­lysts are wor­ried that the money paid by Cit­i­group won’t come close to fix­ing the dam­age to the econ­omy in 2007 and 2008, when mil­lions of people lost their jobs and hun­dreds of thou­sands their homes.

Mr. Cor­bat said the agree­ment “re­solves all pend­ing civil in­ves­ti­ga­tions.”

The Obama ad­min­is­tra­tion was crit­i­cized for its han­dling of the fi­nan­cial cri­sis, and some called the Jus­tice Depart­ment’s pur­suit of banks ane­mic.

Leading up to the fi­nan­cial melt­down, Cit­i­group and sev­eral other banks col­lected “toxic as­sets” made up of risky in­vest­ments, bad loans and sub­prime mort­gages — es­sen­tially of­fer­ing easy credit to bor­row­ers who could not re­pay their debts. The fi­nan­cial in­sti­tu­tions then sold those as­sets to other banks, in­vestors, pen­sion plans and mu­tual funds, down­play­ing the risk in­volved.

The col­lapse of the hous­ing mar­ket caused many to re­al­ize the as­sets they bought were es­sen­tially worth­less. In­vestors lost bil­lions of dol­lars. The un­em­ploy­ment rate rose to 10 per­cent as the U.S. en­tered the worst eco­nomic pe­riod since the Great De­pres­sion.

“They mis­rep­re­sented the facts, in­clud­ing the level of risk,” Mr. Holder said. “They sold de­fec­tive loans to count­less in­vestors, in­clud­ing fed­er­ally in­sured fi­nan­cial in­sti­tu­tions. … They led in­vestors and the pub­lic to be­lieve that these fi­nan­cial prod­ucts had been orig­i­nated in com­pli­ance with the law and key un­der­writ­ing guide­lines when this was of­ten not the case.”

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