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

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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.

Related

Appellate Court Willing to Entertain the Possibility that Citi Was Not Committing Fraud

I've had some fun these last few days proposing counterintuitive theories for why Citi might not suck as much as you probably think it does and it's nice to see others joining in the pastime, even if this sounds a little far-fetched: The district court’s logic appears to overlook the possibilities (i) that Citigroup might well not consent to settle on a basis that requires it to admit liability, (ii) that the S.E.C. might fail to win a judgment at trial, and (iii) that Citigroup perhaps did not mislead investors. That piece of rank conjecture is from the Second Circuit's opinion on an appeal* of Judge Rakoff's rejection of the settlement between the SEC and Citi over some mortgage-backed securities. Here's DealBook: