December 19, 2011
The next time you file your tax return, make an estimated tax payment, or wince at the withholdings from your paycheck, keep in mind that at least some of your tax dollars go toward protecting us all from financial crime and making our markets freer, fairer, and more open. Yup, that's the mission of the Securities & Exchange Commission, better known as the SEC. And boy, have they been busy.
Remember the financial crisis? That whole fiasco of banks lending to anybody for anything that ended up with US taxpayers bailing out big banks, brokerages, and insurance companies? Seems that there ought to be someone answering for the miscalculation, mismanagement, and outright fraud that sent our economy into recession and sent millions to the unemployment line. This is where the SEC comes in. Yes, it's true that the SEC did not protect our economy from the financial practices that brought on the crisis (no more than they protected investors from swindler Bernard Madoff). But at least the SEC is out there rounding up the fraudulent financial architects who built the houses of cards that collapsed in 2007 and 2008, right? Well, sort of.
Two weeks ago a Federal judge rejected the SEC's proposed $285 million mortgage-fraud settlement with Citigroup as "pocket change." He was right, of course. Even though shareholders have seen their stock slide more than 95% since mid-2007, the total market value of Citigroup still stands at $76 billion and Citi's revenues this year will likely top $100 billion. A fraud settlement for only 7% of last quarter's profits is just a cost of doing business. Or, put another way: a cost of doing fraud.
The SEC is hardly the only Federal bulldog. Witness the FDIC's $64 million settlement with former executives of Washington Mutual (WaMu). That settlement represents about 7 cents on the dollar of what FDIC asked for in its lawsuit. Some perspective: WaMu's 2008 collapse gets the trophy for the biggest US bank failure ever. More perspective: WaMu's CEO was paid over $100 million from 2003-2008, floating away on a $15 million golden parachute from the smoking wreckage of his bank. Yesterday's NY Times piece by Gretchen Morgenstern sums it up in a headline: "Slapped Wrists at WaMu."
Morgenstern's article notes that the FDIC was concerned that a larger settlement would reduce the assets available to stakeholders from the WaMu collapse. But is it only about money? Should there be no concern for delineating right and punishing wrong? And about justice: do we let those we suspect of serious fraud settle for a few pennies from the proceeds of their crimes? The bank robber who pays back 10% of what he takes does not get to skip jail. Neither should bankers whose reckless acts wreck their banks.
(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author's opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).