Saturday, September 25, 2010

Attempting to Wrap Up the Absurd Citi-SEC Settlement Story

I started writing about this story a few months ago, when Citi was given the equivalent of two minutes in the penalty box for misleading investors as to the extent of their subprime exposure.  I pointed out that the $75mm fine was especially absurd in light of GS's recent $550mm fine for an offense that involved much smaller notional amounts and much more sophisticated counterparties.

The settlement was subsequently rejected by a judge, which led me to write about exactly how absurd the $75mm fine was, in light of the fact that Citi's deception allowed it to raise nearly $40 Billion of new capital between Q4 2007 and Q2 2008.

Today, the story is that a judge has approved the settlement, including the quote:

"Judge Huvelle said that given the S.E.C.’s economic analysis in reaching the $75 million settlement, “I can’t really in good faith say that this figure is right or wrong.”"

Oooh - OOOOH - PICK ME PICK ME! *raising hand, waiving it violently*
I can in good faith say that the figure is wrong - I went through a simple argument to show that it can't possibly be right.  Take $75mm and divide it by the $40B in capital that Citi raised with false pretenses.  You get 19 basis points, or 0.19%.  You don't have to be a financial markets wizard to assess that the benefit Citi got by not telling investors about their extra $38Billion or so in subprime exposure and thus managing to raise a crap-ton of new capital was more than 19bps.    The real number is probably well into the multiple billions - or more.  After all, once investors realized the truth, the stock collapsed.  I don't think I need to offer proof that had investors known that Citi had massive subprime exposure, they might not have provided capital so readily.

"The judge also directed that the settlement agreement be reworded to make clear that the $75 million would be used to compensate shareholders who suffered losses because of Citigroup’s misstatements, and she told the S.E.C. and the bank to return in two weeks with new language that did that."

Which leads me to the next story - Norway's Central Bank is now suing Citi, for, you guessed it,  precisely the same thing.
"Norway’s central bank has sued Citigroup over $835 million in losses on Citi shares and bonds.
Citi is accused of making “repeated material untrue statements and non-disclosure of material information to investors” from Jan. 19, 2007 through Jan. 15, 2009 that caused Norges Bank, the central bank, to buy the securities at inflated prices."

Citi responds by saying:

"“We believe the suit has no merit and will defend ourselves vigorously,” a Citigroup spokeswoman said in a statement."

I find their denial especially odd, considering that the other suit (the one I wrote about above!) established that Norway's allegations are basically undeniable!

And so it goes...

disclosure: I am LONG Citi, for some inexplicable reason

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