Citigroup is lucky that former Libyan leader Muammar Qaddafi was killed when he was. His death diverted attention from a lethal article involving Citigroup that deserved more attention because it helps to explain why many average Americans have expressed support for the Occupy Wall Street movement. The news was that Citigroup had to pay a US$285 million fine to settle a case in which, with one hand, Citibank sold a package of toxic mortgage-backed securities to unsuspecting customers — securities that it knew were likely to go bust — and, with the other hand, shorted the same securities — that is, bet millions of US dollars that they would go bust.
It doesn’t get any more immoral than this. As the US Securities and Exchange Commission (SEC) civil complaint noted, in 2007, Citigroup exercised “significant influence” over choosing US$500 million of the US$1 billion worth of assets in the deal and the global bank deliberately chose collateralized debt obligations, or CDOs, built from mortgage loans almost sure to fail. According to the Wall Street Journal, the SEC complaint quoted one unnamed CDO trader outside Citigroup as describing the portfolio as resembling something your dog leaves on your neighbor’s lawn.
“The deal became largely worthless within months of its creation,” the Journal added. “As a result, about 15 hedge funds, investment managers and other firms that invested in the deal lost hundreds of millions of US dollars, while Citigroup made US$160 million in fees and trading profits.”
Citigroup, which is under new and better management now, settled the case without admitting or denying any wrongdoing. James Stewart, a business columnist for the Times, wrote Citigroup’s flimflam made “Goldman Sachs mortgage traders look like Boy Scouts. In settling its fraud charges for US$550 million last year, Goldman was accused by the SEC of being the middleman in a similar deal, allowing hedge fund manager John Paulson to help choose the mortgages and then bet against them without disclosing this to the other parties. Citigroup dispensed with a Paulson figure altogether, grabbing those lucrative roles for itself.” (On Thursday, the US District Court judge overseeing the case demanded that the SEC explain how such serious securities fraud could end with the defendant neither admitting nor denying wrongdoing.)
This gets to the core of why all the anti-Wall Street groups around the globe are resonating. I was in Tahrir Square in Cairo for the fall of former Egyptian president Hosni Mubarak and one of the most striking things to me about that demonstration was how apolitical it was. When I talked to Egyptians, it was clear that what animated their protest, first and foremost, was not a quest for democracy — although that was surely a huge factor. It was a quest for “justice.” Many Egyptians were convinced that they lived in a deeply unjust society where the game had been rigged by the Mubarak family and its crony capitalists. Egypt shows what happens when a country adopts free-market capitalism without developing real rule of law and institutions.
However, then, what happened to us? Our financial industry has grown so large and rich it has corrupted our real institutions through political donations. As US Senator Dick Durbin bluntly said in a 2009 radio interview, despite having caused this crisis, these same financial firms “are still the most powerful lobby on Capitol Hill. And they, frankly, own the place.”
The US Congress today is a forum for legalized bribery. One consumer group using information from Opensecrets.org calculates that the financial services industry, including real estate, spent US$2.3 billion on federal campaign contributions from 1990 to last year, which was more than the healthcare, energy, defense, agriculture and transportation industries combined. Why are there 61 members on the US House of Representatives Committee on Financial Services? So many lawmakers want to be in a position to sell votes to Wall Street.
The US can’t afford this any longer. It needs to focus on four reforms that don’t require new bureaucracies to implement:
1) If a bank is too big to fail, it is too big and needs to be broken up. We can’t risk another trillion-US dollar bailout;
2) If US banks’ deposits are federally insured by US taxpayers, it can’t do any proprietary trading with those deposits — period;
3) Derivatives have to be traded on transparent exchanges where we can see if another AIG is building up enormous risk;
4) Finally, an idea from the blogosphere: US lawmakers should have to dress like NASCAR drivers and wear the logos of all the banks, investment banks, insurance companies and real-estate firms that they’re taking money from. The public needs to know.
Capitalism and free markets are the best engines for generating growth and relieving poverty — provided they are balanced with meaningful transparency, regulation and oversight. The US lost that balance in the last decade. If it doesn’t get it back — and there is now a tidal wave of money resisting that — it will have another crisis. If that happens, the cry for justice could turn ugly. Free advice to the financial services industry: Stick to being bulls. Stop being pigs.
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