Thursday, October 27, 2011

Citigroup's Mortgage Fraud Case

Thursday's Wall Street Journal reported that Citigroup will pay $285MM to settle fraud charges involving the bank's selling mortgage-backed securities to investors while simultaneously shorting some of those same instruments.

This is the same sort of behavior for which Goldman Sachs was excoriated before a Congressional committee, and settled related charges for $550MM.

In Citigroup's case, it seems rather odd to me that the US taxpayer rescued this firm. In effect, rather than let such a management fail, our government saw fit to rescue the management team responsible for such fraud. Something seems very wrong with that.

Wouldn't it have seemed more sensible, given the overcapacity of the financial sector, and the many mistakes made by management in some very large firms, to put those which failed into an orderly Chapter 11 process?

Instead, we have our government using our tax dollars to prop up and revive a management which actively engaged in large-scale fraud of investors in its mortgage-backed securities.

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