The total fine of $158 million, after Citi got billions in support, is nothing, a mere rounding error on one of their quarterly reports. A simple cost of doing business...
The key take-away is: no one at Citi went to jail for fraud.
Bingo! Give this man a cookie. It's bullshit that these guys perpetrated outright fraud like this, and - at the end - nobody was really punished, even though they basically admitted they were guilty.
This shit is what gives capitalism a bad name... I'm as much a proud anarcho-capitalist, Ayn Rand reading, Ludwig von Mises quoting, Gary Johnson supporting libertarian as the next guy, and it pains me to get beat up for believing in capitalism because of these crooks at Citi and BoA, when nobody is being punished for their fraud. Capitalism does not inherently entail accepting fraud like this, but every time these asshats get away with this kind of behavior, it reinforces all the negative images that people have about capitalism.
If we're going to accept the idea that government (or something like government) is to protect property rights and enforce a "rule of law" that protects against this kind of fraud, then our government needs to step the %$!# up and prosecute some of these assholes.
In a corporate case it's hard--both legally and practically--to pinpoint someone of guilty mind performing guilty acts beyond reasonable doubt. That's why the corporation is a "legal person" that can itself be legally responsible for stuff and get sued: corporate personhood arose partially as a solution to this problem. This has borne out in legal practice, where even when there's obvious blood in the water, prosecutors have trouble convicting all but a few top guys.
Anyway, I also find your profanity-laden vitrol unbecoming of discussion on this site.
EDIT: I guess it's now considered a sin to state an easily-verifiable truth and ask for polite discourse.
> In a corporate case it's hard--both legally and practically--to pinpoint someone of guilty mind performing guilty acts beyond reasonable doubt.
What? We solved this problem a long time ago. Corporations are beneficial because they provide liability protection to the employees. That's it.
In the case of fraud, we decided the corporate veil should be lifted.
So all you have to do is go through each individual in the corporation, see what laws they broke, and go after them. It's very straightforward.
The problems occur when the corporations received ungodly amounts of money from the government, when a government "appoints" individuals to positions within the corporation, and when there's quite a bit of collusion between the corporate entity and the government.
At that point, the government has very little incentive to prosecute and the corporate entity has even more incentive to commit fraud.
"Limited liability" and "corporate veil" refer to shareholder protection, not employee protection. Traditionally shareholders, not employees, were on the hook for lawbreaking.
Anyway, you say something like "go through each individual in the corporation, see what laws they broke, and go after them" as though it's easy. In practice prosecutors have a hard time doing this even when they want to for the reasons I just said. Some of the Enron guys were acquitted by a jury, for example.
That's why the corporation is a "legal person" that can itself be legally responsible for stuff and get sued: corporate personhood arose partially as a solution to this problem.
Yes, which should lead one to question whether or not a State created legal fiction like a "corporation" should exist to protect individuals from responsibility for their actions.
Anyway, I also find your profanity-laden vitrol unbecoming of discussion on this site.
That's too bad, but I'm not changing the way I go about things. If pg were to post and say "profanity is no longer allowed here," then I'd have a decision to make, but otherwise, I choose my words to suit the situation at hand and to suit my personality.
You make it sound like it's just a few crooks at Citi and BofA. I believe unfettered from regulations, transparency and oversight, this is what capitalism devolves to. I'm a liberal, but I hate too much regulation. I do think, however, the pendulum has swung very far in the lack of the features I mentioned above.
The US is definitely in a weird place. On the one hand, financial deregulation allowed the greed on Wall St to cause the 2008 global meltdown, and no real regulations have been put (back) in place to stop the next one. But, on the other hand, we have the government regulating things like the size of sugary drinks.
The trend seems to be this: more regulation on people and less on corporations. That is a disturbing trend, for sure. Unfortunately, even though I'm a liberal, I feel that neither party will make this better in the short or long term.
You make it sound like it's just a few crooks at Citi and BofA.
No, but by the same token, it's hardly the case that all business leaders in a capitalist society are crooks. This is just particularly galling because it's so blatant and because they're basically saying "yeah, we're guilty" and still no one is being punished.
I believe unfettered from regulations, transparency and oversight, this is what capitalism devolves to.
But we're not in a system that's unfettered from regulations, transparency and oversight. At least not in the sense that we don't have a "government" that purports to provide those things. But the current system obviously doesn't work, so I'm not sure how more government, bureaucracy, rules, regulations, etc. are going to fix anything, when it's clear that certain groups that break the law with (near) impunity.
I'm a liberal, but I hate too much regulation. I do think, however, the pendulum has swung very far in the lack of the features I mentioned above.
I think lack of enforcement (which I attribute to cronyism and corruption) are more then problem than lack of rules, and laws, and regulations. This is one (but not the only) reason I am so skeptical of government, because the more power you grant it, the more there seems to be temptation for it to devolve, along with the "titans of industry", into this quasi-fascist, corrupt, cronyist system. sigh
Times like these, I tend to think it almost doesn't matter what political ideology one believes in... you almost just have to accept that the system is always going to decay and become corrupt eventually, and you just have to scrap the whole thing, throw it out and start over.
But we're not in a system that's unfettered from regulations, transparency and oversight.
But we've cross a line. On this side of the line, we are in grave risk of the type of thing that happened in 2008.
I phrased it in a black and white way, but this type of thing is never black and white. It's a continuum and as I said, we're too far to one side right now, for the corporate side of things.
> But we're not in a system that's unfettered from regulations, transparency and oversight. At least not in the sense that we don't have a "government" that purports to provide those things. But the current system obviously doesn't work, so I'm not sure how more government, bureaucracy, rules, regulations, etc. are going to fix anything, when it's clear that certain groups that break the law with (near) impunity.
They break the law with impunity because prosecutors know that, due to out of date and/or weakly stated rules and legislation, they would never get a conviction - an indictment and trial would waste everyone's time, money, and reputation. Because the laws are still not worded well enough to overlap perfectly with the crimes being committed. Hence more legislation and rules.
Regulation wasn't about putting people in jail: it was about requirements for stock listings and access to federal money. That's a far more significant deterrent when all the company cares about is cash.
Regulations worked: it was when we unravelled existing regulation that things went belly up in almost exactly the same way they had gone belly-up the time before, inspiring the regulation in the first place. Cause-and-effect are a bitch sometimes.
Well, you could just fund some of the arms better, re-instate glass steagal, and then reduce the amount of funding corporations can put into elections.
That would at least lead to some reduction in the ability of money to influence things.
But it's still a horrendously complex thing to do, a revolution doesn't really do much other than bring the complexity level down for a while till all the lessons are learned again and the same problems resurface with new actors.
It's worth pointing out that the market already put Citi out of business, but government stepped in and rewarded them for fraud and interfered with the market. Citigroup was insolvent in November 2008, even after receiving $25 billion in federal TARP funds.
I find it puzzling that you support more government involvement despite government directly funding a company you consider fraudulent.
Because I want a continually functioning economy more than I want to punish Citi? Systematic risk is real, and should be managed on a system-wide level.
In my ideal fantasy world, it is managed with some version of chaos monkey that randomly kills companies to see if the economy crashes ;-)
Surely these guys were perfect anarcho-capitalists.
No, being an An-Cap does not necessarily mean a "profit at all costs mentality." Anarcho-Capitalism, as an ideology, embraces the idea of private property rights, enforcement of contracts, and rejects fraud as a mechanism for achieving one's ends.
Some of these crooks may have chosen the An-Cap label for themselves, but I damn sure don't claim them, FWIW. And neither do most of the other An-Caps I know.
Guns, pitchforks, lynch mobs, Wild West type shit, no? (I don't want that.)
It sounds like you've already made up your mind that it could only be that way, but see my response above if you are actually interested in some more considered discussion of the topic.
I'll just say that I have at least as much faith that people can voluntarily and peacefully reach a workable agreement without using a construct like "The State" as I am that they can do so by using such a construct. In either case, human nature is the ultimate limiting factor.. the State will never be more morally pure, or have more of conscience, etc., than the people who constitute it, IMO.
I don't really have the time or space to right a book here, and - to be quite honest - there are people who are much better equipped to answer those questions than I am. If you're honestly curious, and not just asking that in a sarcastic fashion, I'd suggest a few resources to learn more about the AnCap / libertarian approach:
Do you have a very concise source that will answer the most immediate stumbling block to even considering this idea: how will you enforce contracts? Every time I ask I either get pointed to web sites that probably answer my question somewhere (but I'm not the one selling anything here so I don't feel the onus to do most of the work) or told about private contract enforcement agencies. Since the bulk of what government is is violent force or threat thereof, wouldn't this just be privatized rent-a-governments?
However, I don't feel it does a very good job. It basically devolves into private security provided a la mafia protection money or what's been seen in Sao Paolo / Rio de Janeiro with the cops enforcing payments from the populace for keeping the riff-raff out, while running their own schemes. Likewise, I can very much see the whole law system being subverted to benefit those providing the most cases (thus helping the bottom line) or benefiting a certain plaintiff over another, like with the eastern district of Texas handling so many patent cases.
Overall, the response seems incredibly wishy-washy with little thought paid to the ways the system can be significantly subverted.
They took on immense risk in order to squeeze all the profit they could out of the system.... but faced no consequences as a result of losing on their bets. $45 billion in two installments kept them afloat.
Wouldn't a anarcho-capitalist demand that a market loser like Citi pay the price?
This is completely without context. I mean I hate to be defending the govt. but at the time, they basically were told, "give us cash or the world burns."
This by the same guys who helped slowly get all the checks and balances to prevent precisely their behavior, removed.
It was the government that continued the existence of a terrible system because the most vulnerable were held hostage by the financial institutions. Which are now once again slowly fighting to get their rules re instated.
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.
Isn't this more a case of state capitalism, or corporate capitalism, or just plain corporatism?
I keep seeing the word "capitalism" used but rarely with any assigned definition, as if there were but one universal and agreed-upon meaning.
Me, I see these kinds of shenanigans more as an indictment of mixed economies and statism.
You'll have to excuse my ignorance on politics/government, but under a more libertarian/less government rule who is it that prevents this type of situation from occurring? That is, who ensures that sophisticated financial fraud does not occur? Assuming a small government, would it just be individual whistle blowers up against corporations in court?
They do get prosecuted. Except they carry so much legal firepower, and then hide behind complexity at a level where the govt. has to consider which cases to go after.
See the sec going after goldman for example.
Further, the govt in many cases has been co-opted or convinced that should they go after these guys, the economy would collapse. I believe the state wide cases against the mortgage companies foreclosure mills was a close example.
I don't have the details on the tip of my fingers anymore, but in essence the mills were getting sued in every state, and were negotiating.. Perhaps to get the suits bundled together I think. At which point they introduced a clause which stated that they would not be sued for anything else after this case, on this matter.
Essentially protecting them from further prosecution/investigation. If it weren't for a handful of DAs who said no, particularly the NY DA office, it would have passed.
And then there's regulatory capture and resources being reduced to investigative bodies.
I used to follow this mess for a while, and there are a lot of prosecutions and maneuvers and counter maneuvers going on.
If you are wondering why they aren't being sued I suggest doing some research, rollingstone alone will have some great articles, and if you would like the big picture blog, carries some old articles, and is always tracking the crap the finance industry is pulling.
There is a lot going on - make no mistake. It's just that the govt really is the underdog, and is sadly the first one to get bashed on HN.
You understand what the fraud being perpetrated is right?
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.
Many of the lenders were complicit in fudging numbers to make people qualify for loans they should not have qualified for. They are just as responsible, if not more so than the borrowers.
Originators lend the money and sell the loan. It is agreed that the originate to sell model has perverse incentives. However, the point is that home borrowers are not the victims of this fraud. The people who bought securities backed by these loans are the victim of the fraud.
The homeowners got the money, the investors lost the money because the homeowners can't pay it back. The originators and the securitizers (Citi) facilitated the fraud, because they got their cut as the money passed through the pipeline.
Homeowners were mislead as to the viability of the housing market & the concept that a house was a great investment. Many wanted to get in before it got "too expensive". Many of the loan products on the market were misleading as far as the actual costs and mortgage brokers who were hungry to get people into houses often glossed over explaining the viability of the loan.
Some homeowners were stupid, but most people are their own unpaid, untrained, part time financial adviser. The banking, investment & real estate industries have extremely well paid employees who should know better and are paid as though they do.
Here's a question: If Citi was selling out-of-compliance loans to Fannie and Freddie and the FHA, why aren't those institutions forcing Citi to buy those loans back? Likewise JP Morgan, Bank of America, etc.
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.
Hunt still remembers her first impressions of CitiMortgage’s O’Fallon headquarters, a complex of three concrete-and-glass buildings surrounded by manicured lawns and vast parking lots. Inside are endless rows of cubicles where 3,800 employees trade e-mails and conduct conference calls. Hunt says at first she felt like a mouse in a maze.
Accountability is a tough thing to manage when companies get to this stage. The larger the institution, the less accountable every individual within that institution tends to act. Organizational architecture pushes the risk downstream while pulling the reward upstream.
Workers had a powerful incentive to push mortgages through the process even if flaws were found: compensation. The pay of CitiMortgage employees all the way up to the division’s chief executive officer depended on a high percentage of approved loans, the government’s complaint says.
How does this organizational structure differ from the pyramid scheme, or MLM? With scrutiny, it really doesn't. This organizational structure is what has kept the Realtor-Broker model perpetuating for as long as it has: risk essentially becomes decoupled from the reward for Brokers; they can push their Realtors to pursue risky prospects because they get a cut every time. Furthermore, when Realtors collude with their Brokers, they have collective incentive to both negotiate prices upward and take as large of a cut as possible of that inflated amount. Missing from the equation is a system of checks and balances.
CitiMortgage mortgage brokers' compensation being tied to volume means that turnover in the housing market is something they aim(ed) for. There is something seriously wrong with this model.
The fact that nobody in the NAR or mortgage industry is being held accountable is puzzling.
> The larger the institution, the less accountable every individual within that institution tends to act.
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.
> "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."
When you consider the compensation and review structure at financial institutions, it was absolutely inevitable.
Those who didn't participate, even in the tiny slice that was their domain, would have been pushed aside or replaced in favor of someone who would.
Big Business simply doesn't allow for under-performance. Even on legal/moral grounds. Those are long-term concerns in a world that measures only short-term performance.
Complex systems have unpredictable and often undesirable emergent properties that are not immediately obvious at design time. Engineers have always known this. That's why after running all the simulations, they still use good old-fashioned wind tunnels, for example.
> The argument that gets repeated ad nauseum, that things like this are the fault of "a few bad apples", is just plain false.
Philip Zimbardo, the architect of the Stanford Prison Experiment and author, more recently, of The Lucifer Effect, argues that it's not "bad apples" that spoil the barrel, but a "bad barrel" that spoils the apples.
Here's Zimbardo's TED talk on what makes people do evil:
It isn't three buildings. It's a three story building (and half a basement where they stuck me).
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.
If you work in finance, you should know that raises and bonuses depend partially on company results, partially on individual results, and mostly on whether or not you have a counter-offer from somewhere better. Why should they give you a raise if you're not going to leave without one?
If you work in finance, you should know that raises and bonuses depend partially on company results, partially on individual results, and mostly on whether or not you have a counter-offer from somewhere better. Why should they give you a raise if you're not going to quit?
Can we get a version of this story with a less editorialistic headline?
This is clearly a "fits the narrative" type headline, hardy individual versus big bad bank; and I don't trust stories when they fit popular narratives.
Tell me the facts of the case, Bloomberg, I'll make up my own mind how I want to feel about it.
Actually that won't be possible. You are coming to this story at the end of the narrative which has taken years to reach this far.
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.
It's a great story however skeptical of these retrospective views. I wonder how much of her motives were driven by protecting the mortgage holders and the economy; or protecting her career prospects.
Saying this, Hunt seems much more deserving than the former banker in this article:
It sickens me that Citigroup acknowledged they fraudently bought loans without the required documentation and even in some cases said documentation was forged or incomplete and all they got was a $185 million slap on the wrist. What makes matters worse is that the people who have these mortgages are completely oblivious as to what is going on. What makes the whole situation even more laughable is the fact they got billions in bailout cash and yet were only fined $185 million.
They didn't deny the allegations, why didn't someone go to jail over this? They breached mortgage regulations and by the sounds of it most of their purchased loans were fraudelent. Disgusting.
Even after the housing bubble popped it surprises me that banks are still doing these kinds of things. The saying history repeats itself couldn't be more true even if it tried.
58 comments
[ 3.4 ms ] story [ 108 ms ] threadIs it the idea that folks always have about how "if you go up against company x's legal department you'll get destroyed no matter what"?
One lady winning doesn't really change the odds in general.
The key take-away is: no one at Citi went to jail for fraud.
This shit is what gives capitalism a bad name... I'm as much a proud anarcho-capitalist, Ayn Rand reading, Ludwig von Mises quoting, Gary Johnson supporting libertarian as the next guy, and it pains me to get beat up for believing in capitalism because of these crooks at Citi and BoA, when nobody is being punished for their fraud. Capitalism does not inherently entail accepting fraud like this, but every time these asshats get away with this kind of behavior, it reinforces all the negative images that people have about capitalism.
If we're going to accept the idea that government (or something like government) is to protect property rights and enforce a "rule of law" that protects against this kind of fraud, then our government needs to step the %$!# up and prosecute some of these assholes.
Anyway, I also find your profanity-laden vitrol unbecoming of discussion on this site.
EDIT: I guess it's now considered a sin to state an easily-verifiable truth and ask for polite discourse.
What? We solved this problem a long time ago. Corporations are beneficial because they provide liability protection to the employees. That's it.
In the case of fraud, we decided the corporate veil should be lifted.
So all you have to do is go through each individual in the corporation, see what laws they broke, and go after them. It's very straightforward.
The problems occur when the corporations received ungodly amounts of money from the government, when a government "appoints" individuals to positions within the corporation, and when there's quite a bit of collusion between the corporate entity and the government.
At that point, the government has very little incentive to prosecute and the corporate entity has even more incentive to commit fraud.
Anyway, you say something like "go through each individual in the corporation, see what laws they broke, and go after them" as though it's easy. In practice prosecutors have a hard time doing this even when they want to for the reasons I just said. Some of the Enron guys were acquitted by a jury, for example.
Yes, which should lead one to question whether or not a State created legal fiction like a "corporation" should exist to protect individuals from responsibility for their actions.
Anyway, I also find your profanity-laden vitrol unbecoming of discussion on this site.
That's too bad, but I'm not changing the way I go about things. If pg were to post and say "profanity is no longer allowed here," then I'd have a decision to make, but otherwise, I choose my words to suit the situation at hand and to suit my personality.
This is human nature and has to do with the culture of lrage organisations, and has nothing whatever to do with capitalism per se.
The US is definitely in a weird place. On the one hand, financial deregulation allowed the greed on Wall St to cause the 2008 global meltdown, and no real regulations have been put (back) in place to stop the next one. But, on the other hand, we have the government regulating things like the size of sugary drinks.
The trend seems to be this: more regulation on people and less on corporations. That is a disturbing trend, for sure. Unfortunately, even though I'm a liberal, I feel that neither party will make this better in the short or long term.
No, but by the same token, it's hardly the case that all business leaders in a capitalist society are crooks. This is just particularly galling because it's so blatant and because they're basically saying "yeah, we're guilty" and still no one is being punished.
I believe unfettered from regulations, transparency and oversight, this is what capitalism devolves to.
But we're not in a system that's unfettered from regulations, transparency and oversight. At least not in the sense that we don't have a "government" that purports to provide those things. But the current system obviously doesn't work, so I'm not sure how more government, bureaucracy, rules, regulations, etc. are going to fix anything, when it's clear that certain groups that break the law with (near) impunity.
I'm a liberal, but I hate too much regulation. I do think, however, the pendulum has swung very far in the lack of the features I mentioned above.
I think lack of enforcement (which I attribute to cronyism and corruption) are more then problem than lack of rules, and laws, and regulations. This is one (but not the only) reason I am so skeptical of government, because the more power you grant it, the more there seems to be temptation for it to devolve, along with the "titans of industry", into this quasi-fascist, corrupt, cronyist system. sigh
Times like these, I tend to think it almost doesn't matter what political ideology one believes in... you almost just have to accept that the system is always going to decay and become corrupt eventually, and you just have to scrap the whole thing, throw it out and start over.
But we've cross a line. On this side of the line, we are in grave risk of the type of thing that happened in 2008.
I phrased it in a black and white way, but this type of thing is never black and white. It's a continuum and as I said, we're too far to one side right now, for the corporate side of things.
They break the law with impunity because prosecutors know that, due to out of date and/or weakly stated rules and legislation, they would never get a conviction - an indictment and trial would waste everyone's time, money, and reputation. Because the laws are still not worded well enough to overlap perfectly with the crimes being committed. Hence more legislation and rules.
Regulations worked: it was when we unravelled existing regulation that things went belly up in almost exactly the same way they had gone belly-up the time before, inspiring the regulation in the first place. Cause-and-effect are a bitch sometimes.
But it's still a horrendously complex thing to do, a revolution doesn't really do much other than bring the complexity level down for a while till all the lessons are learned again and the same problems resurface with new actors.
I find it puzzling that you support more government involvement despite government directly funding a company you consider fraudulent.
In my ideal fantasy world, it is managed with some version of chaos monkey that randomly kills companies to see if the economy crashes ;-)
No, being an An-Cap does not necessarily mean a "profit at all costs mentality." Anarcho-Capitalism, as an ideology, embraces the idea of private property rights, enforcement of contracts, and rejects fraud as a mechanism for achieving one's ends.
Some of these crooks may have chosen the An-Cap label for themselves, but I damn sure don't claim them, FWIW. And neither do most of the other An-Caps I know.
It sounds like you've already made up your mind that it could only be that way, but see my response above if you are actually interested in some more considered discussion of the topic.
I'll just say that I have at least as much faith that people can voluntarily and peacefully reach a workable agreement without using a construct like "The State" as I am that they can do so by using such a construct. In either case, human nature is the ultimate limiting factor.. the State will never be more morally pure, or have more of conscience, etc., than the people who constitute it, IMO.
http://en.wikipedia.org/wiki/Anarcho-capitalism
http://www.mises.org
http://en.wikipedia.org/wiki/Murray_Rothbard
http://www.lewrockwell.com/
http://www.ozarkia.net/bill/anarchism/faq.html
http://www.anti-state.com/
However, I don't feel it does a very good job. It basically devolves into private security provided a la mafia protection money or what's been seen in Sao Paolo / Rio de Janeiro with the cops enforcing payments from the populace for keeping the riff-raff out, while running their own schemes. Likewise, I can very much see the whole law system being subverted to benefit those providing the most cases (thus helping the bottom line) or benefiting a certain plaintiff over another, like with the eastern district of Texas handling so many patent cases.
Overall, the response seems incredibly wishy-washy with little thought paid to the ways the system can be significantly subverted.
Wouldn't a anarcho-capitalist demand that a market loser like Citi pay the price?
This by the same guys who helped slowly get all the checks and balances to prevent precisely their behavior, removed.
It was the government that continued the existence of a terrible system because the most vulnerable were held hostage by the financial institutions. Which are now once again slowly fighting to get their rules re instated.
Isn't this more a case of state capitalism, or corporate capitalism, or just plain corporatism?
I keep seeing the word "capitalism" used but rarely with any assigned definition, as if there were but one universal and agreed-upon meaning.
Me, I see these kinds of shenanigans more as an indictment of mixed economies and statism.
See the sec going after goldman for example.
Further, the govt in many cases has been co-opted or convinced that should they go after these guys, the economy would collapse. I believe the state wide cases against the mortgage companies foreclosure mills was a close example.
I don't have the details on the tip of my fingers anymore, but in essence the mills were getting sued in every state, and were negotiating.. Perhaps to get the suits bundled together I think. At which point they introduced a clause which stated that they would not be sued for anything else after this case, on this matter.
Essentially protecting them from further prosecution/investigation. If it weren't for a handful of DAs who said no, particularly the NY DA office, it would have passed.
And then there's regulatory capture and resources being reduced to investigative bodies.
I used to follow this mess for a while, and there are a lot of prosecutions and maneuvers and counter maneuvers going on.
If you are wondering why they aren't being sued I suggest doing some research, rollingstone alone will have some great articles, and if you would like the big picture blog, carries some old articles, and is always tracking the crap the finance industry is pulling.
There is a lot going on - make no mistake. It's just that the govt really is the underdog, and is sadly the first one to get bashed on HN.
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.
The bank lost its papers and forged them for gods sakes. That's a differrent level of wrong doing altogether!
The homeowners got the money, the investors lost the money because the homeowners can't pay it back. The originators and the securitizers (Citi) facilitated the fraud, because they got their cut as the money passed through the pipeline.
Some homeowners were stupid, but most people are their own unpaid, untrained, part time financial adviser. The banking, investment & real estate industries have extremely well paid employees who should know better and are paid as though they do.
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.
Accountability is a tough thing to manage when companies get to this stage. The larger the institution, the less accountable every individual within that institution tends to act. Organizational architecture pushes the risk downstream while pulling the reward upstream.
Workers had a powerful incentive to push mortgages through the process even if flaws were found: compensation. The pay of CitiMortgage employees all the way up to the division’s chief executive officer depended on a high percentage of approved loans, the government’s complaint says.
How does this organizational structure differ from the pyramid scheme, or MLM? With scrutiny, it really doesn't. This organizational structure is what has kept the Realtor-Broker model perpetuating for as long as it has: risk essentially becomes decoupled from the reward for Brokers; they can push their Realtors to pursue risky prospects because they get a cut every time. Furthermore, when Realtors collude with their Brokers, they have collective incentive to both negotiate prices upward and take as large of a cut as possible of that inflated amount. Missing from the equation is a system of checks and balances.
CitiMortgage mortgage brokers' compensation being tied to volume means that turnover in the housing market is something they aim(ed) for. There is something seriously wrong with this model.
The fact that nobody in the NAR or mortgage industry is being held accountable is puzzling.
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.
When you consider the compensation and review structure at financial institutions, it was absolutely inevitable.
Those who didn't participate, even in the tiny slice that was their domain, would have been pushed aside or replaced in favor of someone who would.
Big Business simply doesn't allow for under-performance. Even on legal/moral grounds. Those are long-term concerns in a world that measures only short-term performance.
Philip Zimbardo, the architect of the Stanford Prison Experiment and author, more recently, of The Lucifer Effect, argues that it's not "bad apples" that spoil the barrel, but a "bad barrel" that spoils the apples.
Here's Zimbardo's TED talk on what makes people do evil:
http://www.youtube.com/watch?v=OsFEV35tWsg
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 is clearly a "fits the narrative" type headline, hardy individual versus big bad bank; and I don't trust stories when they fit popular narratives.
Tell me the facts of the case, Bloomberg, I'll make up my own mind how I want to feel about it.
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.
Saying this, Hunt seems much more deserving than the former banker in this article:
http://gawker.com/5553737/
i'll hold up my sarcasm sign in case you missed it.
edit: the 'by bloomberg' remark was meant to convey that it wasn't the OP who editorialized things.
They didn't deny the allegations, why didn't someone go to jail over this? They breached mortgage regulations and by the sounds of it most of their purchased loans were fraudelent. Disgusting.
Even after the housing bubble popped it surprises me that banks are still doing these kinds of things. The saying history repeats itself couldn't be more true even if it tried.