Why Citigroup may matter more than Goldman
In just about every way, going after Goldman Sachs is far sexier than going after Citigroup. The SEC held a dramatic press conference with a dozen investigators the day it announced a $550 million settlement with Goldman. Countless pages of ink were spilled on the case. And the SEC charged the bank with fraud, not the lesser negligence charge that faces Citigroup, which is paying $75 million to settle charges.
But the Citigroup case arguably is much more important.
In the Goldman case, the SEC didn't intervene on behalf of ordinary investors. It intervened on behalf of sophisticated investors--including foreign banks--that knew they were playing in a highly speculative market of sub-prime mortgage investments. These were two clients that went to Goldman explicitly to invest in the sub-prime mortgage market. And even if Goldman Sachs did not tell the big-time investors everything they deserved to know, which the SEC alleged and Goldman essentially admitted, the investors well have made the same losing investments in sub-prime mortgages. In fact, many legal commentators believed that Goldman would be able to successfully argue a "big boys" defense that its clients were not in need of the protection of securities law if it had chosen to fight the SEC charges in court.
Not so in the case of Citigroup.
Citigroup allegedly hid information from all of its shareholders about the bank's exposure to sub-prime mortgages. The bank said it had about $13 billion in exposure in 2007, when in fact, according to the SEC, it had $50 billion in exposures. While no doubt some sophisticated investors owned shares of Citigroup, many of company's shareholders are retirees, parents saving for the kids' college education and average retail investors.
And even these investors may have made a different choice about where to put their money if they knew of Citigroup's exposure to sub-prime mortgages. With the housing market already trembling hard in 2007, any investor could have made an informed judgment that the difference between owning $50 billion of sub-prime mortgages and $13 billion of sub-prime mortgages was the difference between buying or selling a bank's stock.
Citigroup stock has lost more than 90 percent of its value since the middle of 2007.
July 29, 2010; 3:44 PM ET
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