August 4, 2010
Kudos to the SEC...
Given the size and breadth of our behemoth stock market, perhaps the best any regulatory agency can do is to ensure adequate disclosure of the deal and/or circumstances. As FDR said upon presenting the first securities law to Congress in 1933:
The Federal Government cannot and should not take any action which might be construed as approving or guaranteeing that newly issued securities are sound in the sense that their value will be maintained or that the properties which they represent will earn profit...There is, however, an obligation upon us to insist that every issue to be sold in interstate commerce shall be accompanied by full publicity and information.
Charles R. Geisst, Wall Street/A History (1997), p. 228
Which is why we should celebrate the announcement late last week that the SEC had exacted a $75 million penalty from Citigroup for its downplaying of subprime exposure in 2007. In sum, the SEC took issue with the bank minimizing its subprime exposure as $13 billion "when in fact it was more than $50 billion". Not only did the Commission signal that it shall not wait for Congress or class action juries to tackle the key issue of the Crisis, it also named company officials for their part in the lacking disclosures (Citigroup and the executives settled without admitting or denying the allegations).
The SEC's public statement on the charges is itself noteworthy for many reasons:
1. The SEC Director of Enforcement is quoted as saying "Even as late as fall 2007, as the mortgage market was rapidly deteriorating, Citigroup boasted of superior risk management skills..." The focus on 2007 is much more accurate than the 2008 disaster timeline previously offered by the industry (which, of course, serves to benefit from superficial notions of the global economic crisis being "the perfect storm");
2. Likewise the pinning of the alleged violations to specific numbers and "tranches" indicates some heavy lifting by the Commission - applaudable efforts given the routine deference accorded the "technical" world of CDOs;
3. The charges were brought even though the assets in question were eventually disclosed by Citigroup in November 2007, indicating a lack of tolerance for any "eventual disclosure" defense.
4. The fact pattern indicates that the bank's eventual disclosure was prompted by ratings downgrades, revealing that, even though flawed, the credit rating agency model of 2007/2008 did occasionally serve a salutary purpose.
Overall, bravo to the SEC for tackling a thorny issue (i.e., CDO pricing) that has staved off much inquiry and discipline to date. The Commission's statement (with links to the related civil complaint and order) can be found here: http://www.sec.gov/news/press/2010/2010-136.htm
August 4, 2010 | Permalink