Sunday, October 23, 2011

We'd Get Jail Time If We Tried This

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OK, listen up and I’ll tell you what happened.
Citibank is the giant consumer-banking arm of an amazingly, colossally gargantuan financial company called Citigroup.

And they don’t just make their money by charging you confusing and ridiculous fees for using your own money and by issuing credit cards with interest rates that would shame a Mafia loan shark; they also offer “investment services.” Among the investments they peddle are what are called CDOs, which is short for “Collateralized Debt Obligations.” Sounds impressive, doesn’t it?
Simply put, a CDO is a big ol’ bundle of debts. If you buy a CDO, you get paid when the debts do. If a whole bunch of the debts go into default and never get paid, neither do you.
So what Citibank did is offer a whole bunch of these CDOs to investors, telling those investors that the packages had been put together by an impressive-sounding outfit called “Credit Suisse Alternative Capital.”
How could this possibly go wrong? The people picking the investments in the bundle certainly sounded impressive; they had “Swiss” right in the name, and we all know how good the Swiss are with money, right?

Well, no. The CDOs, as it turns out, were backed by those infamous “subprime” mortgages. They were, in fact, crap. When mortgages started defaulting all over, the CDOs they were backing collapsed. Investors lost millions. Citibank, along with several other financial institutions, had to be bailed out by the U.S. government.
They did eventually pay their government loans back in full. So all’s well that ends well, right? Too bad about the people who bought all those bad CDOs, but who could have known they’d be duds?
Well, as it turns out, Citibank knew.
According to documents filed by the Securities and Exchange Commission, it wasn’t Credit Suisse that had had the major hand in picking the lousy investments that backed the CDOs; it was Citibank itself. And they knew the investments they were peddling weren’t as solid as they made them out to be.
In fact, they were so dubious about the products they were selling that they took what are called “short positions” on them in other financial markets. In essence, they bet on their own investments to fail. And when they did, Citibank got paid anyway. In the immortal words of Jerry Reed, Citibank got the gold mine while its customers got the shaft.
Now, imagine if you will that I’d sold you some impressive-looking papers that I swore were bonds that were going to make you wealthy. I even brought out a bearded guy with a tweed coat and a pipe who told you he was a famous economist and that he’d pronounced the investments sound.
But the so-called “bonds” were actually just something I’d printed up on my computer, backed up by a lot of junk from my storage shed. The “economist” was some old dude I’d paid to say any nonsense I told him to. 

Meanwhile, I’d gone and placed a bet that I could bankrupt you.
For you and me, that sort of con game would be a felony. No one from Citibank, however, is going to jail. The company, without admitting any wrongdoing whatsoever, agreed to pay a fine of $285 million. This seems like a lot of money, until you consider that Citibank reported, according to its own website, net income of $3.8 billion [with a “b”] in the third quarter of 2011 alone.
And that, my friends, is one very big reason why people are in the streets, not only on Wall Street and in Times Square, but across the world. They’re sick of the fact that no one, whoever’s in power, seems to be willing to hold these mega-banks to the same standards as you or me when they rip people off.
And yes, I include the Obama administration in that. While they’ve made some attempts at financial reform, they haven’t been nearly as vigorous about it as I’d like. Of course, “as vigorous as I’d like” would include public floggings and the placing of bank executives into the stocks to be pelted with offal, so I don’t think I’ll ever be completely happy with anyone.

But the point is this: If reading about Citibank’s shenanigans and the resultant slap on the wrist ticks you off, then you may have more in common with the “Occupy Wall Street” movement than you think.

7 comments:

Spanish Inquisitor said...

Then there's this.

JD Rhoades said...

SI: heh. I love Borowitz.

Dana King said...

You nailed it.

Someone--it might have been Paul Krugman--responded to the taunts that Occupy Wall Street had not enumerated their demands by replying it's not their job. They have changed the conversation and pointed out the injustice. It's the job of the "experts" and politicians to come up with how to fix it. That's what they're paid for.

It's time they got busy.

Charlieopera said...

They’re sick of the fact that no one, whoever’s in power, seems to be willing to hold these mega-banks to the same standards as you or me when they rip people off.

Right on, brother ... and don't forget Citiank was excused $38 BILLION in taxes (which happened to be the same year I had to pay $36K in taxes for working 7 days a week).

Occupy Wall Street is the start of something real. Whether it happens in our lifetime or not remains to be seen, but you best believe this, whether those protesting know it or not, what they're protesting against is capitalism. It DOESN'T WORK.

Robert said...

I lost my job as a computer programmer nearly 10 years ago. Shortly after I was laid off a friend lost his tech position. I joked, “Hey Sean, I still have stock certificates from Classic Coatings. Why don’t we whip up some financial statements that make it look like a lucrative investment and see how many we can sell?” Then I answered my own question, “Because they’d lock US up for 20 years if WE did that.” We got a good laugh out of that, even though we both knew that that was exactly what had caused the recession that had just cost us our jobs. It’s that Chauncey Gardiner thing, the economy gets ripe for the harvest every 10 years.

eviljwinter said...

Remember when they actually practiced capitalism? You know, where the invisible hand actually moved money around?

When did feudalism take ov-

Oh. Right. Housing bubble.

Charlieopera said...

I lost two jobs to outsourcing within a year. I went from 7 days a week to 0 days a week. It looks as though I’ll be rehired full-time from a temp gig I’ve been working, but that’s after 3 months of earning effectively $24K less than I was making at one of my outsourced jobs. When I say the bailout set labor back 100 years, it isn’t an exaggeration; if anything, it is an understatement. The attitude of most employers now is: You don’t like it, there are plenty of people who’d be glad to have your job (so much more work is expected from those left behind after the layoffs). Unions have been vilified into near non-existence and those who benefitted from their votes ignored them wholesale when they had a chance to fight for them (Obama’s 2007 campaign pledge to put on some comfortable shoes).

I’m not sure which was worse regarding the bailout, the lack of protection for workers or the fact that the bailout cannot be adjudicated (it’s literally part of the legislation--no one can sue the government or those who were gifted the money). That “no strings attached” approach was the most corrupt (never mind incompetent) legislation since the native American treaties (100% of which were never honored by the government).

The gap between rich and poor, probably because of globalization and technology, is now impossible to repair; it can only get worse under a capitalist system. Another writer (Barry Graham) put it way better than I can: ”America is now a third world country.” Perhaps we deserve it for all the looting we’ve done to the rest of the world (we’ve certainly done that to native Americans). The bottom line is it can’t be fixed. Not by Obama or Romney or Ralph Nader so long as we remain a capitalist system. Capitalism requires the poor work for the rich and let’s face it, middle class America is now effectively poor and completely dependent on paychecks that can disappear overnight (for profits overseas). That isn’t about to stop without revolutionary change to our economic system.

A hedge fund manager last year “earned” $2.4 million an hour. How is that possible? Only in America? Not anymore people ... that can happen anywhere these days. Of course the company where said hedge fund manager “worked” probably fired three guys from their mailroom who earned about $40K a year each, but that’s their fault for not being the hedge fund manager ... that’s the attitude of both parties; one brags about it (Republicans) and the other claims to abhor it (Democrats), then comes up with the bailout that produced those mailroom guys losing their jobs.

My son works at Goldman Sachs for an OUTSOURCER because Goldman can’t afford to pay for its support staff? The outsourcing firm has let go people every year (including this year) since the bailout. The administration’s job czar’s company (where he came from) sent 2,000 jobs to China THIS YEAR. How the fuck is that possible?

The Democrats could have demanded those bailed out not outsource jobs anymore; that they undo the outsourcing they’d already done. They could have permitted people about to lose their homes to borrow from their 401K’s (what was left of them) without paying penalties (since they let Citibank walk away from $38 BILLION in taxes). They could have demanded that “X” amount of the bailout money was put back into circulation within a given period of time (what it was intended for) but THEY DIDN’T DO ANY OF THOSE THINGS and it doesn’t take a friggin’ rocket scientist to figure out what a scam that was.

Yes, those responsible for the financial meltdown should be thrown into jail, but so should the politicians who facilitated the entire fiasco (going back several years if need be), but that can’t happen, can it? That one liner Michael Moore pointed out about how nothing can be adjudicated regarding the bailout (at least that aspect of it).

You really think it’ll make a difference whether Romney or Obama is in office over the next four years?

Good luck with that.