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.

49 comments (hidden to protect delicate sensibilities)
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Comments (49)

  1. Posted by guest | August 29, 2012 at 6:45 PM

    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. Posted by Nate | August 29, 2012 at 7:00 PM

    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. Posted by Pit Fall | August 29, 2012 at 7:34 PM

    Can we move on?

    –Guy who loves insider trading articles

  4. Posted by Hartford Whale | August 29, 2012 at 8:29 PM

    Seriously, if I don't get some new material soon I'm going to need to start saving up for an actual lawyer.

    -Guy using material non-public info to aid the efficient capital markets in their never ending quest for accurate price discovery who thinks it is highly unlikely he'll ever be caught and has not been hedging his tail risk

  5. Posted by ********* | August 29, 2012 at 8:29 PM

    I'm feeling so lonely these days, what did I do wrong?

  6. Posted by Carl. I | August 29, 2012 at 8:30 PM

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

  7. Posted by Guest | August 29, 2012 at 10:35 PM

    Those look like some cheap sunglases, pic must be from when they were paying him $1/year.

  8. Posted by Your Pal, John P. | August 29, 2012 at 11:34 PM

    Hey man, I thought all the cool kids wore cheap sunglasses and badass leather jackets, I mean, that advice about "staying golden" was solid, right?

  9. Posted by Guest | August 30, 2012 at 9:31 AM

    I am so ronery

  10. Posted by CDO-Guy | August 30, 2012 at 10:35 AM

    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?

  11. Posted by güest | August 30, 2012 at 10:42 AM

    Matt, you also forgot the pictag! Needs more margheritas.

  12. Posted by Guest | August 30, 2012 at 10:49 AM

    those are clearly transitions..

  13. Posted by CDO | August 30, 2012 at 12:51 PM

    Pretty much all industries fall under that category. I doubt the passion driven shoe shiners working the subways have much of an interest in the quality of my Century 21s.

    -Though I entirely agree that this culture is destructive to the banking industry

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