One of the biggest problems with Wall Street's malfeasance is how the ruling elite view legal settlements – as little more than an acceptable cost of doing business.
Well, no more.
Thanks to Judge Jed Rakoff we may see some real regulatory action leading to good old-fashioned investigations, perp walks, and even jail for the guilty.
Judge Rakoff recently rendered a 15-page decision rejecting the U.S. Securities and Exchange Commission's (SEC) $285 million settlement with Citigroup Inc. (NYSE: C) over toxic mortgages, calling it "neither reasonable, nor fair, nor adequate, nor in the public interest."
This is important because settlements like these have been a farce for years – little more than the financial equivalent of a parking ticket and having about as much impact.
In fact, in a world where banking secrecy is paramount and investment firms like Goldman Sachs Group Inc. (NYSE: GS), JPMorgan Chase & Co. (NYSE: JPM), Bank of America Corp. (NYSE: BAC) and others rule the roost, they're little more than obfuscations of the truth.
The investigations into these banks are toothless or highly secretive at best. Rarely does the public see anything even remotely resembling full disclosure.
Instead we're supposed to be placated by headlines insinuating that the SEC, the National Futures Association (NFA) and more than 20 other regulatory agencies are looking out for our best interests.
Who are they kidding?
A Drop in the Bucket
Remember the $550 million fine Goldman was forced to pay for its role in toxic credit default swaps (CDOs)? At the time it was the largest ever levied.
SEC officials couldn't stumble over themselves fast enough nor get enough sound bites. I recall lots of PR shots with earnest-looking people evidently proud of themselves for having made Goldman pony up at the time.
And the mainstream press loved it. But there was one tiny problem.
The firm booked $13.3 billion that year. Paying off the SEC in a settlement that neither admitted nor denied wrongdoing was an acceptable cost of doing business that amounted to a mere 4% of revenue.
The proposed Citi settlement was much the same. It would have required Citi to give up $160 million of alleged ill-gotten profits, $30 million of interest, and a $95 million kicker for negligence.
Bear in mind, Citi reported full-year net income of $10.6 billion on revenue of $60.5 billion in 2010 which means that, like the Goldman fine, the settlement is a drop in the bucket at a mere 1.50% of net income.
I think Judge Rakoff's ruling has been a long time coming. And I love the fact that he specifically called out the Citi settlement as too lenient – especially when it also potentially allows Citi to skate on reimbursing investors for the $700 million the firm lost as part of its toxic mortgage trading.
You may not realize this, but private investors cannot bring securities claims based on negligence. In my mind, they should be able to, but for now this is the way the law stands.
The way I see it, Rakoff's decision finally gets at the core of what caused the financial crisis: toothless regulators beholden to the very powerful elite they were supposed to keep in check.
I am all too glad to see him show the public the first glimpse of backbone we've seen yet.
Washington, are you watching and listening?
Sitting on the Bench, Swinging for the Fences
Judge Rakoff noted in his ruling that there is an "overriding public interest in knowing the truth."
Yes, there is.
And as Judge Rakoff put it, the SEC's core duty is to "see that the truth emerges." In the event that it doesn't as part of the settlement process, "courts must not, in the name of deference of convenience, grant judicial enforcement, to the agency's contrivances."
I did some checking and I learned that this is not the first time Rakoff has stuck it to the SEC.
Apparently, he's the one who made headlines when he initially rejected the BofA settlement related to that bank's shotgun takeover of Merrill Lynch & Co., a fact I'd forgotten.
At the time, Rakoff rejected the SEC's $33 million BofA settlement on the grounds that it punished shareholders. The SEC then came back with a much more realistic $150 million agreement.
Some think Rakoff has gone too far. They worry that judges have no business interfering in agreements ostensibly reached by private parties.
But I disagree. I believe the SEC is the public.
And the public has the right to know about any case where the transparency of the financial markets (or lack thereof) has so impacted the markets as to destroy the wealth of millions of hard working people and bring the global markets to the edge of oblivion.
Frankly, I'd love to shake Judge Rakoff's hand.
I hope what he's done encourages judges to finally stand up for the body of law they supposedly represent and the public that it's intended to protect.
News and Related Story Links:
- Money Morning:
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- Money Morning:
What I Learned From My Lunch with Vikram Pandit
- Money Morning:
The Gilded Age of Wall Street Remains Intact
About the Author
Keith is a seasoned market analyst and professional trader with more than 37 years of global experience. He is one of very few experts to correctly see both the dot.bomb crisis and the ongoing financial crisis coming ahead of time - and one of even fewer to help millions of investors around the world successfully navigate them both. Forbes hailed him as a "Market Visionary." He is a regular on FOX Business News and Yahoo! Finance, and his observations have been featured in Bloomberg, The Wall Street Journal, WIRED, and MarketWatch. Keith previously led The Money Map Report, Money Map's flagship newsletter, as Chief Investment Strategist, from 20007 to 2020. Keith holds a BS in management and finance from Skidmore College and an MS in international finance (with a focus on Japanese business science) from Chaminade University. He regularly travels the world in search of investment opportunities others don't yet see or understand.