8/19/14, "Sound and Fury in Bank Settlements, Still Signifying Nothing," dealbook.nytimes.com, William D. Cohan
"Once again last month, we were treated to the sorry spectacle of Attorney General Eric H. Holder Jr. holding a news conference to proclaim that a “too big to fail” bank had been brought to justice for its reprehensible behavior in the years leading up to the 2008 financial crisis. All things considered, it was fine theater with the obvious caveat that nothing even remotely close to justice had been served.
This time, Mr. Holder was taking a victory lap for strong-arming Citigroup into paying $7 billion — including a $4 billion cash penalty, the largest such single payment ever — to settle all civil claims against it for its role in packaging troubled mortgages into securities and selling them as investments in the years before the crisis, even though a bunch of Citigroup bankers knew better and did it anyway.
“This historic penalty is appropriate given the strength of the evidence of the wrongdoing committed by Citi,” Mr. Holder said. “The bank’s activities contributed mightily to the financial crisis that devastated our economy in 2008. Taken together, we believe the size and scope of this resolution goes beyond what could be considered the mere cost of doing business. Citi is not the first financial institution to be held accountable by this Justice Department, and it will certainly not be the last.”
For those following closely, as Mr. Holder alluded to in his statement, the Citigroup settlement was a repeat of the performance he gave last November when JPMorgan Chase paid $13 billion to settle similar claims against it. It is probably also serving as set-up for the show that Mr. Holder will be putting on again any day now when Bank of America capitulates to his demands for a settlement after months of threatening not to go along. Bank of America is expected to pay a fine of $16 billion to $17 billion to various government entities — eclipsing the $13 billion that JPMorgan paid — including a stunning $9 billion in cash.
That Mr. Holder prefers large settlements to prosecutions is no surprise to anyone familiar with the so-called Holder Doctrine, which stems from his now-famous June 1999 memorandum — when he was deputy attorney general — that included the thought that big financial settlements may be preferable to criminal convictions because a criminal conviction often carries severe unintended consequences, like loss of jobs and the inability to continue as a going concern. (See Andersen, Arthur, for instance.)
That Mr. Holder, as attorney general, is following through on an idea that he proposed as a subordinate 15 years ago does not make his behavior any less infuriating. The fact is that by settling with the big Wall Street banks for billions of dollars — money that comes out of their shareholders’ pockets — Mr. Holder is allowing them to avoid the sunshine that Louis Brandeis wrote 100 years ago was the best disinfectant. Instead of shining the bright light on wrongdoing that took place at the Wall Street banks, Mr. Holder’s settlements allow them to cover it up permanently.
And that helps no one. The American people are deprived of knowing precisely how bad things got inside these banks in the years leading up to the financial crisis, and the banks, knowing they will be saved the humiliation caused by the public airing of a trove of emails and documents, will no doubt soon be repeating their callous and indifferent behavior.
Instead of the truth, we get from the Justice Department a heavily negotiated and sanitized “statement of facts” about what supposedly went wrong. In the case of JPMorgan, the statement of facts was 21 pages but contained little of substance beyond the fact that an unidentified whistle-blower at the bank tried to alert her superiors to her belief that shoddy mortgages were being packaged and sold as securities. Her warnings went unheeded and the mortgages were packaged and sold all the same.
The explicit details of the bank’s wrongdoing were contained in a civil complaint that Benjamin B. Wagner, the United States attorney for the Eastern District of California, had drafted and threatened to file publicly if JPMorgan didn’t settle. Fearing disclosure of the contents of the complaint, JPMorgan caved to Mr. Holder’s demands. The bottom line was JPMorgan paid the $13 billion, in cash and in-kind, and the American people were deprived of finding out exactly what the bank did wrong.
A similar cat-and-mouse game took place in the Citigroup settlement. This time, though, the statement of facts was a mere nine pages and contained remarkably little substance beyond the fact that Citigroup packaged mortgages it should not have and sold them as securities to investors. In the most anodyne language, Citigroup conceded that it occasionally violated its own internal credit guidelines for mortgages but packaged them anyway. Here is a sample of what Citigroup admitted to in the statement of facts: “In certain instances, Citigroup securitized loans that its vendors had reported exceeded Citigroup’s valuation tolerances or where the vendor’s valuation determination exceeded the reported or appraised value.”
The only quasi-damning piece of evidence in the statement of facts came in the form of an email written by an anonymous trader who had reviewed a bunch of the mortgages that Citigroup intended to package and sell and realized that they were defective.
The trader stated that he “went thru the diligence reports” — describing the mortgages — “and think that we should start praying… I would not be surprised if half of these loans went down. There are a lot of loans that have unreasonable incomes, values below the original appraisals” — where the loan-to-value ratio would exceed 100 percent, a no-no — “It’s amazing that some of these loans were closed at all.” No surprise, according to the statement of facts, “Despite this trader’s observations, Citigroup securitized loans from this pool” in two residential mortgage-backed securities.
The problem is, of course, that these settlements allow for the Wall Street bankers, traders and executives who write these kinds of emails and make these kinds of decisions to get away with their bad — and perhaps illegal — behavior without being held the slightest bit accountable. To the contrary, they were rewarded for making and selling these securities with huge bonuses that often ran into the millions of dollars. And then — thank you very much — Wall Street’s boards reward their exalted chief executives with higher bonuses for resolving these nettlesome legal matters. But all the chief executives did was use their shareholders’ money to make the lawsuits go away and cover up any trace of the bad behavior.
As usual, in any war, the first casualty is the truth. After the announcement of the Citigroup settlement, I received an email from Richard Bowen, a former Citigroup executive who had pinpointed the bank’s wrongdoing in securitizing the faulty mortgages it was buying. Well before the financial crisis hit, Mr. Bowen alerted the top executives of Citigroup about this malfeasance. Of course, Mr. Bowen’s clarion call was ignored and the bank fired him. (I have written about Mr. Bowen before, and “60 Minutes” did a feature on him, too.)
The Citigroup settlement has left him flabbergasted. “In July of 2008, I gave the S.E.C. 1,000 pages documenting fraud and the false representations given to investors in many securitizations and subsequently provided additional evidence to the Financial Crisis Inquiry Commission and the Department of Justice,” he wrote in his email. “In light of the huge losses this behavior caused our country, it is outrageous that, six years later, a settlement of only civil fraud charges would be announced, with no individuals being held accountable and no real admission of wrongdoing or true penalties assessed.” Mr. Bowen figures the Justice Department lets these banks get away with a whitewash of their bad behavior so as not to provide a litigation road map for investors who were burned by the faulty securities.
Something tells me this is precisely the way the powers that be wanted these deals to go down. But the American people deserve — nay, we demand — better."