Citi Pays $590mm To Settle Lawsuit Over Not Selling Crappy Mortgage Bonds

Citi settled a CDO case for $590 million today, and if you are following along at home you’ll note that that is more than 2x as much as it settled its last CDO case for. There are a number of reasons for that but a big one is: in this case, Citi is in trouble for buying the CDOs, whereas in the last one it was in trouble for selling them. You can’t win, of course, but you can minimize your losses, and the method is clear: next time you find yourself with billions of dollars of assets that you’ve got marked at par but that you’re pretty sure will quickly decay into a pool of oozing crap, you should sell them quickly and deceptively. You’ll get sued less.

Also you won’t lose billions of dollars on the actual CDOs, which is arguably better.

I kid I kid this is different and Citi will probably be whacked repeatedly and in creative ways by shareholders over the fraudulent selling of the CDOs – that $285mm it’s paying to the SEC is really just a down payment – so there really is no way to win (except to accurately mark your assets and disclose your exposure clearly and accurately but who would do that?). Like: CDO investors will sue over the fact that Citi sold them crappy CDOs. Citi shareholders will sue over the fact that Citi was going around selling crappy CDOs without disclosing in its 10Q “we are in the business of selling crappy CDOs.” The advanced move will be when people sue because Citi didn’t tell them that other people were going to sue it, which sounds very silly until you remember that that exact thing is happening to BofA right now.

But they won’t do that much better on the CDOs that they didn’t sell. Sure, Citi is settling with its shareholders now, but the bondholders seem to be pressing ahead on similar facts.* Plus I’m sure that subprime CDOs don’t exhaust the list of crappy things that Citi had on its balance sheet. There is no shortage of lawsuit fodder.

I don’t know what to say about this but isn’t it just viscerally weird? What could be the policy rationale for current Citi shareholders giving $590mm to law firms + former Citi shareholders because Citi lost money on investments? Who could be deterred by that: who would say “I’m okay with losing billions of dollars on these CDOs, but I don’t want to also lose hundreds of millions of dollars in the lawsuit that will inevitably follow”?** The money all basically comes from the same place – shareholders – so if you’re willing to lose a lot of it why not lose a little more?

And if you do think every dollar of incentive matters, this seems to create wrong incentives. If you’re going to deceive someone about the value of your assets, it really might as well be yourself, right? And by the transitive property of corporations being people, “yourself” means “your shareholders.” The sort of fraud where you think things are worth more than they are – the sort normally referred to as “stupidity” – seems a little bit less rapacious than the sort where you tell other people that things are worth more than you know they are. (That’s the sort normally referred to as “fraud.”)

Though I guess if you’re a systemically important bank maybe that’s wrong – maybe if you’re too big to fail being shady is better than being dumb. There’s this anyway:

While big, the $590 million seems like a good deal for Citi. The settlement covers investors who bought bank’s stock from February 2007 to April 2008, a period in which Citi’s shares plunged 48%, resulting in a collective $140 billion loss for investors.

Yeah. Maybe they should have found more suckers to sell those CDOs to.

Citigroup reaches $590 mln settlement over CDOs [Reuters]
Citigroup in $590 Million Settlement of Subprime Lawsuit [DealBook]
Citi to pay $590 million to investors [Term Sheet]

* The left-hand column of page 270 of Citi’s 10-K discusses the relevant lawsuits, but the irrelevant ones are good too. I mean, lotta lawsuits, man.

** Yeah, technically it’s a disclosure suit – the problem is not that Citi lost all that money but that it “‘concealed the company’s failure to write down impaired securities containing subprime debt’ at a time when the collapse in the mortgage market made it apparent that banks including Citi would be adversely impacted.” Don’t be fooled, though: they were sued for making bad investment decisions and only realizing it in hindsight. Like of course they marked their assets wrong; if they knew how to mark them right they wouldn’t have bought them.

(hidden for your protection)
Show all comments

49 Responses to “Citi Pays $590mm To Settle Lawsuit Over Not Selling Crappy Mortgage Bonds”

  1. guest says:

    Matt, I've noticed your articles are becoming increasingly brief. You doing alright there bro, or is the absence of margarita fueled standardized test writing getting you down?

  2. Nate says:

    It's not like they didn't know this garbage was worthless, they just didn't want to mark it accurately– that was the problem. If they mark big losses no one gets a bonus, no one gets fired, and no counterparties pull their credit facilities from under them.

    End result of mismarking: shareholders lost more while execs/employees suck out bonus money and salary for making their horrible investments. They should be sued– it was fraud not negligence

  3. Pit Fall says:

    Can we move on?

    –Guy who loves insider trading articles

  4. Carl. I says:

    Vikram totally can't pull off those shades, me on the other hand, I Cahn.

  5. CDO-Guy says:

    Until financial institutions (banks, asset managers, hedge funds, etc) cease to become vehicles used by individuals for personal enrichment (OPM) nothing is going to change. Matt, do you (or anyone else here) actually believe that folks in this industry (the way it's currently set up) are working to make other people money?

  6. TfXNJa I really liked your blog article.Really looking forward to read more. Want more.

  7. spogysmooky says:


  8. I truly appreciate this post.Thanks Again. Great.

  9. Great, thanks for sharing this article.

  10. Thank you for your blog article.

  11. satnam says:

    Thanks-a-mundo for the article. Fantastic.

  12. Thanks, useful material I added your blog to my bookmarks!…

  13. Cat Health says:

    I think this is a real great blog.Thanks Again. Really Cool.

  14. diamant says:

    A big thank you for your blog post.Really looking forward to read more.

  15. Say, you got a nice article. Cool.

  16. I read online (computer problems) positive feedback about your resource. Didnt even believe it, and now saw myself. It turned out that I was not fooled!…

  17. Major thankies for the blog post.Much thanks again. Awesome.

  18. Images says:

    Major thankies for the blog.Really looking forward to read more.

  19. mmorpg games says:

    Awesome article. Cool.

  20. I loved your blog.Much thanks again. Great.

  21. wow, awesome blog post.Really looking forward to read more. Much obliged.

  22. I appreciate you sharing this article post.Really looking forward to read more. Fantastic.

  23. crork says:

    DNxbI5 Very neat blog post.Really looking forward to read more. Great.

  24. Awesome article.Really thank you! Great.

  25. ntQzMG Im obliged for the blog article.Thanks Again. Will read on…

  26. gay talk says:

    Muchos Gracias for your blog article.Really thank you! Cool.

  27. Somewhere in the Internet I have already read almost the same selection of information, but anyway thanks!!…

  28. Im thankful for the blog article.Really looking forward to read more. Fantastic.

  29. Great article post.Really thank you! Really Cool.

  30. Yet, much is unclear. Could you describe in more details!…

  31. I appreciate you sharing this blog post.Thanks Again. Much obliged.

  32. Im obliged for the article post.Really looking forward to read more. Much obliged.

  33. Really appreciate you sharing this blog.Thanks Again. Really Great.

  34. marketplace says:

    Very good article post. Awesome.

  35. funny post says:

    Major thanks for the post.Thanks Again. Cool.

  36. Im grateful for the post.Thanks Again. Much obliged.

  37. free games says:

    I am amazed with the abundance of interesting articles on your site! The author – good luck and wish you the new interesting posts..!

  38. I am amazed with the abundance of interesting articles on your site! The author – good luck and wish you the new interesting posts..!