AG Holder: “The U.S. Announces the Indictment of Citigroup’s Senior Officers for Fraud”

By William K. Black

The third omission from Attorney General Eric Holder’s press conference announcing the settlement with Citigroup of civil charges was the words “criminal” and “indictment.”  The
Department of Justice (DOJ) press conference had a scripted press release.

According to DOJ’s Statements there should have been Numerous Indictments

The DOJ press release contains the following statements that logically should have led to an indictment of a large number of Citi’s officers.  Holder states: “The bank’s activities contributed mightily to the financial crisis that devastated our economy in 2008.”  Citi “made serious misrepresentations to the public – including the investing public – about the mortgage loans it securitized in RMBS.”  Holder’s press release called them “toxic mortgages.”  Holder emphasized the “strength of the evidence of the wrongdoing committed by Citi….”  Holder stated that Citi’s officers knowingly made false “reps and warranties.”

“Contrary to those representations, Citigroup securitized and sold RMBS with underlying mortgage loans that it knew had material defects.

Citigroup nevertheless securitized the loan pools containing defective loans and sold the resulting RMBS to investors for billions of dollars.  This conduct, along with similar conduct by other banks that bundled defective and toxic loans into securities and misled investors who purchased those securities, contributed to the financial crisis.”

The U.S. Attorneys leading the investigation made these statements in the press release.

“‘[O]ur teams found that the misconduct in Citigroup’s deals devastated the nation and the world’s economies, touching everyone,’ said U.S. Attorney of the Eastern District of New York Loretta Lynch.  ‘The investors in Citigroup RMBS included federally-insured financial institutions, as well as a host of states, cities, public and union pension and benefit funds, universities, religious charities, and hospitals, among others.  These are our neighbors in Colorado, New York and around the country, hard-working people who saved and put away for retirement, only to see their savings decimated.’”

The Federal Housing Finance Administration (FHFA) even got to play a part in the press release.

“Michael Stephens, Acting Inspector General for the Federal Housing Finance Agency said, ‘Citigroup securitized billions of dollars of defective mortgages, after which investors suffered enormous losses by purchasing RMBS from Citi not knowing about those defects.  Today’s settlement is another significant step by FHFA-OIG and its law enforcement partners to hold accountable those who committed acts of fraud and deceit in the lead up to the financial crisis….’”

Note that Stephens was the only one to use the “f” word.

DOJ & Citi Framed their “Statement of Facts” to Obfuscate the Facts

The press release states that Citi has made admissions “as part of the settlement” of “serious misrepresentations.”  “Misrepresentations” is a fancy way of saying Citi lied and deceit is the key to proving fraud.

“As part of the settlement, Citigroup acknowledged it made serious misrepresentations to the public – including the investing public – about the mortgage loans it securitized in RMBS.”

I began drafting an explanation of what the convoluted statement of facts includes and excludes and why and how it was drafted to be useless, but discovered that the explanation requires me to explain at length the proper analytics of the toxic mortgage frauds led by Citi’s senior officers, which is the subject of the fourth installment in this series.

Holder Ignores the Criminals and Purports to Hold a Legal Fiction “Accountable”

Notice that Holder and his lieutenants did not identify any of Citi’s banksters who led, and were made wealthy by, some of the most damaging financial frauds in history.  DOJ, inadvertently, demonstrated that the primary fraud scheme involved Citi’s senior officers “looting” Citi.  Holder describes (but does not understand that he has done so) a classic case of accounting control fraud.  These fraud schemes were described decades ago in the white-collar criminology literature, the financial regulatory literature, and the classic 1993 article by George Akerlof and Paul Romer entitled “Looting: The Economic Underworld of Bankruptcy for Profit.”  They were then described (partially) again in the literature on “tunneling.”

The primary intended victims of looting/accounting control fraud are the shareholders and creditors.  The frauds are led by the persons that control the bank.  Holder sees only a part of the fraud scheme and misunderstands that part.  He understands that Citi’s officers lied about the quality of the loans Citi was selling.  He fails to understand that this was not a means of making Citi more profitable.  It was a means of making the senior officers wealthier at Citi’s expense.  Holder did not have to read the criminology, economics, or regulatory literature to understand this – he simply had to read the report of the Financial Crisis Inquiry Commission’s (FCIC) description of what Richard M. Bowen, III found at Citigroup..

“In June 2006, Bowen discovered that as much as 60% of the loans that Citi was buying were defective. They did not meet Citigroup’s loan guidelines and thus endangered the company—if the borrowers were to default on their loans, the investors could force Citi to buy them back. Bowen told the Commission that he tried to alert top managers at the firm by “email, weekly reports, committee presentations, and discussions”; but though they expressed concern, it “never translated into any action.” Instead, he said, “there was a considerable push to build volumes, to increase market share.” Indeed, Bowen recalled, Citi began to loosen its own standards during these years up to 2005: specifically, it started to purchase stated-income loans. ‘So we joined the other lemmings headed for the cliff,’ he said in an interview with the FCIC” (FCIC 2011: 19).

Holder emphasizes that Citi’s controlling officers – over the vehement warnings of Bowen – continued to deliberately, eagerly, and knowingly buy “toxic mortgages.”  Holder knows that Citi’s officers knew that the “toxic mortgages” they were buying could only be resold through Citi making “reps and warranties” that the mortgages were not toxic waste.  Holder’s “statement of fact” repeatedly discusses reps and warranties.  (The recurrent claim that those selling loans in the secondary market had “no skin in the game” is false.)  As FCIC explains, one of the remedies that the purchasers of “toxic mortgages” from Citi had was to require Citi to buy back the mortgages.  What FCIC does not explain makes the point even more powerfully.  First, Citi would likely have to buy back the mortgages at the worst possible time when their value had plummeted.  Second, the purchasers had additional remedies including the ability to sue Citi for fraudulent reps and warranties and to secure punitive damages (or even treble damages under RICO).  FCIC draws the correct conclusion: Citi’s purchase and resale of “toxic mortgages” “endangered the company.”

Why then did “endanger[ing] the company” become Citi’s controlling officers’ paramount mortgage strategy despite Bowen’s copious, dead-on accurate warnings?  Citi’s most senior managers, including former Treasury Secretary Robert Rubin, were personally put on written notice by Bowen that an extraordinary and growing percentage – eventually 80% – of Citi’s purchased mortgages were “toxic” and that it was reselling them through fraudulent “reps and warranties.”  Unlike Holder, there is no conceivable dispute that every Citi officer warned by Bowen instantly understood the implications.  There is only one logical answer – they knew that the accounting controlling fraud scheme Bowen described was a “sure thing” guaranteed to make them personally wealthy at the expense of Citi’s shareholders (and, absent a federal bailout, Citi’s creditors).

In response to these frauds Holder’s response is to fine the bank (Citi) – and to do nothing to the officers who grew wealthy by looting Citi’s shareholders.  The fine, of course, will be paid by Citi’s shareholders – who were one of the primary victims of the controlling officers’ “toxic mortgages” fraud schemes.  In the DOJ’s carefully scripted press release, Holder and his lieutenants repeatedly call this sick parody of justice holding the bank “accountability.”  Yes, Citi probably cries itself to sleep every night because of the shame of its civil settlement.  You can’t compete with Holder’s unintentional self-parody.  Note that this quotation from the press release attributed to Holder not only fails to mention the culpable controlling officers, but also lacks any acknowledgement that officers exist.

“The bank’s activities contributed mightily to the financial crisis that devastated our economy in 2008.  Taken together, we believe the size and scope of this resolution goes beyond what could be considered the mere cost of doing business.  Citi is not the first financial institution to be held accountable by this Justice Department, and it will certainly not be the last.”

Let’s be clear – a “financial institution” is not a person (whatever the Supreme Court’s myths).  It cannot be held “accountable.”  Accountability is a moral concept.  Corporate personhood is a legal fiction.  Unlike “banks,” officers are real and can become wealthy through the “sure thing” of leading frauds.  “Banks” can only commit serious frauds through the fraudulent acts of their officers.

It is sensible to fine a corporation as part of the remedy when it profits or when the senior officers intended the bank to profit from a crime or a tort.  When the corporation is being looted it is a perversion of the word “remedy” to rely on corporate fines as the remedy.

Holder and the banks’ controlling managers that are settling these cases know the following real world dynamics.  First, the controlling managers are in an inescapable conflict of interest that should require them to recuse themselves from any involvement in the settlement.  They led the accounting control frauds that caused the financial crisis and the Great Recession.  Their potential criminal and civil liability is immense.  They should be imprisoned for lengthy terms and they should be required to pay punitive damages that bankrupt them.  They are very wealthy, powerful, and high-status people and they control the bank – not the shareholders or the board of directors.  (Witness the JPMorgan proof of this point where Jamie Dimon got a raise for leading a bank that DOJ found to be a criminal enterprise.)  The obvious “solution” from the perspective of the fraudulent bank CEO is to trade off agreeing to fines – indirectly paid for by the shareholders – to escape any personal liability.  The CEO’s prime priorities are to keep out of prison, retain his fraud proceeds and wealth, and keep his job and income.

The fraudulent CEOs controlling our largest banks get superb legal advice (paid for by the bank) that allows them to optimize these settlements.  They know that Holder and Presidents Bush and Obama dread the prospect of putting elite banksters in prison and losing political contributions that are controlled by bank CEOs.  They know that it is unwise to throw any officers to the wolves if they were aiding the approved fraud schemes because DOJ may “flip” them and have them testify against other officers.  The CEOs gladly trade off fines paid for by the bank (in economic substance, the shareholders) for de facto or de jure immunity from prosecution and compensation “claw backs” for the officers.  This tradeoff is even easier when the bank is a systemically dangerous institution (SDI) (aka “too big to fail”) because DOJ’s policy is never to “cause” (sic – the fraud, not the remedy, causes a failure) an SDI to fail.  Therefore, the CEO knows going in to the negotiations that the fine will sound large to the public but can never be substantial relative to the immense size of the bank lest the fine “cause” even the slightest risk that the bank will fail.

Holder is clueless about the Citigroup fine being “beyond … the mere cost of doing [fraudulent] business.”  (Note that Holder did not use the word “fraudulent” in his press statement.)  The quoted phrase is a non sequitur.  DOJ did not impose any “cost” on the officers who led the frauds and grew wealthy through those frauds.  If Citi proves to be like JPMorgan the CEO may even get a raise for getting Holder to enter into yet another deal imposes zero cost on the officers and directors for leading the frauds that made them wealthy.  The toxic mortgage fraud schemes that Citi’s managers used the bank to commit caused vastly greater societal losses than the $7 billion total settlement (and a large chunk of that deal is phony “consumer relief” fluff that isn’t a real expense to Citi).

The Top Questions You’ll Find Unanswered by Holder’s Press Release

You can read the entire DOJ press release on the Citi deal, the attached documents, and watch the video of the press conference and you will never be able to even begin to answer the most important questions about the “toxic mortgage” fraud schemes at Citi.

  • Which senior officers led the fraud schemes?
  • Why did they do so?
  • How did they get hundreds of Citi officers and employees to commit the systematic frauds involving the sale of hundreds of billions of dollars of “toxic mortgages”
  • Why did a host of banks originate “toxic mortgages” and sell them to Citi through fraudulent “reps and warranties?”
  • Why did a host of sophisticated financial firms buy “toxic mortgages” from Citi when even the most primitive underwriting would have disclosed that Citi’s “reps and warranties” were endemically false?
  • What is DOJ going to do about all these signals of endemic accounting control fraud led by the senior officers of Citi, the lenders that fraudulently sold their fraudulently originated toxic mortgages to Citi, and the financial institutions that bought Citi’s toxic mortgages?
  • Why did DOJ create a task force that does not even investigate the massive loan origination frauds that were the primary cause of the financial crisis?
  • Why didn’t DOJ and the banking regulators hold them personally accountable years ago?
  • DOJ investigations (as pathetically weak as they have been) have now confirmed that the three largest banks in America (with roughly 30% of our total bank assets) were systematically used by their senior officers as “weapons” to commit the most destructive financial frauds in world history, triggering the financial crisis and the Great Recession: why isn’t this treated as a moral, political, and economic crisis demanding an urgent, radical transformation of our moral, financial, and political systems?
  • Why is no leader of these financial frauds going to prison or losing their fraud proceeds, or even being kicked out of their elite clubs?
  • Has anyone seen the President of the United States?  He’s been MIA on these issues for six years.  Every time he speaks about bank fraud he downplays it.
  • Why doesn’t President Obama award the Bowen the Presidential Medal of Freedom – this coming Monday – in a Rose Garden ceremony?  At the ceremony, Obama and Holder can announce: the creation of the Federal Whistleblower Center, a national call on Americans to come forward and blow the whistle on elite crimes, the indictment of Citi’s senior managers, and the restoration of the criminal referral process at the banking regulatory agencies.


I am dead serious about these proposals for what Obama and Holder should do Monday.  They are all things that make perfect sense substantively and politically.  They would be good for the world and add to Obama’s popularity.  They are all within his power – his political opponents cannot block them and they would look terrible if they tried to do so.  I also think the chance that he will take any of these actions closely approximates zero.  That combination is the most revealing aspect of the whole situation.  I have reached the point where my assumption is that Obama won’t do the right thing even when the Nation and he would gain from doing so.  .

In my next installment of this series of articles I explain why the statement of facts reveals the wholesale analytical errors by the DOJ and the FBI and why the fraud case against Citi’s officers is far stronger than that presented by Holder and his lieutenants at the press conference.  This installment has explained why even with all these analytical flaws and want of intellectual honesty and political courage Holder should have indicted a wide swath of Citi’s managers.

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