Maverick Judge Jed Rakoff Stares Down Citigroup, Wall Street

Rejected $285M settlement is a refreshing show of backbone

     

One of the biggest problems with Wall Street’s malfeasance is how the ruling elite view legal settlements — as little more than an acceptable cost of doing business.

Well, no more.

Thanks to Judge Jed Rakoff, we might see some real regulatory action leading to good old-fashioned investigations, perp walks and even jail for the guilty. I’m not talking just about the Bernie Madoffs or the Raj Rajaratnams, either. I’m talking about potentially CEOs and even entire corporate boards.

Judge Rakoff recently rendered a 15-page decision rejecting the SEC’s $285 million settlement with Citigroup (NYSE:C) over toxic mortgages, calling it “neither reasonable, nor fair, nor adequate, nor in the public interest.” This is important because settlements like these have been a farce for years — little more than the financial equivalent of a parking ticket and having about as much impact.

In fact, in a world where banking secrecy is paramount and investment firms like Goldman Sachs (NYSE:GS), JPMorgan Chase (NYSE:JPM), Bank of America (NYSE:BAC) and others rule the roost, they’re little more than obfuscations of the truth.

The investigations into these banks are toothless or highly secretive at best. Rarely does the public see anything even remotely resembling full disclosure. Instead, we’re supposed to be placated by headlines insinuating that the SEC, the National Futures Association and more than 20 other regulatory agencies are looking out for our best interests.

Who are they kidding?

A Drop in the Bucket

Remember the $550 million fine Goldman was forced to pay for its role in toxic credit default swaps? At the time, it was the largest ever levied.

SEC officials couldn’t stumble over themselves fast enough nor get enough sound bites. I recall lots of PR shots with earnest-looking people evidently proud of themselves for having made Goldman pony up at the time — and the mainstream press loved it.

But there was one tiny problem.

The firm booked $13.3 billion that year. Paying off the SEC — in a settlement that neither admitted nor denied wrongdoing — was an acceptable cost of doing business that amounted to a mere 4% of revenue.

The proposed Citi settlement was much the same. It would have required Citi to give up $160 million of alleged ill-gotten profits, $30 million of interest and a $95 million kicker for negligence. Bear in mind, Citi reported full-year net income of $10.6 billion on revenue of $60.5 billion in 2010, which means that, like the Goldman fine, the settlement is a drop in the bucket at a mere 1.5% of net income.

I think Judge Rakoff’s ruling has been a long time coming, and I love the fact that he specifically called out the Citi settlement as too lenient — especially when it also potentially allows Citi to skate on reimbursing investors for the $700 million the firm lost as part of its toxic mortgage trading.

You might not realize this, but private investors cannot bring securities claims based on negligence. In my mind, they should be able to, but for now this is the way the law stands.

The way I see it, Rakoff’s decision finally gets at the core of what caused the financial crisis: toothless regulators beholden to the very powerful elite they were supposed to keep in check.

I am all too glad to see him show the public the first glimpse of backbone we’ve seen yet. Washington, are you watching and listening?

 
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