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Home Publications Blogs Beat the Press Did the Banks Have to Commit Fraud?

Did the Banks Have to Commit Fraud?

Friday, 18 July 2014 05:23

Floyd Norris has an interesting piece discussing Citigroup's $7 billion settlement for misrepresenting the quality of the mortgages in the mortgage backed securities it marketed in the housing bubble. Norris notes that the bank had consultants who warned that many of the mortgages did not meet its standards and therefore should not have been included the securities.

Towards the end of the piece Norris comments:

"And it may well be true that actions like Citigroup’s were necessary for any bank that wanted to stay in what then appeared to be a highly profitable business. Imagine for a minute what would have happened in 2006 if Citigroup had listened to its consultants and canceled the offerings. To the mortgage companies making the loans, that might have simply marked Citigroup as uncooperative. The business would have gone to less scrupulous competitors."

This raises the question of what purpose is served by this sort of settlement. Undoubtedly Norris' statement is true. However, the market dynamic might be different if this settlement were different.

Based on the information Norris presents here, Citigroup's top management essentially knew that the bank was engaging in large-scale fraud by passing along billions of dollars worth of bad mortgages. If these people were now facing years of prison as a result of criminal prosecution then it may well affect how bank executives think about these situations in the future. While it will always be true that they do not want to turn away business, they would probably rather sacrifice some of their yearly bonus than risk spending a decade of their life behind bars. The fear of prision may even deter less scrupulous competitors. In that case, securitizing fraudulent mortgages might have been a marginal activity of little consequence for the economy.

Citigroup's settlement will not change the tradeoffs from what Citigroup's top management saw in 2006. As a result, in the future bankers are likely to make the same decisions that they did in 2006.

Comments (10)Add Comment
written by djb, July 18, 2014 5:47
Yes we have to excuse crime by people with enough money because otherwise they might not be able to transfer as much wealth to themselves
written by Larry Signor, July 18, 2014 6:52
I have seen no scruples displayed, during or since 2006, by the Wall St bankers. It seems obvious that they will make the same decisions over again. I believe Pavlov referred to this as a conditioned response.
Officer officer
written by Ryan, July 18, 2014 7:15
I'd love to see this excuse deployed by people (little people, not corporate persons, which are super people). "Officer officer, if I didn't steal the loaf of bread, someone else would have."

Seriously, is that the argument advanced? Can people start saying things in their heads before they say them out loud please?
written by Squeezed Turnip, July 18, 2014 8:02
Citigroup is a very large bank. The fact that Citi (or JPM etc) agreed to go ahead with a, face it, idiotic business decision (if not for the American taxpayers making salaries 1/300th of Citi executives') not only carries an imprimatur but also establishes or strengthens an ethically questionable trend. Citi should have tanked and their former CEO knows it.
Exactly right!
written by Dave, July 18, 2014 9:55
Citi should not be in business. Its leaders should be in jail.

Until that happens, our system is at risk of collapse once again. Next time, will we put people in jail and close businesses? Ask the president in charge.

Why did Obama allow his Treasury Secretary and Attorney General to do this? It is inexcusable.

Does he recognize this?
New Mortgage Loan Rejection Standard: No Means No
written by Last Mover, July 18, 2014 10:21

Funny how that works. The conservative morality play. The one taught from childhood on how easy it is to go astray from impulses that lead to instant gratification.

Restrain yourself they admonish. Freedom is not free. Whatever you do will cost you one way or the other. If not now then later.

This applies to economic opportunity as well. If it looks too good to be true then it is. You get what you pay for. Beware the shams, the cons, the crooks and liars for they shall not inherit the earth.

That everyone breaks the rules when convenient is not a reason for you to break the rules as well.

As Vice President Biden has said, it is time to start treating mortage lending standards like rape cases and stop blaming the victim.

No means no. It makes no difference how you are dressed to lure in a loan with flirtatious come-ons in your off-duty janitor or fast food attire. It makes no difference if you jack up your income tenfold as the mortgage lender gazes in admiration at your fake jewelry.

Don't project victimhood onto the perpetrator America. You ask for these loans. No one forced them on you. You dared stray into the forbidden freeloader territory of the 1% and paid dearly for the mistake, when you could have just said no means no and walked away from the deal.

Now pick yourselves up, dust off the carnage and carry on middle class America. With that slap on wrist, Citigroup will be back in no time as a repeat offender hitting on you for, well you know, sitting there in the waiting area flashing your monetizable ankles at a googling loan service provider.

But don't worry. Now they know no means no.
written by PeonInChief, July 18, 2014 11:45
"Less scrupulous competitors" than Citi? Where?
written by Jay, July 18, 2014 4:43
If someone is convicted, the government could go after their assets through criminal forfeiture. That would be a bigger deterrent than one or two years in a minimum security prison with the chance of parole or selection of accomodations.
This, and other similar instances ...
written by John Puma, July 18, 2014 6:09
of the "Justice" Dept refusing to bring criminal charges, is no less than government collusion in corporate crime.

written by Dryly 41, July 19, 2014 4:21
As usual, Dean has this exactly right. The Obama non-Justice Justice Department's refusal to prosecute these white collar Wall Street fraudsters is more than the lack of deterrence but is actually an incentive to commit fraud.

But why did the Obama administration do this? What's the real reason? After all, Obama is supposed to be a Harvard University law school product, which means he is superior to the rest of us doesn't it?

Could the real reason be that Obama has seen the riches acquired by Bill Clinton? George Packer in the New Yorker indicates that Clinton has scoffed up more than $100 million just in charging for speeches since leaving the White House, and, drawing the contrast with Harry Truman who would never do anything to diminish the Oval Office and live a most frugal life. When it comes to his own personal future acquisition of post-President wealth, it this the motivating factor for Obama's go easy on the banksters as well as his most mild re-regulation of finance such that we will most certainly have another crisis?

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.