Citigroup Pays $285 Million to Settle Fraud Charge; Just Another Cost of Doing Business for Bankers

Move Along, No Need for Regulation Here

The people who like The Dismal Political Economist believe that the financial industry should remain private but heavily regulated regularly point to misdeeds in that industry as their reason.  Opponents of regulation just ignore them.  In fact it is a lot easier to oppose regulation if you just pretend the abuses do not occur.

The current case for regulation can be made by the payment by Citigroup of about $285 million to settle a government claim of fraud in its business practices.  Citigroup did not admit wrong, allowing the accused to settle and  not admit wrong is a staple of these agreements.  Of course, why a company would pay $285 million to settle a claim when what they did was right, well that question never gets answered.

Here is what Citigroup did that did not require an admission of wrong doing on their part.

Hedge funds had asked Citigroup to sell them investments that would decline if the housing market crashed. Citigroup did so, and wanted to get in on the action, the SEC said.

Citigroup bet that the investments would fail, but never told investors it had done so, SEC enforcement chief Robert Khuzami said in a conference call. . . .

Even though Citigroup designed the investment to fail, it told investors it had been designed by an independent manager, the SEC said. Citigroup's marketing materials said the investments were picked by Credit Suisse. In an email about the deal, one Citigroup banker asked another not to tell Credit Suisse that it was designed for Citigroup to profit.

And how did Citigroup make money?  Well it bought insurance against failure of the investment pool it had designed to fail.

Among the biggest losers were Ambac, a bond insurer, and BNP Paribas, a European bank. Ambac had sold Citigroup protection against losses on the investment, allowing Citigroup to bet against it.

and Ambac is essentially out of business.

So does any of this call for regulation of the financial industry?  Not really, if you are a Republican, allowing these abuses would create jobs, for lawyers, bankruptcy officials etc.  As for the financial industry itself, the  payment for unadmitted wrong doing is just another expense item.