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Summary

  • Citigroup's rumored settlement of $7 billion is way out of line with other similar judgments.
  • The DoJ is simply trying to make an example of Citi, but the fine is disproportionate to the actions being punished.
  • Citi management should fight it out in court, which would potentially save shareholders billions of dollars.

Citigroup (NYSE:C) shares have been an interesting study over the past few years. Famously, Citi is the only too-big-too-fail bank to see its shares fail to cross the tangible book value threshold since the financial crisis' effects have begun to wear off. The bank has a different business model than the other TBTFs, but of course, it's still in the same business. Another interesting way that Citi is different from its competitors is the MBS settlements that have been dominating headlines for the past few months.

JPMorgan (NYSE:JPM) was first, with its then-considered-gigantic $13 billion settlement for Bear Stearns securities that were issued prior to JPMorgan even owning the company. This settlement, shocking in size at the time, has come to set the stage for TBTF fines levied by our nation's government. The amount was 2% of the securities JPMorgan was judged to be responsible for having been issued, irrespective of the fact, in my view, that JPM actually had little to nothing to do with said securities. The fine, therefore, was egregious.

Then there is Bank of America (NYSE:BAC), whose fate is yet undetermined, but given press rumors, we have a pretty good idea of what the Charlotte bank is going to have to pay. BAC offered a $12 billion settlement (or 1.8% of issuances) to the Justice Department, to which our nation's top bank robber replied quite rudely, suggesting the offer was so low he is unwilling to even negotiate. It is said that the DoJ wants something more like $17 billion from BAC, a number that would represent ~2.6% of issuances, substantially higher than JPM's settlement. At any rate, it appears the "acceptable" number is in the 2%+ range for these types of penalties.

That is, until Citi gets involved. Citi issued far less MBS than the other two mentioned; something like one-fifth of JPM's issuances and one-seventh of BAC's. However, the DoJ still wants $7 billion from Citi, despite the fact that losses on the securities in question were in line with the other issuances on a percentage basis. So why, then, is Citi being forced to pay a fine that is proportionally many times greater than the others?

One could simply be scale. If the DoJ made Citi pay a 2% settlement, or just under $2 billion, it may appear like the settlement is too small. That is incredible, considering we are talking about billions of dollars, but I strongly suspect that's the motivation. Once again, the Department of Justice is far less concerned with actual justice and far more concerned with a witch hunt that produces a very public perpetrator.

From a shareholder's perspective, I think JPM was right to simply pay the gigantic fine and move on. Similarly, I think BAC is getting a similar deal and should, after negotiating a bit, simply pay what the DoJ wants, say around the $15 billion area. However, I am outraged at the size of the fine that Citi is apparently being levied in relation to its "misdeeds" that are allegedly being punished. As a result, I'd like to see Citi fight.

I understand the administration's goal is to simply milk the banks for all their worth in a populist effort to punish the "evil" banks, but this has gotten ridiculous. Why is Citi forced to pay three or four times the penalty of the others? Because it didn't issue as many securities and a "fair" fine wouldn't be large enough for the witch hunt? If there were no precedent for this, I could see the DoJ plucking the 7.7% number out of thin air and forcing the bank to pay it. However, that is not the case, as we have two very high-profile cases to compare Citi against, and the discrepancy is staggering.

Thus, I am imploring the management of Citi to fight this settlement, if indeed, the rumors are true about the number. There is absolutely no reason to pay a fine this large when the "sins" are on such a smaller scale than the others mentioned. Citi should force the DoJ to go to court and plead their case to a judge, because I'd bet that, even after hundreds of millions of dollars in legal fees, Citi would end up paying much less than $7 billion. Plus, the simple fact is that Citi has much deeper pockets than the DoJ, and the latter is likely opposed to going to court.

As a shareholder, I'll be unbelievably disappointed in Citi management if it simply crawls to the DoJ, hat in hand, and writes a gigantic check for no reason. I think Citi should be paying something like $2.5 billion, and as such, Citi management needs to fight until the bitter end and let the DoJ know it can't just walk all over private industry and demand whatever it wants. Our attorney general is trying to make his mark on history by extorting ever-larger sums of money from private industry, and it is time someone actually fought. BAC doesn't have a case to take to court, as its settlement amount is in line with JPM's, but Citi, a much smaller player in this game, does and should make the AG actually fight it out in court.

Source: A Plan To Save Citigroup Shareholders Billions Of Dollars