Something has been bugging me today about Citi's recent fine and settlement with the SEC. From the NY Times:
"Citigroup agreed on Thursday to pay $75 million to settle federal claims that it failed to disclose vast holdings of subprime mortgage investments that were deteriorating during the financial crisis and ultimately crippled the bank."
What exactly did Citi do?
"According to the S.E.C. complaint, the bank made a series of disclosures to investors during the summer of 2007 suggesting it had roughly $13 billion of exposure to subprime mortgage-related assets that were losing value. But Citigroup excluded roughly $43 billion of exposure to similar assets that bank officials deemed ultrasafe. Instead, they turned out to be among the most problematic investments on Citigroup’s books.
Citigroup did not disclose the position until early November 2007, after a downgrade of those securities by the major credit ratings agencies in mid-October."
For those out there in the cheap seats, Citi erroneously thought that $43B of subprime related super senior CDO tranches were "money good," as they say, and thus didn't disclose the details of the exposure to shareholders, and ended up losing more than THIRTY BILLION dollars on the positions.
So, what's bugging me is how this compares to the Goldman case. At first, the answer seems somewhat obvious - while Goldman was guilty of misleading investors, Citi was guilty of ignorance of risk, which led them to mislead their shareholders. Said differently, stupidity isn't a crime. The NY Times puts it thusly:
"This month, Goldman Sachs agreed to pay $550 million in a settlement over the S.E.C.’s claims that the bank misled investors in a complex mortgage deal. The Citigroup settlement differs from that, because the S.E.C. is basically asserting that Citigroup misled its own shareholders, whereas it said Goldman misled its customers. And unlike Goldman Sachs, Citigroup resolved fraud accusations that it acted negligently without acknowledging it made a mistake."
Now wait just a second... It's ok to mislead your shareholders, I guess, as long as you're doing it out of gross incompetence, (CUE SACASM FONT) see as long as your screwup is due to incompetence, it means you probably weren't acting deviously, as Goldman appeared to be.
It also doesn't matter that Goldman's customers positively should have been able to do the work to see the facts, while Citi's shareholders almost positively were largely NOT equipped to do the work to see the facts (although I'm not making excuses for them!)
But wait another second, the Times gives us more info:
"The evidence in the case centers on the preparation of an unusual announcement Citigroup prepared for investors in the fall of 2007, warning of a lower earnings outlook for the quarter as markets were deteriorating.
The bank’s executives decided to record an audio announcement about the change, according to the complaint. In preparation, Mr. Tildesley and other staff members reviewed a script over e-mail. An investment bank officer then raised concerns that the script mentioned only a $13 billion position that was considered vulnerable and did not give investors a clear picture of the bank’s total subprime exposure, the complaint said.
The officer subsequently suggested removing a discussion about the highest-rated portion of the subprime assets, a $43 billion position that had not been previously disclosed to investors, to avoid investors’ questions about them, according to the complaint.
The commission said that Mr. Tildesley “took no action” on that matter, resulting in a script that only characterized the larger exposure but did not quantify it. Mr. Crittenden, who had not participated in the e-mail exchange, made a recording using that script, and it was distributed to investors on Oct. 1."
They removed a discussion about the bulk of the assets to avoid questions about them?!? And Citi gets off light here?!?
To review: Citi was 1) at best, grossly incompetent in their ability to diagnose the risk of their assets but in ADDITION, 2) also tried to cover up the positions (implying that they knew they weren't riskless!). And they get slapped with a $75mm fine!!!
Strangely, the public is much angrier about the Goldman Sachs case, which blows my mind, because while Goldman was busy non-disclosing data points to sophisticated big boys, Citi was busy non-disclosing much bigger facts on much biggers sums to much less sophisticated market players (yeah - equity purchasers are less sophisticated than synthetic CDO buyers.). People should be FURIOUS about this Citi case and settlement, but you've probably hardly heard a whisper about it.
“Citigroup’s improper disclosures came at a critical time when investors were clamoring for details about Wall Street firms’ exposure to subprime securities,” said Scott W. Friestad, associate director of the S.E.C.’s enforcement division. “Instead of providing clear and accurate information to the market, Citigroup dropped the ball and made a bad situation worse.”
Yes! Why no consequences then? Director of enforcement, Robert S. Khuzami noted:
“The rules of financial disclosure are simple — if you choose to speak, speak in full and not in half-truths.”
Ignorance and incompetence are bad enough, but ignorance combined with willful witholding of information, which it seems clear that Citi did, is inexcusable, and this fine, ESPECIALLY when considered in relation to the Goldman fine, is puzzlingly small.
disclosure: no positions in GS, long C