7 Reasons Consumers Won't Love the $7 Billion Citigroup Deal

The Justice Department's settlement with Citigroup was finally announced Monday. A $7 billion settlement against a too-big-to-fail bank? What’s not to love?

We’ll answer that with another question: If the settlement that the Justice Department just negotiated with Citigroup is as punitive, why did Citigroup’s stock go up when the deal was announced? Reasons for the rise include the report of a good second quarter – a report that just happened to be released on the same day this deal was announced.

Not bad for a bank that just settled fraud charges, recently failed a Federal Reserve stress test, and wouldn't even exist if the American people hadn't bailed it out.

Apparently the fraud settlement was anything but a mortal blow for the bank, an entity created by the actions of both Democrats and Republicans in Washington. Citigroup was subsequently saved from collapse with a $45 billion emergency loan from the government, after participating in the crime wave that helped precipitate a financial crisis. (More background here.)

It wasn't just Citigroup. The stock market overall had a good day Monday. The American people, not so much. As we’ll see, the “consumer relief” in these deals tends to prove elusive. The government isn't doing much to help. Of the $38.5 billion set aside to help homeowners in 2009, the Obama administration has only spent $10 billion (as of the January 2014 Troubled Asset Relief Program (TARP) Inspector General’s Report).

These agreements leave criminal bankers with no incentive to mend their ways. They reinforce the message that they won't be prosecuted, and allow them to keep their ill-gotten gains while shareholders (many of whom were defrauded by the bank itself) pick up the tab for their wrongdoing. And they allow a too-big-to-fail bank with an extensive record of fraud to remain a systemic threat.

If you’re looking for a silver lining, here it is: The Obama administration is clearly feeling the heat about its treatment of Wall Street. Otherwise the rhetoric wouldn’t be quite as stern and the settlement figures would probably be lower. But that’s not a reason for the public to settle for deals that leave perverse incentives – and dangerous banks – in place.

Here are seven reasons why the much-touted new deal isn’t everything it’s cracked up to be, especially for consumers.

1. No individual prosecutions were announced.

They have the evidence, including damning emails that reveal that Citigroup employees knew they were peddling highly defective mortgages as AAA-rated and materially misrepresenting them to investors. Consider this sentence, one of many such statements in the Justice Department's filing: "Citigroup’s due diligence personnel reevaluated certain of the vendor’s loan grades and directed the due diligence vendor to change some of those grades ..."

Who, exactly? Wasn't that evidence of an intent to defraud?

Not a single Citi executive or employee is being charged with a crime as of this writing. In fact, no major banker has been. By contrast, more than 1,000 bankers were prosecuted and convicted in the savings and loan scandal of the 1980s – a crime wave that represented much less fraud than that committed by America’s big banks in the run-up to the 2008 financial crisis.

2. The Justice Department appears to be offering false hopes of prosecution.

Attorney General Eric Holder says that this doesn’t preclude the possibility of criminal indictments. But he said the same thing when the $13 billion settlement with JPMorgan Chase was announced. That was eight months ago, in November of 2013.

“The bank’s misconduct was egregious,” the Attorney General said in Monday’s announcement. But “banks” don’t commit crimes. Bankers do.

There’s no deterrence in this deal – and, as David Dayen has observed, the usual suspects are up to some of their old tricks. It will take some prosecutions to change that. Let's hope the Attorney General plans to follow through.

3. Citigroup seems to have negotiated the government to a draw.

Citi wants some bloggers and other financial types to buy the notion that it sold a much smaller number of mortgage-backed instruments than JPMorgan Chase, which came to a $13 billion deal. (Better Markets, an excellent bank reform organization, filed suit against that deal, maintaining that it was conducted with a lack of transparency that is against the public interest.)

But Citi wasn't a minor player in the mortgage game. As Ben Protess, Jessica Silver-Greenberg, and Michael Corkery noted in the New York Times, “Citigroup ... sold roughly half as many mortgage securities as JPMorgan had through its various subsidiaries.” (Their article addresses the public relations timing of today’s announcement.) That makes the $7 billion figure roughly proportional. So, while the Justice Department told reporters it rejected Citi’s argument that its fine should be based on relative market share, it sounds like Citi did pretty well.

What’s more, since the Justice Department recently floated a figure of $10 billion, while Citi proposed $4 billion, it looks very much like they split the difference. That’s a pretty good deal for Citi, especially since there was massive evidence that one of the parties committed criminal fraud – and the other party was the United States government.

4. This $7 billion settlement isn’t worth $7 billion.

Citigroup Chief Financial Officer John Gerspach told analysts on today’s earnings call that Citigroup may not pay out the entire $2.5 billion that it has agreed to provide in “consumer relief.”

What’s more, while the $4 billion fine is not tax-deductible, the CFO told analysts that the $2.5 billion (or however much it offers) will be deductible. That means the taxpayer will be footing part of the bill for this deal. (See the Wall Street Journal’s “Citigroup to Get Tax Silver Lining in $7 Billion Settlement” for more.)

They may also be able to use this money as JPMorgan Chase has done: by presenting their construction work and other efforts as a charitable effort, earning community goodwill for what should be an act of penance – while taxpayers foot part of the bill.

No matter how you slice it, this isn’t really a $7 billion deal, once you factor in the loopholes and tax breaks.

5. The “soft dollars” in these deals are funny money, anyway.

The government's disastrous foreclosure fraud settlement was touted as a $25 billion deal. But as we saw in that instance, banks have many ways to game the “soft-dollar,” consumer relief portion of these deals. They have “forgiven” debts owed to investors, not themselves, and counted it against the total. And they have counted renegotiated deals that were in their own best interests – deals that they would have renegotiated anyway – against this amount. (See Travis Waldron for more.)

Now, if Citi’s CFO is correct, they may also be able to get a tax break for those write-downs.

Who negotiated a deal like that? An associate attorney general named Thomas J. Perrelli “led the Government’s efforts” in those negotiations, according to his law firm’s website – efforts that ultimately led to an error-ridden, bank-friendly deal. (Perrelli rejoined his former firm after leaving government service.)

5. Half a billion dollars is going to the states – many of whom stiffed consumers in the last deal.

The states got to handle a big chunk of Perrelli’s “$25 billion” deal, too – and the money wound up being used for a lot of things besides helping consumers. (Homeowners’ groups recently filed a lawsuit against California Gov. Jerry Brown in an attempt to get the money back.)

And Citi’s CFO tells us that this money will be tax-deductible, too.

7. The agreed-upon “monitor” for this deal doesn’t inspire confidence.

The parties agreed that Citigroup would hire a “monitor” to make sure it adhered to this terms of the deal. He’s the one who is supposed to look out for the interests of bank consumers and the general public.

His name? Thomas J. Perrelli.