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Why Robert Rubin and Citibank Execs Should Be in Deep Trouble

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Former Citibank Chairman Robert Rubin knew about mounting subprime mortgage losses at his company, but still allowed executives to mislead to Citibank's shareholders about those losses, according to the SEC. But that same agency wants to let Rubin off the hook for an offense that has sent others to jail, and which contributed directly to Citi's epic taxpayer-funded bailout.

Those subprime losses were no small matter. Citi told its shareholders it had $13 billion in subprime exposure, when the actual figure was almost $40 billion higher. As the financial crisis deepened, Citi's heavy involvement in the subprime business nearly destroyed the bank, propelling it into one of the ugliest bailouts of 2008. The new revelations about the depth of Rubin's involvement in Citi's subprime scam come from a damning court filing the SEC turned over on September 7, at the request of Federal Judge Ellen Huvelle, and reported by Joshua Gallu and William McQuillen for Bloomberg News. The SEC has been dragging its feet and pulling its punches on the Citi case, which appears to be one of the most straightforward examples of Wall Street fraud from the crash of 2008. The agency is still trying to prevent fraud charges from being filed against either Citi CEO Chuck Prince or Rubin, who served as Treasury Secretary under President Bill Clinton before raking in more than $120 million at Citi.

According to court documents, the SEC believes that all of Citi's top officials knew exactly what was going on with the bank's subprime accounting, and knew that the official line being fed to the public was bunk. Lying to your shareholders is a big, straightforward no-no in Corporate America—it's considered securities fraud, subject to both hefty fines and jail time.

Thanks to the corporate reform laws Congress passed after the Enron debacle, every top executive at every significant U.S. corporation has to personally verify every accounting statement her corporation issues. That signature means that the executive is personally liable for the accuracy of those statements, and subject to criminal prosecution for egregious inaccuracies. But while the SEC has been forced to acknowledge that it believes every top official at Citi knew about the subprime scam, it is only seeking a slap on the wrist against two officials: CFO Gary Crittenden and former investor relations chief Arthur Tildsley.

Under a settlement proposed by the SEC, Crittenden faces the steepest penalty at $100,000. But in 2007 alone, the year the alleged impropriety took place, Crittenden took home $19.4 million. The fine amounts to about half of one percent of his income in a single year, a rounding error on a bonus.

In addition to ignoring big fish like Rubin, the SEC actually wants to fine Citi shareholders $75 million for having the audacity to be lied to. The agency probably wouldn't even be going after the case at all if it weren't for the efforts of the Financial Crisis Inquiry Commission, which publicly revealed the scandal in an April 7 hearing ( see page 368 of this pdf transcript).

Rubin's involvement with Citi has always reeked of impropriety. Back when Rubin was still running the Treasury Department, he convinced Congress and President Clinton to sign-off on the Gramm-Leach-Bliley Act, which repealed decades of Wall Street regulation. The bill allowed ordinary, boring banks to get into high-flying Wall Street securities trading, and was directly lobbied for by Citibank, which needed the legislation in order to go through with a key merger. Once the bill was passed, Ruin left Treasury for Citi, where he made $120 million before departing in disgrace after the crash.

After AIG, Citi was the top recipient of Wall Street welfare. The bank needed $45 billion in direct bailout funds, plus hundreds of billions in taxpayer guarantees against losses. The company was run like an insane hedge fund, taking on outrageous amounts of risk, and not even bothering to insure itself against it like its Wall Street peers. AIG went under because it was insuring crazy risks from other Wall Street banks, but Citi didn't even bother to seek protection for its insanity.

The SEC's job is to pursue securities fraud and help prosecutors with criminal cases against white-collar criminals. While the agency has made a handful of important cases against smaller hedge funds, it has found excuses from high-profile bankers mysteriously convincing. It has not pushed for criminal charges against any Citi executive, nor has it seriously pursued significant civil charges against Bank of America executives who lied about bonuses, or Barclays executives who laundered money from Iran.

It's conceivable (though unlikely) that Robert Rubin and Chuck Prince really didn't understand what was going on. In his testimony before the FCIC, Rubin emphasized that subprime securities were rated AAA by rating agencies, and claimed he didn't expect losses to get so out-of-control. Maybe he really, truly failed to understand what he'd allowed his bank to get into. If that's really true, then he was failing to demand detailed reports or research on the most critical issue facing his bank in 2007, an issue which would have bankrupted the company without a monstrous government bailout. And both Rubin and Prince were getting paid like kings for this idiocy, helping to destroy the economy in the process.

Since the Reagan years, the SEC has been systematically starved for funding. Its enforcement regime has been intentionally gutted, and the entire economy paid the price for that effort with the financial crash of 2008 and the worst recession since the Great Depression. When bankers think they can get away with rampant fraud and get paid very well to do it, they'll do it. Rubin's best defense is that he really isn't all that bright—he's either an idiot or a criminal. Without high-profile investigations into top-line officials like Rubin, we can expect this same pattern of stupidity or criminal fraud to continue-- with more financial crashes, more job losses, and bigger bonuses. The Wall Street crash wasn't the result of a few bad apples going rogue-- top-level executives systematically pursued businesses that wrecked the economy. It's time to break the cycle, and the SEC has the power to do it.