Wall Street Bank Regulator Issues Outrageous Press Release

By Pam Martens: December 22, 2014

Present Franklin Delano Roosevelt Signing the Glass-Steagall Act on June 16, 1933

Present Franklin Delano Roosevelt Signing the Glass-Steagall Act on June 16, 1933

Last week members of both the House and Senate were issuing press releases to express their outrage over the sneaky repeal of a Dodd-Frank financial reform provision meant to stop giant Wall Street banks from using FDIC-insured bank affiliates to make wild gambles in derivatives, thus putting the U.S. economy in grave danger again and the taxpayer at risk for another behemoth bailout.

What was the Federal regulator of these very same banks doing? It was bragging in a press release issued at the end of the same  week about the gargantuan risks these  insured banks were taking in derivatives.

The press release was issued on Friday, December 19, 2014 by the Office of the Comptroller of the Currency (OCC), the regulator of all national banks which is mandated to make sure that insured banks “operate in a safe and sound manner.”

The press release begins with a bizarre sounding headline for a bank regulator: “OCC Reports Third Quarter Trading Revenue of $5.7 Billion.” It wasn’t actually the OCC that had this trading revenue, of course, it was that “Insured U.S. commercial banks and savings institutions reported trading revenue of $5.7 billion in the third quarter of 2014” and year-to-date trading revenue of $18.3 billion, as the press release explains.

In a sane financial world, of course, insured banks are not supposed to be trading; they are supposed to be receiving insured deposits backstopped by the U.S. taxpayer in return for making loans to worthy businesses and consumers in order to create jobs and grow our economy.

But Alice in Wonderland regulators have now completely bought in to the lunacy of today’s Wall Street bank structure, as this press release leaves no doubt. This next paragraph sounds more like a gushing letter to clients from a hedge fund than a press release from a Federal bank regulator:

“ ‘There were fairly low expectations for trading revenue at the beginning of the quarter, but client demand picked up fairly sharply toward the end, helping to make trading performance fairly positive,’ said Kurt Wilhelm, Director of the Financial Markets Group. ‘Trading revenue tends to weaken as the year goes on, so it wasn’t much of a surprise that it fell from the second quarter. But, stronger client demand, especially in foreign exchange (FX) products, helped to make it a much stronger quarter than last year’s third quarter.’ ”

We learn further that “Credit exposures from derivatives increased during the third quarter” and were driven by a 90 percent increase in receivables from foreign currency exchange contracts which now total $623 billion.

A 90 percent increase in any speculative trading should raise alarm bells but when foreign currencies like the ruble, yen and euro are experiencing wild volatility and Wall Street banks are under investigation for rigging foreign exchange markets, the concern should be even more pronounced, not cause for a celebratory press release.

Equally alarming is the news that “the notional amount of derivatives held by insured U.S. commercial banks increased $2.6 trillion” to a total of $239 trillion, of which 93 percent is concentrated at the four largest banks. The report itself breaks this out in more detail: Citigroup, the poster child for bank bailouts, now holds more derivatives than any other bank, $70 trillion, in its insured unit, Citibank. JPMorgan Chase, the bank that lost $6.2 billion just two years ago gambling in its insured bank with exotic derivatives, now holds $65 trillion in derivatives. Next in line is Goldman Sachs Bank USA with $48.6 trillion in derivatives and just $111.7 billion in assets in the insured bank unit. Coming in fourth is Bank of America with $37.5 trillion.

The irrational exuberance of this press release reminded us of its stark contrast to the opening lines of the Glass-Steagall Act, the legislation Congress put in place following the 1929 Wall Street crash – an epic collapse of speculation very much on a par with the crash of 2008. The Glass-Steagall Act, also known as the Banking Act of 1933, opens with these words:

“…to provide for the safer and more effective use of the assets of banks, to regulate interbank control, to prevent the undue diversion of funds into speculative operations, and for other purposes.”

The legislation created insured bank deposits to stop the run on banks while giving the Wall Street banks just one year to split apart: banks holding insured deposits could no longer put the country at risk with wild speculations in trading and underwriting of securities. Those operations, investment banking and brokerage, had to be spun off. The Glass-Steagall Act was repealed at the behest of Wall Street and its army of lobbyists in 1999; the financial system crashed a mere nine years later.

The response by Congress to the 2008 crash was to allow Wall Street banks to grow dramatically in asset size, derivative holdings and systemic risk. Even after the Senate’s Permanent Subcommittee on Investigations released a 299-page report last year, clearly demonstrating that Wall Street had learned nothing from its wild trading gambles that collapsed the financial system in 2008, Congress has taken no concrete action to rein in the risk.

The Senate’s 299-page report released on March 15, 2014 concluded a nine-month investigation into how JPMorgan Chase, the country’s largest bank, had misled the public and its regulators while hiding vast losses on exotic derivatives in its insured banking unit. The episode became known as the London Whale scandal since the trading occurred in London and the size of the trades was mammoth. Senator Carl Levin, Chair of the Subcommittee, released the following statement at the time:

“Our findings open a window into the hidden world of high stakes derivatives trading by big banks.  It exposes a derivatives trading culture at JPMorgan that piled on risk, hid losses, disregarded risk limits, manipulated risk models, dodged oversight, and misinformed the public. Our investigation brought home one overarching fact:  the U.S. financial system may have significant vulnerabilities attributable to major bank involvement with high risk derivatives trading…

“The whale trades demonstrate how credit derivatives, when purchased in massive quantities with complex components, can become a runaway train barreling through every risk limit.  The whale trades also demonstrate how derivative valuation practices are easily manipulated to hide losses, and how risk controls are easily manipulated to circumvent limits, enabling traders to load up on risk in their quest for profits…And given how much major U.S. bank profits remain bound up with the value of their derivatives, derivative valuations that can’t be trusted are a serious threat to our economic stability.”

Until the Glass-Steagall Act is reinstated, our country, our economy and the U.S. financial system remain in peril.

Meet the Men and Women on the Hill Who Told Citigroup to Go to Hell

By Pam Martens and Russ Martens: December 18, 2014

There has been much focus on the fiery speeches that Senator Elizabeth Warren delivered from the Senate floor in an effort to stop the roll-back of a key derivatives provision of the Dodd-Frank financial reform legislation that was slipped into the giant $1.1 trillion spending bill that was signed into law this week by President Obama – who campaigned for passage of the bill despite the weakening of protections against Wall Street abuses. The bill became known as the Cromnibus because it is part Continuing Resolution and part Omnibus spending bill to fund the government through September of 2015. Those who voted against the bill in the Senate are provided here; in the House, here.

But Warren was far from alone in expressing outrage at Citigroup writing most of the provision  that was quietly slipped into a spending bill that was critical to pass to avoid a government shutdown. Members of both the House and Senate, from broadly diverse political leanings, not only spoke out against the provision but voted against the spending bill to back up that outrage.

We’ll get to the still festering outrage among members of Congress in a moment, but first a warning for the next member of Congress who might be asked by a slick Wall Street bank lobbyist to try a similar maneuver. The House Rep who slipped the provision into the spending bill, which was effectively written by Citigroup according to Mother Jones and the New York Times, is Kevin Yoder of Kansas.

Yoder is now being viciously assailed on his own Facebook page and held up to public ridicule in Kansas newspapers. On Facebook, a woman identifying herself as Amy Hanks calls Yoder the “lowest of the low” and adds: “Hope you burn in hell.” Another woman calls Yoder “one greedy immoral coward.” OpenSecrets.org shows “Securities and Investment” as the number one industry contributing to Yoder’s campaign committee and leadership PAC.

Senator Sherrod Brown

Senator Sherrod Brown

Citigroup received the largest taxpayer bailout in history during the financial crisis as a result of its unchecked derivatives: $45 billion in TARP funds; over $306 billion in asset guarantees; and more than $2 trillion in low-cost loans from the Fed according to the General Accountability Office. The abject repulsion that the very bank that got the biggest handout and played a pivotal role in collapsing the economy should now be gaming Congress to repeal financial protections drew a joint letter of protest from Republican Senator David Vitter of Louisiana and Democratic Senator Sherrod Brown of Ohio. (See Senators Sherrod Brown and David Vitter Ask House to Remove Citigroup Provision on Derivatives from Cromnibus for full text of letter.)

In a separate statement, Brown said: “This giveaway to Wall Street would open the door to future bailouts funded by American taxpayers. It’s been just six years since risky financial practices put our economy on the brink of collapse and cost millions of Americans lost jobs, homes, and retirement savings. This provision, originally written by lobbyists, has no place in a must-pass spending bill.”

Vitter added: “Ending too big to fail is far from over. Before Congress starts handing out Christmas presents to the megabanks and Wall Street, we need to be smart about this. Removing these risky derivatives that aren’t even necessary for normal banking purposes is important, and Members of Congress need to rethink repealing this critical provision.”

Senator Cory Booker of New Jersey Says "I Am Outraged" Over Slick Way Roll Back of Derivatives Regulation Was Slipped Into Spending Bill

Senator Cory Booker of New Jersey Says “I Am Outraged” Over Slick Way Roll Back of Derivatives Regulation Was Slipped Into Spending Bill

One Senator who appeared as visibly outraged as Senator Warren was Cory Booker, Democrat from New Jersey. (See video here.) Booker said what Wall Street had done to the country during the crash was “cataclysmic” and said any “changes to financial regulations should be done in a much more transparent process” and not through a must-pass omnibus spending bill. He said he was “outraged” and “frustrated.”

Senator Charles Grassley, a Republican member of the Senate Finance Committee who has observed Wall Street’s serial ability to game the system, voted against the bill and issued the following statement: “This bill continued a bad pattern the Senate has fallen into in recent years under the current leadership. Instead of hastily considering a 1,600-page, $1.1 trillion spending bill, we need to return to considering annual appropriations bills. So much spending deserves debate, consideration and an open, transparent amendment process…A poor process leads to bad policy, like scaling back banking derivatives laws without debate or accountability.  It also leads to the distrust the American people have in their government…”

Perhaps no one in Congress better understands the intense danger that the roll-back of this provision creates than Senator Carl Levin, retiring Chair of the Senate’s Subcommittee on Permanent Investigations. Senator Levin’s Subcommittee conducted a comprehensive investigation into JPMorgan’s use of Federally-insured deposits at its banking unit, Chase Bank, to gamble in exotic derivatives and lose $6.2 billion in 2012 – just four years after the Wall Street collapse. The CEO of the company, Jamie Dimon, has kept his job despite an endless series of scandals and $29 billion in settlements and fines. According to numerous media reports, Dimon made calls to members of Congress urging the passage of this bill.

Senator Carl Levin

Senator Carl Levin

Senator Carl Levin released a statement saying: “Less than 14 years ago, the seeds of our financial crisis were planted in a derivatives provision planted in the 2001 appropriations bill. This provision, which like the provision in the bill before us, was added at the last minute and not subject to debate on its own, exempted derivatives from regulatory scrutiny, and left regulators, banks, and the American public on the hook when risky bets went bad…Now we risk repeating the same mistake of 2001. The language of the provision was written — literally written — by lobbyists for the big banks…The Senate has long operated under rules that prevent legislative changes from being made on an appropriations bill. This provision runs completely against that longstanding precedent.”

Senator Jeff Merkley, Democrat from Oregon, said he voted no “because of my deep opposition to a provision that puts the Wall Street Casino back in business.”

Senator Maria Cantwell, Washington State

Senator Maria Cantwell, Washington State

Senator Maria Cantwell, Democrat from Washington State, said she voted against the passage because it “would overturn a critical component of our work on the 2010 Wall Street reform legislation.” In 2013, Cantwell, together with Senator Elizabeth Warren, Senator John McCain and Senator Angus King introduced the 21st Century Glass-Steagall Act which would reinstate the law separating insured banks from Wall Street’s trading, derivatives and stock underwriting businesses.

Connecticut Democrat, Senator Richard Blumenthal, voted against the bill and released a statement saying that it included “massive special interest giveaways rolling back taxpayer protections against risky financial maneuvers by banks, reversing transportation safety rules, undercutting pension rights, and opening huge loopholes for billionaires to increase their influence on political campaigns and candidates. That is why I voted against this flawed measure poisoned by special favors flagrantly contrary to the public interest.”

Also voting against the bill was West Virginia Democrat, Senator Joe Manchin, who issued a statement urging his colleagues to stay in session for an additional week to draft a bipartisan bill that would fairly represent American values. In addition to calling out the Wall Street giveaway, Manchin took aim at the increase in campaign spending for the wealthy, stating: “The current limit of $32,400 was already too high for most West Virginians and Americans to be able to take full advantage. The new limit of $324,000 is inconceivable for the vast majority of Americans. That means that our political process will only be available to a small number of wealthy individuals who will have more influence on our government than the hard-working Americans we are sent here to represent.”

House Rep Kevin Yoder is Assailed on his Facebook Page for Slipping the Wall Street Derivatives Roll-Back Into the Spending Bill

House Rep Kevin Yoder is Assailed on his Facebook Page for Slipping the Wall Street Derivatives Roll-Back Into the Spending Bill

Paul Krugman Buys into the Big Lie About the 2008 Financial Collapse

By Pam Martens: December 17, 2014

New York Times Columnist, Paul Krugman

New York Times Columnist, Paul Krugman

Wall Street On Parade holds great respect for Paul Krugman as an economist. We link regularly to his columns under our “Publisher’s Must Reads.” But every time Krugman posits on Dodd-Frank financial reform or the crash of 2008 he blunders into the quagmire created by financial reporter Andrew Ross Sorkin’s misinformation campaign in the pages of the New York Times.

Take this past Monday for example. Krugman devoted his column to the spending bill just passed by Congress that guts a key derivatives provision of the Dodd-Frank financial reform legislation, writing that “One of the goals of financial reform was to stop banks from taking big risks with depositors’ money. Why? Well, bank deposits are insured against loss, and this creates a well-known problem of ‘moral hazard’: If banks are free to gamble, they can play a game of heads we win, tails the taxpayers lose.”

So far so good.  Krugman then continues: “Dodd-Frank tried to limit this kind of moral hazard in various ways, including a rule barring insured institutions from dealing in exotic securities, the kind that played such a big role in the financial crisis. And that’s the rule that has just been rolled back.”

Again, spot on. But then Krugman steps into Andrew Ross Sorkin’s illusion of what actually happened in 2008, writing: “Now, this isn’t the death of financial reform. In fact, I’d argue that regulating insured banks is something of a sideshow, since the 2008 crisis was brought on mainly by uninsured institutions like Lehman Brothers and A.I.G.”

Regulating insured banks is a sideshow? Nobel laureates can’t go around saying things like that for very long before their academic colleagues start to roll their eyes and the Nobel folks start to wonder if there’s some way to rescind the prize.

Serious financial reform isn’t about regulating any ole insured banks. It’s about regulating some of the largest banks that have ever existed in history, such as JPMorgan Chase, Wells Fargo, Bank of America, and Citigroup. There are 6,546 FDIC insured banks in the U.S. but as of the second quarter of this year, just these four banks held almost $4.5 trillion in deposits, representing 45 percent of all bank deposits, according to data from the Office of the Comptroller of the Currency (OCC).

And while holding the life savings of moms and pops across America, backstopped with insurance guaranteed by the taxpayer, these four banks are simultaneously holding $171 trillion in derivatives or 72 percent of all derivatives held at all 6,546 FDIC insured banks, according to 2014 second quarter data from the OCC. If you add in Goldman Sachs’ insured, deposit-taking bank, Goldman Sachs Bank USA (yes, Goldman Sachs is allowed to own an FDIC insured bank under the miracle of financial “reform”) which is holding $53 trillion in derivatives against a meager $109.5 billion in assets, these five institutions control 95 percent of all bank derivatives at FDIC insured institutions.

Now, it may be an inconvenient truth for the 2008-crash revisionists, but it was derivatives which caused the greatest financial collapse since the Great Depression and those derivatives were concentrated in 2008 on the books of the biggest insured banks – and they are still concentrated on the books of the biggest insured banks.

The report issued by the Financial Crisis Inquiry Commission (FCIC) on the 2008 collapse explained the problem as follows: “Among U.S. bank holding companies, 97% of the notional amount of OTC derivatives, millions of contracts, were traded by just five large institutions (in 2008, JPMorgan Chase, Citigroup, Bank of America, Wachovia, and HSBC)…”

Each of those institutions in 2008 was an FDIC insured bank. Wachovia would be absorbed during the crash by Wells Fargo. The FCIC report goes on:

“When the nation’s biggest financial institutions were teetering on the edge of fail- ure in 2008, everyone watched the derivatives markets. What were the institutions’ holdings? Who were the counterparties? How would they fare? Market participants and regulators would find themselves straining to understand an unknown battlefield shaped by unseen exposures and interconnections as they fought to keep the financial system from collapsing.”

The largest insured bank when the crisis first got underway in 2007 was Citigroup and its role in the crash was pivotal according to the FCIC report. News headlines of 2008 confirm that Citigroup’s year long death spiral drained confidence in the stability of the U.S. financial system.

Here’s a sampling of the Citigroup headlines in timeline order:

January 10, 2008, Wall Street Journal: “Citigroup, Merrill Seek More Foreign Capital,” noting: “Two of the biggest names on Wall Street are going hat in hand, again, to foreign investors.”

January 17, 2008, Los Angeles Times: “Citigroup Loses Nearly $10 Billion”

March 5, 2008, MarketWatch: “Citigroup CEO Says Firm ‘Financially Sound’ ” with the opening sentence explaining that “The chief executive of Citigroup sought to ally investor fears Wednesday, a day after the stock hit a multiyear low…”

April 20, 2008, New York Times: “Citigroup Records a Loss and Plans 9000 Layoffs,” explaining that the bank reported a $5.1 billion loss and would have to slash jobs.

June 26, 2008, Wall Street Journal: “Citigroup: Worth Less and Less Every Day,” sharing the scary news that the stock was worth one-third of where it had been at its 52-week high.

July 23, 2008, Bloomberg News: “Citigroup Unravels as Reed Regrets Universal Model.”

On July 14, 2008, Bloomberg News reported that in addition to holding $2.2 trillion in assets on its balance sheet, Citigroup has $1.1 trillion of “mysterious” assets off its balance sheet, including “trusts to sell mortgage-backed securities, financing vehicles to issue short-term debt and collateralized debt obligations, or CDOs, to repackage bonds.”

All of these headlines occurred months before Lehman Brothers collapsed and AIG was taken over by the U.S. government. Those events occurred on September 16, 2008. But according to the OCC, Citigroup’s financial troubles began in earnest in 2007. The FCIC also notes further: “More than other banks, Citigroup held assets off of its balance sheet, in part to hold down capital requirements. In 2007, even after bringing $80 billion worth of assets on balance sheet, substantial assets remained off. If those had been included, leverage in 2007 would have been 48:1…”

At the height of Citigroup’s troubles, its shares traded at 99 cents — what had been the country’s biggest bank was now a penny stock.

All of these details are critically important to the well-being of this country because they present a siren call for the reestablishment of the Glass-Steagall Act, separating casino banks from those holding insured deposits.

It also explains why there is outrage among Senators (who have their facts straight) that Citigroup has actually been allowed to write its own legislation and repeal the derivatives provision of Dodd-Frank that would have forced these trillions of dollars of risky derivatives out of the insured banks.

OCC Chart Showing Notional Amount of Derivatives at Banks  as of June 30, 2014. (Figures in Millions)

OCC Chart Showing Notional Amount of Derivatives at Banks as of June 30, 2014. (Figures in Millions)

Meet Your Newest Legislator: Citigroup

By Pam Martens: December 16, 2014

Citi Congress In SessionCitigroup is the Wall Street mega bank that forced the repeal of the Glass-Steagall Act in 1999; blew itself up as a result of the repeal in 2008; was propped back up with the largest taxpayer bailout in the history of the world even though it was insolvent and didn’t qualify for a bailout; has now written its own legislation to de-regulate itself; got the President of the United States to lobby for its passage; and received an up vote from both houses of Congress in less than a week.

And there is one more thing you should know at the outset about Citigroup: it didn’t just have a hand in bringing the country to its knees in 2008; it was a key participant in the 1929 collapse under the moniker National City Bank. Both the U.S. Senate’s investigation of the collapse of the financial system in 1929 and the Financial Crisis Inquiry Commission (FCIC) that investigated the 2008 collapse cited this bank as a key culprit.

The FCIC wrote:

“…we do not accept the view that regulators lacked the power to protect the financial system. They had ample power in many arenas and they chose not to use it. To give just three examples: the Securities and Exchange Commission could have required more capital and halted risky practices at the big investment banks. It did not. The Federal Reserve Bank of New York and other regulators could have clamped down on Citigroup’s excesses in the run-up to the crisis. They did not. Policy makers and regulators could have stopped the runaway mortgage securitization train. They did not…Too often, they lacked the political will – in a political and ideological environment that constrained it – as well as the fortitude to critically challenge the institutions and the entire system they were entrusted to oversee.”

The words above from the FCIC also perfectly describe what just happened in Congress and the Oval Office. Citigroup snuck its deregulation legislation into the $1.1 trillion Cromnibus spending bill that will keep the government running through next September. (It’s called Cromnibus because it’s part Continuing Resolution or CR and part omnibus spending bill.) Just as the FCIC wrote about the reasons for the financial collapse, Citigroup was able to pass this outrageous deregulation legislation because the majority of Congress and the President “lacked the political will” and the “fortitude to critically challenge the institutions and the entire system they were entrusted to oversee.”

What Citigroup has now done with the willing participation of Congress and the President is to set the country up for the next financial collapse in which it appears destined to play another starring role, seeing that the Fed gave it a failing grade on its stress test this year. The legislation that was just passed by Congress allows Citigroup and other Wall Street banks to keep their riskiest assets – interest rate swaps and other derivatives – in the banking unit that is backstopped with FDIC deposit insurance, which is, in turn, backstopped by the U.S. taxpayer, thus ensuring another bailout of Citigroup if it blows itself up once again from soured derivative bets.

According to Bloomberg data, over the past five years – when Dodd-Frank financial reform was supposed to be making these mega banks safer – Citigroup has increased the notional amount of derivatives on its books by 69 percent. As of this past June, according to Bloomberg, “Citigroup had $62 trillion of open contracts, up from $37 trillion in June 2009.” That’s trillion with a “t.”

How much might Citigroup need from the taxpayer if it blows up again? According to the General Accountability Office, Citigroup received more bailout assistance than any other bank in the last collapse. On October 28, 2008, Citigroup received $25 billion in Troubled Asset Relief Program (TARP) funds. Less than a month later it was back with hat in hand and received another $20 billion. But its finances were so shaky that it simultaneously needed another $306 billion in government asset guarantees. And on top of all that, the New York Fed was secretly funneling it over $2 trillion in emergency loans at interest rates frequently below 1 percent.

This is how we described Citigroup’s 2008 meltdown in an article on November 24, 2008:

“Citigroup’s five-day death spiral last week was surreal. I know 20-something  newlyweds who have better financial backup plans than this global banking giant.  On Monday came the Town Hall meeting with employees to announce the sacking of 52,000 workers.  (Aren’t Town Hall meetings supposed to instill confidence?)  On Tuesday came the announcement of Citigroup losing 53 per cent of an internal hedge fund’s money in a month and bringing $17 billion of assets that had been hiding out in the Cayman Islands back onto its balance sheet.  Wednesday brought the cheery news that a law firm was alleging that Citigroup peddled something called the MAT Five Fund as ‘safe’ and ‘secure’ only to watch it lose 80 per cent of its value. On Thursday, Saudi Prince Walid bin Talal, from that visionary country that won’t let women drive cars, stepped forward to reassure us that Citigroup is ‘undervalued’ and he was buying more shares. Not having any Princes of our own, we tend to associate them with fairytales. The next day the stock dropped another 20 percent with 1.02 billion shares changing hands. It closed at $3.77.

“Altogether, the stock lost 60 per cent last week and 87 percent this year.  The company’s market value has now fallen from more than $250 billion in 2006 to $20.5 billion on Friday, November 21, 2008.  That’s $4.5 billion less than Citigroup owes taxpayers from the U.S. Treasury’s bailout program.”

Not everyone has caved under political pressure from Wall Street. Senator Elizabeth Warren delivered three impassioned speeches on the Senate floor last week, culminating in a Friday speech that many are calling an historic battle cry to a complacent nation. Warren explained how Citigroup pulled off its coup, stating:

“Mr. President, I’m back on the floor to talk about a dangerous provision that was slipped into a must-pass spending bill at the last minute to benefit Wall Street. This provision would repeal a rule called, and I’m quoting the title of the rule, “Prohibition Against Federal Government Bailouts of Swaps Entities.”…

“Mr. President, in recent years, many Wall Street institutions have exerted extraordinary influence in Washington’s corridors of power, but Citigroup has risen above the others. Its grip over economic policymaking in the executive branch is unprecedented. Consider a few examples:

“Three of the last four Treasury Secretaries under Democratic presidents have had close Citigroup ties. The fourth was offered the CEO position at Citigroup, but turned it down.

“The Vice Chair of the Federal Reserve system is a Citigroup alum.

“The Undersecretary for International Affairs at Treasury is a Citigroup alum.

“The U.S. Trade Representative and the person nominated to be his deputy – who is currently an assistant secretary at Treasury – are Citigroup alums.

“A recent chairman of the National Economic Council at the White House was a Citigroup alum.

“Another recent Chairman of the Office of Management and Budget went to Citigroup immediately after leaving the White House.

“Another recent Chairman of the Office of Management and Budget is also a Citi alum — but I’m double counting here because now he’s the Secretary of the Treasury.

“That’s a lot of powerful people, all from one bank. But they aren’t Citigroup’s only source of power.  Over the years, the company has spent millions of dollars on lobbying Congress and funding the political campaigns of its friends in the House and the Senate.

“Citigroup has also spent millions trying to influence the political process in ways that are far more subtle — and hidden from public view. Last year, I wrote Citigroup and other big banks a letter asking them to disclose the amount of shareholder money they have been diverting to think tanks to influence public policy.  Citigroup’s response to my letter? Stonewalling. A year has gone by, and Citigroup didn’t even acknowledge receiving the letter…”

Anticipating public outrage and potential voter backlash in 2016, incoming Majority Leader Mitch McConnell inserted another provision into the Cromnibus that allows individuals to give almost 10 times as much money to political party committees as allowed under current law – ensuring that only the super rich continue to run Washington.

Senator Bernie Sanders of Vermont was outraged, issuing a press release that stated: “Instead of cracking down on Wall Street CEOs whose greed and illegal behavior plunged the country into a terrible recession, this bill allows too-big-to-fail banks to make the same risky bets on derivatives that led to the largest taxpayer bailout in history and nearly destroyed the economy. Instead of cutting back on the ability of billionaires to buy elections, this bill outrageously gives the wealthy even more power over the political process.”

If all of this is not enough to propel Americans into the streets in mass protests, perhaps the history of how the coddled Citigroup handles the money of its investors and shareholders will stir the pot. Below is just a sampling:

December 11, 2008: SEC forces Citigroup and UBS to buy back $30 billion in auction rate securities that were improperly sold to investors through misleading information.

February 11, 2009: Citigroup agrees to settle lawsuit brought by WorldCom investors for $2.65 billion.

July 29, 2010: SEC settles with Citigroup for $75 million over its misleading statements to investors that it had reduced its exposure to subprime mortgages to $13 billion when in fact the exposure was over $50 billion.

October 19, 2011: SEC agrees to settle with Citigroup for $285 million over claims it misled investors in a $1 billion financial product.  Citigroup had selected approximately half the assets and was betting they would decline in value.

February 9, 2012: Citigroup agrees to pay $2.2 billion as its portion of the nationwide settlement of bank foreclosure fraud.

August 29, 2012: Citigroup agrees to settle a class action lawsuit for $590 million over claims it withheld from shareholders’ knowledge that it had far greater exposure to subprime debt than it was reporting.

July 1, 2013: Citigroup agrees to pay Fannie Mae $968 million for selling it toxic mortgage loans.

September 25, 2013: Citigroup agrees to pay Freddie Mac $395 million to settle claims it sold it toxic mortgages.

December 4, 2013: Citigroup admits to participating in the Yen Libor financial derivatives cartel to the European Commission and accepts a fine of $95 million.

July 14, 2014: The U.S. Department of Justice announces a $7 billion settlement with Citigroup for selling toxic mortgages to investors. Attorney General Eric Holder called the bank’s conduct “egregious,” adding, “As a result of their assurances that toxic financial products were sound, Citigroup was able to expand its market share and increase profits.”

Former SEC Attorney, James Kidney, Speaks Out on Court’s Insider Trading Bombshell

By Pam Martens: December 15, 2014

Today we welcome former SEC attorney, James A. Kidney, as a guest columnist to our front page. Mr. Kidney brings 25 years of SEC experience and wisdom to the conversation. Here’s the backdrop:

The U.S. Department of Justice has been burning through millions of dollars of taxpayer money chasing down suspected insider traders who are four and five times removed from the person leaking inside information; convening grand juries to indict the traders; convincing trial courts to send them off to prison. The Securities and Exchange Commission has gone after the same individuals, banning them for life from the industry. That’s the same DOJ and SEC that have failed to bring charges against one CEO of a major Wall Street firm for the crash of 2008 — the greatest and most corrupt financial collapse since the Great Depression.

Last week, in a wide-reaching decision, the U.S. Court of Appeals for the Second Circuit, in United States of America v Todd Newman, Anthony Chiasson effectively advised Americans that the Department of Justice has grossly misapplied insider trading laws. And since the SEC has targeted the same individuals using the same legal principle, the decision means the SEC also doesn’t understand the laws it is supposed to be carrying out.

In a nutshell, the Court found that to be guilty of a crime the person trading on inside information has to have knowledge that the inside tipster breached a duty of trust to the corporation in exchange for a personal benefit. That knowledge was missing in many of these traders who were four and five times removed from the tipster. In fact, the court found that there may not have even been a tangible personal benefit to the tipster.

In simple terms, if a corporate insider gives material non-public information to a trader in exchange for cash or something of value, and the same trader then trades on that information, that’s a classic case of insider trading. But when the traders have no knowledge of any personal benefit given to the tipster, there is no insider trading crime.

Whether this is good law or bad can be debated. For example, corporate insiders might leak information for no current personal benefit on the hope or expectation that in the future they’ll be rewarded with a plum job and fat compensation at the trader’s firm. (That form of quid pro quo is a staple on Wall Street.)

The message the Appeals Court might have been subtly sending to the DOJ and SEC is to stop casting their wide net at people four times removed from a crime scene and go after the real criminals on Wall Street whose past and current actions pose a real and pressing danger to the entire financial system.

We turn the discussion over to James A. Kidney, who caused quite a stir earlier this year in a speech at his retirement party criticizing SEC management for policing “the broken windows on the street level” while ignoring the “penthouse floors”.

Finding the Courage to Go After the Big Fish 

By James A. Kidney: December 15, 2014

James A. Kidney, Former SEC Trial Attorney

James A. Kidney, Former SEC Trial Attorney

Most of the highlights of my 25-year career as a trial attorney at the Securities and Exchange Commission involve the half dozen or more insider trading cases I tried before juries.  I was lead counsel in the very first jury trial the SEC ever brought – an insider trading case in Seattle in 1989.  I prevailed on behalf of the SEC in every one of my insider trading trials.

I wish I could say these victories achieved something important for securities enforcement.  I doubt that they did. Those cases tried against other than true corporate insiders were largely a waste of government (and my) time.  As were the far more numerous such cases which settled without trial, sometimes for substantial sums by any standard, and sometimes by such small sums they were substantial only to the middle class sap who acted on a stock tip and had the misfortune to be persecuted by the SEC.

Investigating and litigating insider trading cases are probably the most fun the SEC Enforcement staff has as it muddles around the oft-amended, often confusing statutes and rules embedded in 70 year old basic securities laws that are long past their sell-by date.  Of all the common securities law claims brought by the SEC as civil cases (and, sometimes, by the Department of Justice as civil or criminal matters), insider trading requires investigations that are the most like Sam Spade detective work as seen on film and television.  Insider trading is often like finding out who killed Colonel Mustard in the library with a candlestick. I know I enjoyed them, even as I doubted their utility.

The investigation team at the SEC (and the U.S. attorneys’ offices) first have to figure out if information was leaked from a corporate source. Maybe the trading on good or bad news was a corporate source using a beard, such as a friend or neighbor.  Maybe the corporate source was getting paid, in cash, favors, future employment, or some other benefit, for passing on material nonpublic information to a stock trader.  It is fun trying to track down the inside source, usually working backwards from someone who made a timely purchase or sale in advance of good or bad corporate news.  Finding the key telephone call or other communication and then springing the evidence on the defendant in a deposition or courtroom is a thrill rare in the annals of securities litigation.  A little like Perry Mason, if I may date myself.

In addition to working backwards to the source, the staff usually will also work forward, finding persons who traded at several levels removed from the insider.  I have tried cases, and prevailed in front of juries, in which the defendant was several levels removed from the insider.  In my most extreme case, the defendant was five levels removed from the original source of the information.  The source was supposedly the brother of a guy who worked for the company and received information from his brother.  The brother called his broker – but didn’t trade himself when the broker told him doing so would be illegal.  But the broker couldn’t keep his mouth shut and told some of his customers, who told their friends, who told their friends. The SEC sued about a dozen people in this chain (but not the original insider).  All but the fifth level guy settled. We tried the case against him, a high school dropout who operated a scaffolding company and who was his own lawyer.  After a four-day trial in front of a senior federal judge, the SEC prevailed with the jury.  Whooo Hoo!  Markets saved.

In my view, as a recently retired SEC trial lawyer, the Commission spends far too many resources on pursuing low level “insider traders” who are far removed from the corporate suite.  Most of these cases have zero impact on market prices or practices.  So-called “remote tippee” cases employ legal fictions that are fuzzy at best and often outright unfair and unrealistic.  Insider trading cases rely on “legal fictions” of transferred duties from the insider to one tippee, to another tippee, to a third tippee, who might have been tipped on the golf course by a friend who vaguely says he got it from a guy who knew a guy at the subject public company.  These actions put the emphasis on “fiction” in legal fiction.

Such cases are not by any means the only waste of enforcement resources.  The Commission staff typically spends much time near the end of the fiscal year (September 30) boosting its enforcement numbers with window dressing cases, such as administrative follow-ons to criminal convictions, some years old, filing actions to deregister defunct corporations and bringing minor administrative actions against corporate officers who fail to report stock transactions as required by law.  The press and Congress, as well as the Commissioners themselves, want the enforcement numbers pumped up.  And the press uncritically considers the raw enforcement numbers a measure of the success or failure of the Division of Enforcement.  No matter if large numbers of cases are the equivalent of jaywalking tickets while banks are being robbed (or, rather, doing the robbing).  The numbers are up!  Again, Whooo Hoo!

This practice is defended by the current SEC chair and the current director of the Division of Enforcement as the “broken windows” theory of “law enforcement,” as if big Wall Street firms gave a dam whether a smalltime Joe got nailed by the Big Bad SEC.  As is well-known, much of the SEC docket is devoted to enforcement against such small timers.

“Broken windows” might be tolerable, if the SEC staff did not also shy away from the big picture windows on the upper floors of Wall Street.  I know from personal experience at the SEC that the Division of Enforcement has been loath to bring perfectly colorable fraud actions against more senior insiders at the big banks that brought us the 2008 financial crisis and their large customers.  Division of Enforcement senior management, presumably at the behest of the chairman at the time, actually had a virtual template for the SEC staying its hand in other cases involving other large Wall Street institutions – grab a big fine from the institution and sue a very small fry.  After all, a firm like Goldman Sachs will let a junior vice president peddle a billion dollar product with no supervision, right?

I often pictured some banking fat cat reading a headline about the SEC or DOJ nailing some “broken windows” defendant and thinking, “Keep it up.  Leave me alone.”

All of which brings us to the good news about last week’s decision by a panel of the U.S. Court of Appeals for the Second Circuit in U.S. v. Newman.   In that criminal case brought by the Office of the U.S. Attorney for the Southern District of New York, the court unanimously held that the prosecutor must prove that remote tippees knew that the original insider who provided material nonpublic information did so in return for a personal benefit.  This was a straightforward reading of a 30-year-old Supreme Court decision which the SEC and the Justice Department over the years had turned into a practical nullity in remote tippee cases such as Newman.

The press reaction has been all about how damaging this decision will be to insider trading enforcement. Yes, it will serve as a major deterrent to bringing enforcement actions, civil or criminal, against remote tippees who had no personal contact with the corporate insider and often do not even know his or her name or corporate position. Until now, as a practical matter, the prosecution had only to persuade a jury that a remote tippee defendant had sufficient facts to know, or, in an SEC civil case, was reckless in not knowing, that the information on which the defendant traded likely came from an insider corporate source, that it was material and that at the time the defendant made the trade it was still nonpublic. In other words, that the defendant knew he was acting on what he thought was a “hot stock tip.”

Of course, the defendants in U.S. v. Newman were not small fry. They were traders employed by crème de la crème hedge funds, which is why the reversal and dismissal of their criminal convictions and long white collar prison sentences causes such consternation.  But acting on a hot tip, even knowing that it probably came from a corporate insider (and thus was more reliable than mere gossip) stretches notions of securities fraud far beyond safe boundaries for society. The rules of proper behavior are too ill-defined when information is received far from its source, even if the defendants or their employers are among the One Percent, as in Newman.  Most important, remote tippee insider trading does little economic damage to the markets — certainly far less damage than the billion dollar deals put together by Wall Street and sold as relatively safe when they are in fact built on soft mud – but it’s an easy win and fun to work on, at least at the SEC.

I don’t go along with those who say insider trading should be legal because it adds information to the market through trading. I am very skeptical of the whole efficient markets theory, and there are concrete reasons to bar insiders from benefitting from corporate information.  Insiders are paid a salary and often bonuses – sometimes quite large – and should not be taking advantage of their position for additional personal gain, especially at the expense of shareholders lacking the inside information and, therefore, willing to trade their shares.  Nor should they be permitted to advantage their friends and relations by tipping them to inside information as a gift.  The court’s decision in U.S. v. Newman does not change the existing law in this regard.

The really good news about U.S. v. Newman, should it not be reversed on appeal or circumvented by clever SEC and DOJ lawyers, is that all those resources spent in going after remote tippee defendants such as those I made a career of prosecuting (at the direction of my bosses) can now be used to ferret out conduct far more damaging to the markets and, sometimes, the economy. That is, if the aforementioned SEC and DOJ ever find the courage to do so.