U.S. Treasury Becomes a Laughing Stock

Actress Louise Linton and Husband, U.S. Treasury Secretary  Steve Mnuchin

Actress Louise Linton and Husband, U.S. Treasury Secretary Steve Mnuchin at the Bureau of Engraving and Printing, November 15, 2017

By Pam Martens and Russ Martens: November 17, 2017

U.S. Treasury Secretary Steven Mnuchin appears to have inaugurated a perpetual bring your wife to work day. It’s become so farcical that it frequently feels like the United States Treasury Department has morphed into a low-budget, badly scripted reality TV show where the female star is so out-of-touch that she must continually scurry about in her haute couture erasing the haughty things she has written about the little people on multiple continents. We’ll get to that shortly, but first some background:

It all started back on January 19 when actress and then fiancée Louise Linton sat by her man during his Senate Finance Committee confirmation hearing to become U.S. Treasury Secretary. At the hearing, Democratic Senator Ron Wyden of Oregon had this to say about his repugnance to see Mnuchin fill the post as U.S. Treasury Secretary:

“Mr. Mnuchin’s career began in trading the financial products that brought on the housing crash and the Great Recession. After nearly two decades at Goldman Sachs, he left in 2002 and joined a hedge fund. In 2004, he spun off a hedge fund of his own, Dune Capital. It was only a few lackluster years before Dune began to wind down its investments in 2008.

“In early 2009, Mr. Mnuchin led a group of investors that purchased a bank called IndyMac, renaming it OneWest. OneWest was truly unique. While Mr. Mnuchin was CEO, the bank proved it could put more vulnerable people on the street faster than just about anybody else around.

“While he was CEO, a OneWest vice president admitted in a court proceeding to ‘robo-signing’ upward of 750 foreclosure documents a week. She spent less than 30 seconds on each, and in fact, she had shortened her signature to speed the process along. Investigations found that the bank frequently mishandled documents and skipped over reviewing them. All it took to plunge families into the nightmare of potentially losing their homes was 30 seconds of sloppy paperwork and a few haphazard signatures.

“These kinds of tactics were in use between 2009 and 2014, a period during which the bank foreclosed on more than 35,000 homes. ‘Widow foreclosures’ on reverse mortgages – OneWest did more of those than anybody else. The bank defends its record on loan modifications, but it was found guilty of an illegal practice known as ‘dual tracking.’ One bank department tells homeowners to stop making payments so they can pursue modification, while another department presses on and hurtles them into foreclosure anyway.”

Before the confirmation hearing concluded, Senator Wyden added the following suggestion that Mnuchin had attempted to mislead the Committee in his financial disclosures:

“Mr. Mnuchin, a month ago you signed documents and an affidavit that omitted the Cayman Island fund, almost $100 million of real estate, six shell companies and a hedge fund in Anguilla. This was not self-corrected. The only reason it came to light was my staff found it and told you it had to be corrected.”

Other Democrats were equally repulsed by the vision of Mnuchin as U.S. Treasury Secretary prior to his confirmation to the post. In a press release, Democratic Senator Jeff Merkley said:

“Donald Trump’s choice of Mnuchin is not only a fundamental betrayal of his promise to stand up to Wall Street — it is a punch in the gut to the thousands of American families who were thrown out of their homes by Mnuchin’s bank. The voices of these Americans should be heard loud and clear as the Senate examines his record and considers his nomination.”

Senator Bernie Sanders weighed in with this:

“During the campaign, President-elect Donald Trump told the American people that he was going to change Washington by taking on Wall Street. But now that the election is over, Donald Trump’s choice for Treasury Secretary is the same old, same old Wall Street insider who made a fortune during the financial crisis as millions lost their homes. If confirmed, Steve Mnuchin would be the third Treasury Secretary to come from Goldman Sachs in the last 17 years. That is not the type of change that Donald Trump promised to bring to Washington — that is hypocrisy at its worst. The last thing we need is another Treasury Secretary from Goldman Sachs and another broken promise from Donald Trump.”

Mnuchin was confirmed by a slim margin of votes in the Senate, 53-47, along party lines, with all Republicans voting for him and all Democrats voting against him, except for Senator Joe Manchin of West Virginia, who voted yes.

Linton was also there peeking over the shoulder of her husband on May 18 of this year as Mnuchin faced a grilling from members of the Senate Banking Committee. During that hearing Mnuchin shredded the promise that the Trump administration had nurtured for months — that it was considering restoring the Glass-Steagall Act and breaking up the big banks on Wall Street. After Mnuchin attempted to say this had never been their position, Senator Elizabeth Warren called his testimony “bizarre,” “crazy,” and “like something straight out of George Orwell.”

Linton’s trips on official business with her husband went viral in August when she bragged in an Instagram post about her designer clothing as she disembarked with him from a U.S. chartered plane. Linton flaunted her #hermes, #valentino, #roulandmouret, and #tomfordsunnies attire. When a female reader responded in a post: “glad we could pay for your little getaway,” Linton berated her in a subsequent post for being “adorably out of touch,” and bragging about how much more in taxes Linton and her husband pay.

After effusive apologies over her indelicate diatribe and an erasure of the Instagram post, just three months later Linton has again become a viral meme on the Internet. This past Wednesday, Linton accompanied her husband on official business to the Bureau of Engraving and Printing as he inspected the first run of new $1 bills with his signature as U.S. Treasury Secretary. Linton got herself into photos from the event helping her husband hold an uncut sheet of money and bizarrely decked out in all black attire, including above the elbow black leather gloves and a black leather skirt. One Twitter commenter asked why she was dressed like Darth Vader while another suggested that she had become a cartoonish evil character.

The truth might be even more cynical. Despite stating on her official website that a “great life passion” is “the welfare of children and animals,” the very same web page says that she is now “the inaugural Brand Ambassador for British leather goods company, Dunmore with the launch of their handbag line, ‘The Linton Collection.’”

Last year, Linton was also lampooned for a preposterously inaccurate book she had written and self-published on Zambia. The book was titled In Congo’s Shadow: One Girl’s Perilous Journey to the Heart of Africa. Linton said that she was an 18-year old volunteer in Zambia in 1999.

After the U.K.’s Daily Telegraph printed an excerpt from the book, readers blasted it for publishing a grossly inaccurate account. The Daily Telegraph removed the content, apologized and said Linton had “announced that she had agreed to remove the book from sale and give the profits to charity, and issued an apology for the offence caused.”

The New York Times’ Tariro Mzezewa, a native of Zambia, cited the following passage from the book in a column:

“I witnessed random acts of violence, contracted malaria and had close encounters with lions, elephants, crocodiles and snakes. As monsoon season came and went, the Hutu-Tutsi conflict in neighboring Congo began to escalate and then spill over into Zambia with repercussions all along the lake.”

Mzezewa noted in the column that  “Zambia doesn’t have a monsoon season. And the Hutu-Tutsi conflict happened in Rwanda.” He also called out an insulting passage where Linton writes about “a smiling gaptoothed child with H.I.V. whose greatest joy was to sit on my lap and drink a bottle of Coca-Cola.” In another passage, he says Linton actually calls herself “angel haired” in the book.

Mnuchin and his permanent sidekick in the job are emblematic of the hubris of the Trump administration. Mnuchin had never previously held public office. Trump nominated Mnuchin for the post of U.S. Treasury Secretary not because of his sterling credentials but because Mnuchin had helped to raise millions of dollars for Trump as his Campaign Finance Chairman.

Next to the President of the United States and the Federal Reserve Chairman, the U.S. Treasury Secretary is considered one of the most critical jobs in Washington. The Treasury is not some nebulous, do-nothing agency. Its bureaus include the IRS; the Office of the Comptroller of the Currency which supervises and inspects national banks for safety and soundness; the Bureau of Engraving and Printing and the U.S. Mint that issue the currency and coin of the United States.; the Financial Crimes Enforcement Network which is supposed to combat money laundering; and numerous other units. The Treasury Secretary not only sits at the helm of the Treasury Department but since the passage of the 2010 Dodd-Frank financial reform legislation, the Treasury Secretary now chairs the Financial Stability Oversight Council which is responsible for preventing another epic financial implosion like that of 2008. The Treasury Secretary also serves as the Managing Trustee of the Social Security and Medicare Trust Funds and has one of three votes, along with the Secretaries of Commerce and Labor, on the federal corporate pension guarantor, the Pension Benefit Guaranty Corporation.

The Mnuchins continue to disgrace the U.S. Treasury and it’s important to remember that 100 percent of Senate Republicans put him in that job despite what their Democratic colleagues testified was his history as a foreclosure king – even foreclosing on active duty military men and women.

Trump Bank Regulator Wants to Merge Taxpayer-Backstopped Banks With Corporate Conglomerates

By Pam Martens and Russ Martens: November 13, 2017 

Keith Noreika, Acting Comptroller of the Currency

Keith Noreika, Acting Comptroller of the Currency

A man holding one of the most important and powerful jobs for keeping the U.S. banking system safe from another epic crash like that of 1929 and 2008 has tongues wagging over the bizarre speech he delivered at the Clearing House Annual Conference last Wednesday in New York.

Keith Noreika is the acting head of the Office of the Comptroller of the Currency (OCC), the Federal agency responsible for supervising national banks and inspecting them for safety and soundness.

What Noreika recommended last Wednesday, however, would make the U.S. banking system significantly more dangerous than it already is. Noreika thinks there is no good reason to prevent giant corporate conglomerates from owning insured depository banks that are backstopped by the U.S. taxpayer. He had this to say in his speech last week:

“The narrative persists to keep commercial interests from owning or having controlling interests in banks, in part, because many view them as ‘public interests’ rather than the ‘private businesses’ they are. In more modern times, this line of reasoning was used to keep companies like Walmart from owning a state-chartered FDIC-insured industrial loan company, while allowing others like Target, to own a credit card bank. The narrative also ignores the fact that banks are subject to a robust regulatory regime to ensure their safety and soundness and compliance meant to protect both markets and consumers.”

Noreika must have spent the last nine years in a coma from which he has just emerged with this insane epiphany. Over the past decade that this Trump appointee has not been paying attention to the failed status of bank supervision, the largest banks in the country have been charged with rigging foreign exchange and interest rate markets, gaming the subprime debt market, fleecing millions of Americans with illegal overcharges and, by the way, collapsing the U.S. economy in 2008 and 2009. Federal regulators allowed the illegal conduct to go on for years without detecting it – think JPMorgan Chase and its regulators allowing Bernie Madoff to launder money through the bank for decades in support of an epic Ponzi scheme. (See JPMorgan and Madoff Were Facilitating Nesting Dolls-Style Frauds Within Frauds.)

Noreika is not some wide-eyed innocent who is simply offering a preposterous position based on naiveté. Prior to his appointment by Trump, Noreika had been a corporate lawyer for the past 10 months at Simpson Thacher & Bartlett LLP. But the real smoking gun is what Noreika did for the 18 years prior to that. He spent those years at Covington & Burling, the law firm that sent multiple lawyers to run the U.S. Justice Department under Obama, including the top post of U.S. Attorney General (Eric Holder) and head of the Criminal Division (Lanny Breuer). The biggest banks were cozy and safe under those two, with no prosecutions for the biggest financial crash since the Great Depression and, according to the PBS program, Frontline, never even had a wiretap or issued a subpoena in pursuit of a criminal case. (Covington & Burling held a corner office open for Holder to return to and Breuer also returned to the firm following his stint at Justice and is now Vice Chair of the firm.)

Covington & Burling has a curious history in landing top dogs at the OCC to oversee bank deregulation. John Dugan, a former bank lobbyist, headed the OCC from 2005 to 2010 – the period leading up to and including the subprime mortgage meltdown, fraudulent foreclosures, robo-signing, the rigged peddling of mortgage-backed securitizations and the largest taxpayer bailout of banks in U.S. history.

Before Dugan, another Covington & Burling partner, Eugene Ludwig, was appointed by President Bill Clinton to head the OCC from 1993 to 1998. That was the period leading up to the repeal of the Glass-Steagall Act in 1999. As a result of that repeal, commercial banks were allowed to merge with Wall Street investment banks, creating today’s era of “too-big-to-fail” banking behemoths.

Ludwig’s testimony to the U.S. House of Representatives on March 5, 1997 sounds an awful lot like the nonsense that Noreika was spewing in New York last Wednesday. Ludwig had this to say:

“…we should not let an unsupported hypothesis that banks enjoy a subsidy dissuade us from pursuing financial modernization. And we should not let an unsupported hypothesis dissuade us from adhering to a fundamental principle that should underlie modernization: Financial institutions need the freedom to manage their activities and structure their operations in a way that best suits their needs and the needs of their customers. Allowing these institutions to engage in new activities on the one hand but imposing an artificial structure on the other will impede rather than promote safety and soundness. It will not limit any more effectively their use of the alleged subsidy, even if the subsidy actually existed. And it will impose substantial costs and inefficiencies on the financial services industry that limit the industry’s ability to prosper, to serve America’s consumers and communities, and to compete in the global marketplace.”

Citigroup was one of the corporate conglomerates that resulted from the repeal of the Glass-Steagall Act. This is how we described its condition on November 28, 2008 – despite what Noreika calls a “robust regulatory regime”:

“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.”

Making headlines recently is how Harvey Weinstein’s lawyers assisted him in running a protection racket to conceal his misdeeds over decades. Much more transparency is likewise needed to ascertain the role of Big Law in corrupting the U.S. banking system and then failing to prosecute the misdeeds.

Financial Experts Release Video on How Wall Street Loots the U.S. Economy

By Pam Martens and Russ Martens: November 10, 2017

Nomi Prins Discussing the 2008 Crash on DemocracyNow!

Nomi Prins

If you feel lost in the cacophony of contrasting claims that Wall Street was adequately reformed under the Dodd-Frank legislation of 2010 or that it remains an insidious wealth transfer system for the 1 percent, then you need to invest one-hour of your time to listen carefully to some of the smartest experts in America address the topic.

A free one-hour video is now available (see below) which should settle the debate once and for all that the Dodd-Frank legislation of 2010 has failed to deliver the needed reforms to Wall Street’s corrupt culture and fraudulent business models and that nothing short of restoring the Glass-Steagall Act is going to make the U.S. financial system safe again.

Don’t let the grainy quality of the video turn you off (it was made from a live webinar): the integrity of the voices will quickly reassure you that you are watching something powerful and critical to the future of the U.S.

The background of the participants is as follows:

Dr. Marcus Stanley

Dr. Marcus Stanley

Dr. Marcus Stanley is the Policy Director of Americans for Financial Reform, a coalition of more than 250 national, state, and local groups who have come together to advocate for reform of the financial sector. Stanley has a Ph.D. in public policy from Harvard University and previously worked as a Senior Economist at the U.S. Joint Economic Committee.

Nomi Prins is a renowned author whose last book, All the Presidents’ Bankers, is a seminal work on the problematic relationships of Wall Street bankers and U.S. presidents over the past century. Prins is also a respected former veteran of Wall Street investment banks where she reached a top rung as Managing Director of Goldman Sachs.

Bartlett Naylor

Bartlett Naylor

Bartlett (Bart) Naylor is the Financial Policy Advocate for the nonprofit, Public Citizen, which since its founding in 1971 has served as the voice of the American people in Washington D.C. Naylor is an expert on corporate governance, financial markets and shareholder rights and previously served as Chief of Investigations for the U.S Senate Banking Committee.

Heather Slavkin Corzo

Heather Slavkin Corzo

Heather Slavkin Corzo is the director of the AFL-CIO Office of Investment and served as the chair of the Americans for Financial Reform task force on derivatives regulation from 2010 through 2013. Corzo holds a law degree from Boston University School of Law.

Also appearing in the video is Mayo Makinde, representing Our Revolution in NW Ohio. The grassroots organization, an outgrowth of Senator Bernie Sanders campaign for President in 2016, has been an active supporter of the restoration of the Glass-Steagall Act.

Mayo Makinde

Mayo Makinde

In the video presentation, Prins addresses the new market bubbles that are occurring today and which pose a serious risk to U.S. financial stability. One dangerous area says Prins is that the Collateralized Debt Obligations (CDOs) that played a major role in blowing up Wall Street in 2007-2008 are still being created but are now called BTOs (Bespoke Tranche Opportunity.)

On August 23 of this year, the Financial Times wrote about the BTOs, noting the following:

“Bespoke tranches are created by allowing investors to pick a bundle of about 100 different ‘single-name’ credit defaults swaps — derivatives that reflect market perceptions of the named company’s creditworthiness. The bundle is then sliced into ‘tranches,’ offering different levels of risk and return…Citigroup is the largest bank counterparty for such trades, according to investors and traders, with JPMorgan Chase and BNP Paribas also active. The resurgence of interest has pushed other banks, such as Goldman Sachs, to begin looking at expanding trading in the product as well.”

Wall Street On Parade has previously highlighted how Citigroup, the bank at the center of the crisis in 2007 and 2008 and the recipient of the largest taxpayer bailout of a bank in U.S. history, has continued to pile into some of the riskiest areas of the market. (See Bailed Out Citigroup Is Going Full Throttle into Derivatives That Blew Up AIG.)

Stanley explains how the repeal of the Glass-Steagall Act led directly to the financial crisis on Wall Street and the greatest economic collapse since the Great Depression. Stanley says that when “you repealed Glass-Steagall you took down those firewalls between the different parts of the financial system and you allowed these mega banks to grow; that combined the support for the commercial bank (the government-guarantee to your insured deposits) and the capital markets activity of the big investment banks. And all of those giant mega banks were simultaneously involved in the same fraudulent business models.”

One fraudulent business model cited by Stanley was the CDO market – a $640 billion market which Stanley says lost 65 percent of its value after being sold as AAA-rated securities, “the Gold Standard,” says Stanley. He compares this to going to a grocery store you trust and bringing home your food to find out that two-thirds of it is toxic.

The speakers urge American citizens to become engaged in the battle to restore the Glass-Steagall Act by calling their members of Congress and demanding that they add their sponsorship to the bills that have been introduced in both the House and Senate to bring back the complete separation of insured depository banks from their high-risk casino cousins, the investment banks of Wall Street. The phone number to reach either your Senator or Congress Member is 202 224 3121.

Does Jerome Powell Hear the Alarm Bells from Flattening Yield Curve?

Source: Federal Reserve Bank of St. Louis

Source: Federal Reserve Bank of St. Louis

By Pam Martens and Russ Martens: November 9, 2017

In November of 2016, there was more than 100 basis points (one percent) difference between the yield on the 2-year and the 10-year U.S. Treasury Note. As of this morning, that difference stood at 68 basis points, a dramatic flattening in the yield curve and harkening to the levels seen during the onset of the financial crisis in 2007.

As of 7:48 a.m. this morning, the spread between the 10-year Treasury Note (yielding 2.33 percent) and 30-year Treasury Bond (yielding 2.81 percent) is even smaller, at a meager 48 basis points or less than half of one percent.

It is a serious commentary on the bizarre financial times in which we live that a fixed income investor would be rewarded with less than half a percent of additional income to add 20 years of risk to the maturity date on his bond.

The Treasury yield curve is the sine qua non to bond investors because it is thought to represent the composite wisdom on the future of the U.S. economy from a vast body of diverse Treasury buyers – from pension funds to insurance companies to mutual funds to mom and pop investors.

A growing economy with related worries about increases in future inflation would typically produce rising yields on longer-term notes and bonds, not declining yields. A dramatic flattening in the yield curve is seen as a red flag for an economic slowdown, sagging inflation and as a potential precursor to the onset of recession. None of that would be consistent with the Federal Reserve continuing to tighten interest rates – which it is expected to do again in December.

The dramatic flattening in the yield curve comes at an inopportune time for the Federal Reserve, which is in the midst of passing the baton from a known factor, Chair Janet Yellen, to a less known factor, newly nominated Fed Chair, Jerome Powell. Unlike his recent predecessors, Powell holds no degree in economics. He has a law degree from Georgetown University Law Center and a B.A. in Politics from Princeton University. Powell has served as a member of the Fed Board of Governors since 2012. From 1997 through 2005, Powell was a partner at the private equity firm, the Carlyle Group. He also has significant Wall Street investment bank experience, having previously worked in executive positions at Dillon Reed and Bankers Trust.

Powell’s Senate confirmation hearing is set for November 28 and it is anticipated that he will take the reins at the Fed in February when Yellen’s term expires.

Traders of shares in the largest Wall Street banks have taken note of the flattening yield curve with cumulative share losses in the range of two to four percent over the past four trading sessions. JPMorgan Chase, which closed at $101.59 on Thursday, November 2, ended the trading day yesterday at $97.64.

Bank stocks, the Treasury market and its yield curve may also be re-pricing the prospect of a lame duck presidency less than 10 months into the first term of Donald Trump. See Four Big Banks Lose $37.60 Billion in Market Cap in Trump Fallout as a guide to what happened on the day it was announced that Deputy Attorney General Rod Rosenstein signed an order naming former FBI Director, Robert Mueller, to become the Special Counsel for an inquiry into the Trump campaign’s involvement with Russia. The first indictments in that matter were unsealed in Federal Court on Monday, October 30.

Robert Rubin’s Selective Memory and the Collapse of Citigroup

By Pam Martens and Russ Martens: November 8, 2017

Robert Rubin, Former Treasury Secretary and Citigroup Board Chair

Robert Rubin, Former Treasury Secretary and Citigroup Executive Committee Chair

According to the now publicly available transcript of the testimony that former U.S. Treasury Secretary Robert Rubin gave before the Financial Crisis Inquiry Commission (FCIC) on March 11, 2010, he was not put under oath, despite the fact that the bank at which he had served as Chairman of its Executive Committee for a decade, Citigroup, stood at the center of the financial crisis and received the largest taxpayer bailout in U.S. history.

The fact that Rubin was not put under oath might have had something to do with the fact that he showed up with a team of six lawyers from two of the most powerful corporate law firms in America: Paul, Weiss, Rifkind, Wharton & Garrison and Williams & Connolly. One of Rubin’s lawyers from Paul, Weiss was Brad Karp, the lawyer who has gotten Citigroup out of serial fraud charges in the past.

As one reads the transcript, it becomes alarmingly apparent that a man making $15 million a year at Citigroup for almost a decade has not involved himself in very many intricate details of how the firm is being run or has a very selective memory. (Rubin gave up his $14 million annual bonus when the bank was blowing up during the financial crisis but kept his $1 million salary. According to widely circulated estimates, Rubin’s total compensation for his decade at Citigroup was over $120 million, for a job which he concedes included no operational role and with just two secretaries reporting to him.)

To many of the questions posed by Tom Greene, Executive Director of the FCIC, Rubin responded “I don’t remember.” Rubin used that phrase 41 times during the interview.

At one point, Rubin’s own lawyer, Brad Karp, appears to nudge Rubin on his failing memory. Greene asks Rubin if he attended a tutorial for the Board of Directors on September 17, 2007 on the risk environment. Rubin answers as follows: “It is interesting. I don’t remember either going or not going.”  Karp then says to Rubin: “Bob, they have the minutes of this meeting.”

On matters big and small, Rubin simply couldn’t remember – despite the fact that many of the meetings and events under scrutiny had taken place less than three years prior and came at a critical time for this global bank.

Six months after Rubin testified before the FCIC, the Commission’s legal staff sent a Memorandum to the FCIC Commissioners recommending that Rubin, Citigroup CEO Chuck Prince and CFO Gary Crittenden be referred to the Department of Justice for further investigation. The September 12, 2010 memo reads as follows:

“The Securities and Exchange Commission recently concluded a $75 million civil settlement with Citigroup, its former chief financial officer and the head of investor relations arising from affirmative statements to the markets in 2007 that the company had only $13 billion in subprime exposure when, in fact, the company ultimately disclosed $55 billion in subprime exposure.

“The SEC’s complaint, filed in conjunction with the settlement, does not name the CEO, the chair of the Executive Committee of the Board of Directors, other members of the Board who were briefed on these exposures or the president of the firm’s Citi Markets and Banking unit, Citigroup’s investment bank, even though they all were aware of this information well before it was disclosed to the public.

“Based on FCIC interviews and documents obtained during our investigation, it is clear that CEO Chuck Prince and Robert Rubin, chair of the executive committee of the Board of Directors knew this information.  They learned of the existence of the super senior tranches of subprime securities and the liquidity puts no later than September 9, 2007.

“On October 15, 2007, the same day markets were told that Citi’s subprime exposure amounted to $13 billion, members of the Corporate Audit and Risk Management Committee of the Board were advised that: ‘The total sub-prime exposure in Markets and Banking was $13bn with an additional $16bn in Direct Super Seniors and $27bn in Liquidity and Par Puts.’ This information was shared with other members of the Board of Directors.

“Two weeks later, on November 4, 2007, after a steep decline in subprime valuations, Citigroup announced that it had subprime exposures amounting to $55 billion; the value of these assets had declined by $8 to $11 billion and CEO Chuck Prince had resigned.

“Based on the foregoing, the representations made in the October 15, 2007 analysts call appear to have violated SEC Rule 10b-5, which makes it unlawful for ‘any person, directly or indirectly’ using any means of interstate commerce to ‘omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading’ in connection with ‘the purchase or sale of any security.’

“The SEC’s civil settlement ignores the executives running the company and Board members responsible for overseeing it.  Indeed, by naming only the CFO and the head of investor relations, the SEC appears to pin blame on those who speak a company’s line, rather than those responsible for writing it.

“The former CEO, Mr. Prince, the former chairman of the Board, Mr. Rubin, and members of the Board may have been ‘directly or indirectly’ culpable in failing to disclose material information to the markets in violation of section 10b-5 of the 1934 Act.

“In addition, section 302 of the Sarbanes-Oxley Act requires the CEO and the CFO to certify that annual and quarterly reports do ‘not contain any untrue statement…or omit to state a material fact.’  In carrying out this certification obligation, the ‘signing officers’ are responsible for establishing ‘internal controls’ that ‘ensure that material information…is made known’ to the officers during the time they are preparing the report.

“Although financial statements were routinely signed by the CEO and the CFO during the lead up to Citigroup’s ultimate disclosure of $55 billion in subprime exposure, internal controls were facially inadequate.  As noted in a Federal Reserve Board report,

‘…there was little communications on the extensive level of subprime exposure posed by Super Senior CDSs, nor on the sizable and growing inventory of non-bridge leveraged loans, nor the potential reputational risk emanating from SIVs which the firm either sponsored or supported.  Senior management, as well as the independent Risk Management function charged with monitoring responsibilities, did not properly identify and analyze these risks in a timely fashion.’

“Since the CEO and CFO are responsible under the Act for accurate quarterly and annual reports, as well as the adequacy of the risk management systems needed to make those reports accurate, referrals for violations of section 302 of the Sarbanes-Oxley Act appear warranted.”

More than one year ago, Senator Elizabeth Warren sent detailed letters to the Inspector General of the Department of Justice and to then FBI Director James Comey, asking for a full disclosure of what had happened to these and other referrals made to the Department of Justice by the FCIC, since the DOJ brought no related prosecutions.

To date, the public remains in the dark on this matter.

Editor’s Note: Pam Martens, Editor of Wall Street On Parade, worked for two large Wall Street firms for 21 years. From 1996 through 2001, Martens challenged Wall Street’s private justice system in the U.S. District Court for the Southern District of New York and at the 2nd Circuit Court of Appeals. Simultaneously, she also challenged a Citigroup unit’s employment practices. Brad Karp represented the Citigroup unit in the matter.

Related Articles:

As Citigroup Spun Toward Insolvency in ’07- ’08, Its Regulator Was Dining and Schmoozing With Citi Execs

Is the New York Fed Too Deeply Conflicted to Regulate Wall Street?

Relationship Managers at the New York Fed and Citibank: The Job Function Ripe for Corruption

Sealed, Redacted and Censored: Saving Citigroup, Killing America