Woman Who Couldn’t Be Intimidated by Citigroup Wins $31 Million

I'm reading Liars and Outliers, by Bruce Schneier, and this is one of the big points he makes in his discussion of how trust and security balance to allow society to function.

There is a huge difference between personal morality and organizational morality, for instance. Even if every person working for Citigroup had been basically moral (in the sense that they wouldn't have committed fraud alone) this still could have happened, and probably would have.

The argument that gets repeated ad nauseum, that things like this are the fault of "a few bad apples", is just plain false. The bad apples certainly exist (especially given that our society and economy reward anti-social behaviors), but the incentive structure is the real problem. It's systemic, there's no getting around that fact.

Almost all CitiMortgage employees get merit based bonuses. My department, on the other hand, gets shafted. Seven years working there and two years programming for them and running Oracle reports and I didn't even get a raise last year. (And now I see why since we lost so much money.)

Business has really slowed down and most people work in Lost Mitigation now.

I need out!

</rant> =) Sorry, just had to get that off my chest. Working at the O'Fallon headquarters of CitiMortgage is not where I want to spend my career. It's not even where I want to spend my Friday.

This shit is what gives capitalism a bad name... I'm as much a proud anarcho-capitalist, Ayn Rand reading, Ludwig von Mises quoting, Gary Johnson supporting libertarian as the next guy, and it pains me to get beat up for believing in capitalism because of these crooks at Citi and BoA, when nobody is being punished for their fraud. Capitalism does not inherently entail accepting fraud like this, but every time these asshats get away with this kind of behavior, it reinforces all the negative images that people have about capitalism.

If we're going to accept the idea that government (or something like government) is to protect property rights and enforce a "rule of law" that protects against this kind of fraud, then our government needs to step the %$!# up and prosecute some of these assholes.

Citi passed fraudulent mortgages on to investors. That is, either homeowners or third party mortgage brokers fraudulently obtained loans to which they otherwise would not have been able to get. The victim of this fraud is not the homeowner, but the lender.

Citi became culpable only when they bought loans that a prudent man would have recognized as obtained through fraud and packaged and sold them as securities.

Now if you're willing to send officers of Citi to jail for complicity in a fraud perpetrated by and large by home owners and small time mortgage brokers, who also were the primary beneficiaries, you've got to be willing to send them to jail as well.

I don't know the answer and there might be a good one.

But I can't help noticing that these institutions were "too big too fail", that substantial sums were advanced and pledged to keep them afloat, and that their preservation has been an important consideration of Fed policy for going on five years.

It isn't too hard to imagine a decision to accept additional losses among the GSEs and federal housing agencies for the higher purpose of keeping the US financial system afloat. Please note that Fannie and Freddie are something like $100 billion in the hole to the Federal government, financial catastrophes that dwarf any bailout extended and yet have somehow escaped the public attention proportionate to their amazing losses. (Indeed we have politicians advocating still greater losses for them as part of efforts to settle the housing market.)

These banks are big beyond the wisdom or fortitude of public officials to conduct prudent and and equitable policy. If banks that big exist, they'll earn rents based on their regulatory position, and their executives' compensation be essentially free from any market discipline. And those banks and executives will provide political contributions and favors and soft landings to politicians and regulators whose views will matter so much to their profitability. It's an "iron triangle" secured by the governments' regulatory monopoly and the flow of capital through the system.

The expansion of the government into housing finance through the GSEs and various guarantors only makes the situation worse.

There is no doubt that smaller banks lead to higher capital costs and accepting lower slower economic growth. There are real economies of scale in these businesses. But realizing that potential contribution requires an intelligence and integrity of regulation, over sustained periods of time, that is simply beyond the institutional capacities of public institutions. They thus accumulate excess risks, which translate to costs, which ultimately consume their promised potential and leave us with net losses. And political distortions to boot.

There are few on this board more conservative than I. But US banking policy must be put into a place where no one can fail to know that the failure of any US financial institution will result in losses for its capital providers, equity and debt, with no possibility of public intervention on any basis. The freedom of our economy and polity must be distorted to the extent of our deviation from that state.

Just read the article. The headline is one sentence. You have to evaluate the whole thing anyway.

It's also a tortured story - complex, with one narrator actively trying to cover his tracks. And This article is more for adding a human angle to what is extremely tortured and boring reading.

For you to get the facts at this stage is not going to happen from an article like this. You would need to google gumshoe a bit to read up for that.