Think the US government isn't tough enough on Wall Street? Judge Jed Rakoff agrees. On Monday, Judge Rakoff, of the Federal District Court in Manhattan, rejected a settlement proposed by the government that would have let Citigroup pay its way out of a huge fraud investigation without having to admit it did anything wrong. It's yet another example of captured regulators letting failed banks exploit the taxpayer – only this time there was an outspoken judge to stop them.
Stealing from investors
Rewind to 2007. The sub-prime mortgage crisis hadn't yet paralysed the US economy: banks were supergluing together dubious securities and pitching them to investors. Citigroup – the giant financial services corporation that includes Citibank crafted a complex billion-dollar bundle of bundles of their worst sub-prime mortgages. They pitched it as a sensible investment, with assets chosen by an independent party. In reality, it was designed to fail ('the portfolio is horrible,' one Citigroup manager explained).
At the same time that they were selling it to investors, Citi was betting against it. The company made $160m. The investors lost $700m.
Bad regulators, good judge
The Securities and Exchange Commission rightly investigated the scam, finding that Citi had deliberately set up a failure that it could bet against. But when the SEC pulled Citi in to settle the case, the regulator was toothless. The parties agreed that the company would pay a mere $285m in penalties without ever have to admit wrongdoing or face a potentially embarrassing trial.
This has become standard operating procedure: the SEC uncovers criminal behavior, corporations pay a fine but escape having to acknowledge real responsibility. (If they were ever found guilty, they'd have to actually repay all the investors they defrauded.) The SEC contends that it doesn't have the resources to take each case to trial and get a real guilty verdict. In his opinion, Judge Rakoff dismissed that excuse:
The SEC, of all agencies, has a duty, inherent in its statutory mission, to see that the truth emerges; and if it fails to do so, this Court must not, in the name of deference or convenience, grant judicial enforcement to the agency's contrivances.
Rakoff's decision was a remarkable victory for corporate accountability. By rejecting the settlement, he is forcing Citi and the SEC to hash out a more just agreement or head to court next July.
Financial crime reaches far beyond Citigroup. Rakoff called the firm a recidivist, a repeat offender, but all of Wall Street was complicit in the fraudulent behavior leading to the crash. Last year Goldman Sachs paid $550m to settle a similar case brought by the SEC – the difference was that Goldman was building a security to enrich trader John Paulson, whereas Citi was just enriching itself.
The problem is not a few bad actors, but a corrupt and unworkable system. Big firms collude with the ratings agencies – which are in effect on their payrolls – then cough up meagre, face-saving penalties when the SEC discovers wrongdoing. For the big banks there is little risk of criminal charges and no incentive to reform. That needs to change.
Take action: Judge Rakoff made an important stand. We need to help. This autumn, hundreds of thousands of people around the globe stood against criminal behaviour in the financial sector. Support them in the fight for just and equitable reform by responding to a global opinion poll that will identify the economic policies the majority of the world wants.