The Insignificance of Citi's $75 Million Fine for Subprime

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Banking behemoth Citigroup has settled a case with the Securities and Exchange Commission alleging that it misled investors about the extent of its exposure to subprime mortgages. The fine was a paltry $75 million. That's a fraction of the $550 million it cost Goldman recently regarding a synthetic collateralized debt obligation deal gone bad. Just how insignificant is Citi's fine? Let's put it into perspective.

First, here's what Citi was accused of doing wrong, according to the Wall Street Journal:

The SEC alleges that Citigroup repeatedly made misleading statements in earnings calls and public filings about the extent of its holdings of assets backed by subprime mortgages.

Between July and mid-October 2007, Citigroup represented that subprime exposure in its investment banking unit was $13 billion or less, when in fact it was more than $50 billion, according to the SEC.

The SEC says the $13 billion figure reported by Citigroup omitted two categories of subprime-backed assets: "super senior" tranches of collateralized debt obligations and "liquidity puts." Citigroup had more than $40 billion of additional subprime exposure in these categories, which it didn't disclose until November 2007 after a decline in their value.

Citi settled the charges without admitting to or denying the SEC's allegations.

Who suffered from Citi's failure to provide better information about its subprime mortgage exposure on those earnings calls? Obviously, its equity investors would have been harmed most. So let's see if they got justice.

Citi currently has around 29 billion shares outstanding. If you divide that $75 million over those shares, it could reward investors about one penny for every four shares they own. That's an extra small order of fries from McDonald's dollar menu for every 400 shares they own.  

In another sense, this could be taken to mean that Citi's failure to disclose this information lowered its share price by $0.0026. Citi CEO Vikram Pandit probably moves the share price more when he sneezes.

This looks like another situation where the SEC had a weak case against a bank, so Citi happily settled. After all, $75 million is well worth avoiding the headache of years fighting in court -- even if the bank eventually won. It's hard to take a fine this low seriously, given how much a truly significant material omission would have cost shareholders. If the punishment fits the crime, then this crime must not have been all that bad.

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Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.
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