Why Let a Bank Write U.S. Financial Reform Legislation?

The proper level of financial regulation is a complex topic, about which people can have honest differences. But, reasonable people would agree that a bank having a history of involvement with fraud and mismanagement (and a recipient of one of the largest bank bailouts) shouldn't be writing bank legislation. Unless, of course, you are the U.S. Congress doing business as usual.

According to The New York Times, a financial services reform bill with bipartisan support:

"sailed through the House Financial Services Committee this month -- over the objections of the Treasury Department -- [and] was essentially Citigroup's...The bill would exempt broad swathes of trades [including Citigroup's] from new regulation...Citigroup's recommendations were reflected in more than 70 lines of the House committee's 85-line bill. Two crucial paragraphs, prepared by Citigroup...were copied nearly word for word. (Lawmakers changed two words to make them plural.)" - Source: Lipton, E. and Protess, B. (2013, May 24). "Banks' Lobbyists Help in Drafting Financial Bills." New York Times

Recall that, Citigroup has been involved in most of the major financial frauds (e.g., Enron, Worldcom, the foreclosure scandal) and crises of the last 30 years. And in the 2008 financial crisis, it received one of the largest bailout packages. In 2001, 2005, 2006 and 2008 alone, Citigroup entered into agreements with the SEC promising not to break the law in future. Even more unsettling, the agreements with the SEC weren't effective -- Citigroup continued to get in trouble. See the Appendix below for details.

(AP Photo)

I don't find it reassuring that Citigroup believes it should be subject to less regulation, or that Congress adopted Citigroup's proposed language nearly verbatim -- with a mere change of "two words to make them plural."

One possible explanation for having Citigroup write financial services legislation is its significant knowledge (based upon experience) of fraudulent and bad management practices. But with this line of reasoning, Bernie Madoff should've headed Congress' efforts for financial services reform.

Yes, Citigroup replaced several top managers since the last financial crisis. However, the current CEO began with Citigroup out of college in 1983, and has been a senior leader at Citigroup for at least the past 10 years. Citigroup (again) promised to reform itself (although it's made and broken that promise before). And maybe Citigroup won't be ground zero for the next crisis. But, it still seems odd to trust Citigroup to draft the very legislation determining how much regulation Citigroup will be subject to.

Why would Congress turn over to Citigroup its responsibility for writing this legislation? Does Congress honestly believe Citigroup has America's best interests at heart, and/or that Citigroup's interests align with those of the American taxpayer? Or could it be the over $100 million Citigroup's spent on lobbying and campaign contributions since 1998? Perhaps some members of Congress or their staff hope to obtain lucrative post-political careers with Citigroup (not a bad bet, given that 90 percent of Citigroup's lobbyists have previously worked in government). Or, is it more simply that, as Mark Twain observed:

"Suppose you were an idiot. And suppose you were a member of Congress. But I repeat myself."

Appendix: Examples of Citigroup's Involvement with Fraud and Mismanagement (Limited to the 21st Century) 

Adapted from: Chittum, R. (2012, March 9). "200 Years of Citi". Columbia Journalism Review.

2001: Citigroup paid investors and bondholders $3.7 billion for its role in the Enron fraud (and promised the SEC not to break the law in future).

2002: Citigroup paid the second-largest securities settlement in history - $2.7 billion to WorldCom investors and bondholders for its role in the Worldcom fraud. In a separate matter, Citigroup paid a record $215 million fine to settle a complaint about predatory lending.

2004: Citigroup paid a record $400 million -- twice as much as any other firm -- to settle charges about (i) flawed, conflicted stock research inflating the tech bubble and (ii) for giving CEOs it did business with preferential access to hot IPOs. Additionally, Citigroup reached a $70 million settlement for predatory subprime lending. And Japan closed Citigroup's private bank there for improper activities.

2005: Citigroup paid $208 million after the SEC accused it of defrauding mutual fund customers. Citigroup (again) promised the SEC not to break the law.

2006: Citigroup settled with the SEC after being accused of manipulating bond markets. The SEC again made Citigroup promise to not break the law (which Citigroup had already promised in 2001 and 2005).

2008: Citigroup agreed to pay $18 million after it (according to the California Attorney General ) "knowingly stole from its customers, mostly poor people and the recently deceased" and fired a whistleblower who complained about these practices. At the SEC's insistence, Citigroup agreed to repurchase $7 billion in auction-rate securities it sold to investors, when itknew the securities financial outlook was deteriorating. But don't worry - the SEC again made Citigroup promise to not break the law (we know how effective this strategy was in 2001, 2005, and 2006).

2008-2009: Financial Crisis - The U.S. government (a.ka. "we the people of the United States") had to invest $45 billion and purchase 36 percent ofCitigroup just to stabilize it.

2010: Citigroup agreed to pay $75 million to settle SEC charges about misleading its investors at the start of the financial crisis concerning its subprime exposure, which it understated by $43 billion.

2011: Citigroup paid $285 million for misleading investors on a CDO (collateralized debt obligation) deal - which one of its traders called "dogshit" and "possibly the best SHORT ever".

2012: Citigroup agreed to pay $2.2 billion as its portion of the settlement relating to the mortgage foreclosure/robo signing scandal.

Note: Dates listed above are either year of incident, or year of settlement (when the incidents were spread over multiple years).

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