On Monday, the Department of Justice slapped Citigroup with a $7 billion penalty for misleading investors about the toxic mortgage products it peddled that helped cause the financial crisis. Though it's the largest civil penalty in history, it's not nearly a harsh enough punishment, consumer advocates say.
In the mid-2000s, Citigroup assured investors that the subprime mortgage loans it packaged and sold as securities for billions of dollars were high quality. But the bank knew that many of those underlying loans would likely never be paid back. A Citigroup trader at one point even stated in an internal email that he "would not be surprised if half of these loans went down… It's amazing that some of these loans were closed at all."
Despite the historic size of this settlement, consumer advocates insist that the government should have gone much further. And they cite six ways the massive Citi settlement falls short.
1. It's not a $7 billion fine. Citigroup will pay $4.5 billion to settle federal and state civil claims related to the shoddy securities. The other $2.5 billion will underwrite loan modifications and principal reductions on mortgages—which the bank is required to do anyway—and finance some affordable rental housing construction.
2. It didn't really hurt Citigroup. The settlement did tank the bank's second quarter profits, but it did not even pull earnings into the red. After the deal was announced, Citigroup's stock climbed 3.6 percent, indicating investors thought that Citigroup dodged a bullet. The settlement deal is simply the "cost of doing business," says John Taylor, the president and CEO of the National Community Reinvestment Coalition, a housing advocacy group. Citi will "pay these fines and move on."
3. Shareholders foot the bill, not Citigroup executives. The Citi officials responsible for the decision to mislead investors should have been the ones to foot the penalty, says Marcus Stanley, the financial policy director at Americans for Financial Reform. When the burden of the settlement falls on shareholders, the punishment is diluted. No individual officials are held accountable; consequently, other bank officials may not be sufficiently deterred from committing future misdeeds. (The deal does not absolve Citigroup officials from future civil or criminal charges.)
4. This should have been a criminal case, not a civil case. "If the evidence shows fraud, there should be a criminal case," says Bart Naylor, a financial policy advocate at the consumer watchdog group Public Citizen.
5. The settlement's consumer provisions might not pan out. It's unclear if all the funds directed toward struggling homeowners will actually end up helping them. There's precedent for this concern. In the National Mortgage Settlement, a $25 billion agreement with five major banks in 2012 over flawed foreclosure practices, much of the supposed homeowner relief dispensed as part of that deal has benefited banks more than homeowners.
6. Citi should have gone to trial. The Justice Department should have taken Citigroup to trial instead of settling out of court, Taylor says. A trial would have brought to light the details of how Citi screwed investors and how much it profited as a result. The negotiations for this settlement were largely conducted behind closed doors. A trial also could have given the government leverage to exact a harsher punishment against Citi. (There is, of course, the possibility that Citi could have prevailed in a trial.)
The Citi deal is one of several lukewarm settlements the government has entered into with banks in recent years over financial crisis-related wrongdoing. In November, JPMorgan Chase agreed to pay a record $13 billion for selling toxic mortgage products in the run-up to the financial crisis. Some experts say the fine should have been 22 times higher.
Last year, Sen. Elizabeth Warren (D-Mass) sent a letter to the Justice Department, noting she was concerned that the Obama administration was letting big banks off too easy: "If large financial institutions can break the law and accumulate millions in profits, and if they get caught, settle by paying out of those profits, they do not have much incentive to follow the law."
Three years ago, Senate Minority Leader Mitch McConnell (R-Ky.) was a huge cheerleader for the controversial budget plan proposed by Rep. Paul Ryan (R-Wis.) that would have partially privatized Medicare and slashed social spending programs. Now McConnell, who's in a tough reelection fight, is backing away from his support and trying to suggest he was not an outright champion of this draconian budget measure.
In an ad released this week, McConnell's Democratic opponent, Alison Lundergan Grimes, attacks the GOP senator for backing Ryan's 2011 budget proposal, which would have essentially ended Medicare as a guaranteed federal program, slashed Medicaid, and repealed Obamacare. In the ad, an elderly Kentucky man named Don Disney asks why McConnell voted to raise his medical costs by thousands of dollars a year—referring to a provision in the Ryan budget that, according to the Congressional Budget Office, would hike out-of-pocket costs for Medicare beneficiaries by $6,000.
McConnell's campaign fired back, pointing out that the senator did not vote for the proposal itself, but rather only voted in favor of bringing the measure to the Senate floor for a vote. "There is no way to speculate" what McConnell would have done regarding a final vote on the Ryan budget, his campaign insists.
But that's cutting the legislative sausage rather thin. The vote on whether to bring the Ryan plan to the Senate floor for an up-or-down vote was the key vote—and McConnell voted in favor of the proposal. It was only because the majority Democrats blocked the bill from reaching a final vote that McConnell did not have a chance to officially vote for passage of the budget proposal. But McConnell himself bragged about having "voted" for the Ryan budget. And he repeatedly praised the Ryan plan and expressed support for the measure.
In a speech on the Senate floor in April 2011, McConnell called Ryan's budget a "serious and detailed plan for getting our nation's fiscal house in order." He maintained that it would "strengthen the social safety net."
That month, he also called Ryan's budget "a serious, good-faith effort to do something good and necessary for the future of our nation and…for the good of the nation," according to Congressional Quarterly.
In May 2011, McConnell, appearing on Fox News, vowed to vote for Ryan's proposal. He said Ryan's plan was "a very sensible way to go to try to save Medicare."
Even though the Senate never held a final vote on the Ryan budget, McConnell's backing for the plan—which included large tax cuts for the wealthy—was full-throated and unambiguous. "He's probably relieved that it never came to a final vote," says Ross Baker, a professor of political science at Rutgers University.
In responding to the Grimes ad, McConnell's campaign also took issue with the charge that he voted to raise medical costs for Kentucky seniors by $6,000 each. The campaign claimed that this figure is out of date because Ryan's subsequent budget plans—which also were not passed by Congress—would raise Medicare beneficiaries' out-of-pocket costs by much less. Yet Paul Van De Water, a senior fellow at the nonprofit Center on Budget and Policy Priorities, says that the Grimes campaign "accurately" cited what the 2011 plan would have done.
Ryan's 2011 budget would have slashed Medicare by $389 billion by raising the eligibility age and partly privatizing the program, dramatically increasing costs for new retirees. Under the same plan, funding for Medicaid would have been slashed by 35 percent over 10 years. The proposal additionally would have ended Obamacare, preventing millions from obtaining affordable health insurance. At the time, Senate majority leader Harry Reid warned the Ryan budget "would be one of the worst things that could happen in this country if it went into effect."
As the McConnell-Grimes race—one of the most closely watched Senate contests of the year—heats up, Grimes is attempting to tar McConnell with the extreme budget plan that he once embraced. McConnell, the veteran Capitol Hill wheeler-and-dealer, is trying to wiggle out of the trap through a legislative loophole—creating a false impression and distancing himself from his party's policymaker-in-chief.
His campaign did not respond to a request for comment.
Former GOP Senate candidate Todd Akin is not sorry for saying that women don't usually get pregnant from rape.
Akin tanked his 2012 Missouri Senate campaign by claiming that there is no need for rape exceptions to abortion bans because "if it's a legitimate rape, the female body has ways to try to shut that whole thing down." In his new book due out next week, titled Firing Back: Taking on the Party Bosses and Media Elite to Protect Our Faith and Freedom, Akin says he regrets airing a campaign ad apologizing for the statement, Politico reported Thursday.
"By asking the public at large for forgiveness," Akin says in the book, "I was validating the willful misinterpretation of what I had said."
He adds that the media misconstrued his words and explains why he's still right about rape and pregnancy. "My comment about a woman's body shutting the pregnancy down was directed to the impact of stress of fertilization. This is something fertility doctors debate and discuss. Doubt me? Google 'stress and infertility,' and you will find a library of research" on the impact of stress on fertilization, he writes.
And Akin doubles down on the term "legitimate," which he says refers to a rape claim that can be proved by "evidence," as opposed to one used "to avoid an unwanted pregnancy."
Akin's comments two years ago perpetuated what Democrats have dubbed the GOP "war on women," which refers to Republican attempts to limit abortion coverage, contraception, and workplace rights for women.
The release of Akin's book comes just weeks after the Supreme Court ruled that family-owned companies—which employ more than half of all American workers—do not have to provide contraception coverage for women as mandated by Obamacare if their owners have a religious objection to doing so. The decision is expected to open the floodgatesto further assaults on contraceptive access for women.
On Wednesday evening, President Barack Obama called for a new Wall Street crackdown, noting that more than five years after the financial crisis, banks still focus too much on gaining profits through often risky trading, instead of investing in Main Street America.
"More and more of the revenue generated on Wall Street is based on…trading bets, as opposed to investing in companies that actually make something and hire people," the president said in an interview with Marketplace host Kai Ryssdal. He called for "additional steps" to rein in the industry.
Obama's comments Wednesday represent one of the most pointed critiques he has made of the banking industry since he took office at the height of the financial crisis, and suggest that he may use his final two years in office to pursue further Wall Street reforms.
The president singled out big bonuses as a central problem plaguing the financial system. Banks can still "generate a huge amount of bonuses by making some big [trading] bets," he said. "If you make a really bad bet, a lot of times you've already banked all your bonuses. You might end up leaving the shop, but in the meantime everybody else is left holding the bag."
He did not offer specific policy cures, instead alluding to the need to "restructure" how banks work "internally."
The massive Dodd-Frank financial reform law that Congress passed in 2010 was supposed to keep banks from taking excess risks and prevent another economic collapse. Obama pointed out that much of that law has already gone into effect. Banks now have to keep more funds on hand to guard against an economic downturn or a bad trading bet, he said. The law created a new agency designed to prevent consumers from being duped by mortgage lenders, credit card companies, and student lenders. Last year, Wall Street regulators implemented a much-touted Dodd-Frank measure aimed at limiting the high-risk trading by commercial banks that helped lead to the 2008 economic crash.
But much is left to be done. Wall Street regulators have completed only about half of the banking rules mandated by Dodd-Frank. Scores of these regulations have been watered down by financial industry lobbyists. Congress has made many legislativeattempts to weaken Dodd-Frank. Despite efforts to ensure that banks are no longer too-big-to-fail—or so large that their collapse would endanger the entire economic system—the largest banks are bigger than they were during the financial crisis.
Progressives fault the president for part of the lax response to the financial crisis. Under Obama's Justice Department, for example, no high-level bankers went to jail or faced criminal charges for actions that led to the financial crisis. And liberal critics slam Obama's economic team for focusing too heavily on bailing out banks after the crisis, and allowing the foreclosure crisis to fester.
It is unclear how Obama will push through additional Wall Street reforms. He has limited oversight of rule-making, and banking legislation is not likely to get through the current sharply divided Congress.
That's just a sampling of the many compliments paid to former Wall Street defense lawyer Mary Jo White in January 2013, when President Barack Obama nominated her to run the Securities and Exchange Commission (SEC), a major banking watchdog. But after more than a year in charge, White hasn't lived up to the hype, instead crafting weak regulations, delaying new rules to rein in the industry, and granting special privileges to a bank involved in fraud.
Rule-making is slow as molasses: Cracking down on individual banks is important, but in order to prevent another financial crisis, the SEC needs to address broader problems in the financial system. The commission is supposed to do that by crafting provisions of the 2010 Dodd-Frank financial reform law into scores of enforceable rules. White promised she would prioritize finishing up these regs, but rule-making at the SEC has slowed to a crawl since she took the helm of the agency. Over the past year, White has pushed back expected completion dates on 64 percent of rules. Contrast this with the progress made by the Commodity Futures Trading Commission (CFTC), another federal Wall Street regulator with similar jurisdiction, which has finished writing nearly all of its Dodd-Frank rules.
"We should've gotten a lot of these rules done already," an SEC official told the Financial Times in May. "By delaying and delaying, someone else is winning and it's not the people fighting for reform."
Republican obstruction isn't to blame. There are five commissioners at the SEC who vote to approve new regulations. Three of them, including White, are Democrats. That means White should be able to easily secure a majority of votes in order to finish up all those rules. That she hasn't done so suggests she doesn't want to, financial reformers argue. When she was confirmed to head the SEC, White said she would make sure Dodd-Frank regulations didn't impose "unnecessary burdens" on financial firms. Last July, former CFTC chair Gary Gensler told Bloomberg that White and Treasury Secretary Jack Lew seemed more like banking lobbyists than federal regulators when they met with him to talk about how banking rules should apply to US firms' overseas branches.
Rules that the SEC has finalized are full of loopholes: The few regulations that the SEC has completed over the past year are "weak," says Marcus Stanley, the policy director at Americans for Financial Reform. A measure the SEC finalized about a year ago, for example, makes it easier for start-ups to go public, but it does not contain enough protections for investors, Stanley says. And reformers say that a rule the SEC finished up last fall, which was supposed to curb abuses in certain parts of the bond market, has a number of crucial loopholes.
Regulations in the works are toothless, too: The rules the SEC is still hammering out are also disappointing, progressives say. A measure the SEC started working on before White's time, for instance, is supposed to ensure that credit rating agencies—companies that rate financial firms' ability to pay back debt—stop the sloppy ratings practices that led to the financial crisis. Reform advocates say White could improve the "ineffective" rule before the commission votes on it, but she hasn't made a move to do that. The SEC is also considering adding new exemptions to an already weak proposed rule governing certain types of mutual funds.
The agency dropped a corporate political spending measure: Last November, White nixed a much-touted initiative to require corporations to disclose their political spending.
White voted to give special privileges to a bank accused of fraud: In another business-friendly move in April, White voted with the two Republicans at the SEC to give special benefits to the Royal Bank of Scotland (RBS), despite the fact that the bank recently plead guilty in connection with an interest rate-rigging scandal. The SEC allowed RBS to raise money by offering securities without waiting for approval from the agency, even though companies that break the law are supposed to be denied this benefit. Democratic commissioner Kara Stein slammed the decision, noting that "we repeatedly relieve [firms] of the supposedly automatic consequences of their misconduct."
An SEC official maintains that the SEC "continues to vigorously pursue all aspects of its mission," and notes that the agency has completed several rules, including the massive Volcker rule, which limits the risky trading by commercial banks that helped lead to the financial crisis.
"Excellent. Job well done," counters a congressional Democratic aide. "We haven't seen much since."