Sweet Deal? Citi Bank Claims One SEC Settlement Clears All Charges

Filed under: Features,Legal,Management,Management Ethics |

If ClassV Funding III was some outlier, the SEC’s action might make more sense. But it wasn’t.

Citigroup’s CDO operation churned out at least 18 CDOs around the same period. Often they were large CDOs, created with credit default swaps, effectively a bet that a given bond will rise or fall.

Most of the CDOs included recycled Citi assets that the bank couldn’t sell. By purchasing pieces of its older deals, Citigroup could complete deals and keep the prices for CDO assets higher than they otherwise would be. Some investors helped picked the assets and then bet against them, facts that Citi didn’t clearly disclose to other investors in the deals.

Closing the book on Citi’s CDO business means the public may never know the true story of Citigroup’s, and Wall Street’s, actions during the financial crisis.

One oft he largest victims of the CDOs was the bond insurer Ambac. The now-bankrupt firm settled with Citi in 2010, long before it got to the root of the problems with securities Citi convinced it to insure. A shareholder class action lawsuit that is wending its way through the courts has the potential to reveal some details, but often such cases are settled with evidence then sealed from public view.

Amongthe unresolved questions: What was Citigroup’s role in a series of deals involving Magnetar, an Illinois-based hedge fund that invested in small portions of CDOs and then made big bets against them?  Our investigation showed that Citi put together at least 5 Magnetar CDOs worth $6.5 billion.  Did Citi mislead the investors who lost big on these deals?

Here are some other questions about Citi CDOs created around the time of Class VFunding III:

  • 888 Tactical Fund. A February 2007, $1 billion deal, it had a significant portion of other Citi deals in it. Did the bank have influence over the selection of the assets, as it did in Class V Funding III?
  • Adams Square Funding II. A $1 billion March 2007 deal. The pitch-book to clients for Class V Funding III was adapted almost wholesale from this deal, according to the SEC complaint. Was Citigroup shorting this deal, or adding assets that were selected by others to short the deal? And was that adequately disclosed toc lients?
  • Ridgeway Court Funding II. Completed in June 2007, this $3 billion deal contained a mysterious $750 million position in a CDO index. Experts believe that such positions were included for the purposes of shorting the market. Did Citi disclose why it included these assets to the investors in this CDO? As much as 30% of the assets in the deal were from unsold Citi CDOs. Was this a dumping ground for decaying assets the bank could not unload, as a lawsuit by Ambac, which was settled, charged?
  • Armitage. This $3 billion March 2007 CDO looked a lot like Ridgeway II. It had a large portion of other CDOs, much of which came from other Citi deals, including $260 million from Adams Square Funding II. Did Citi adequately disclose to investors what they were buying?
  • ClassV Funding IV. A $2 billion June 2007 deal, Citi appears to have done this directly with Ambac. The SEC complaint about Class V Funding III makes it clear that Ambac was unaware of Citi’s position in that deal. Did the bank disclose more to Ambacin this deal?
  • Octonion. This $1 billion March 2007 CDO bought some of Adams Square Funding II. Adams Square II bought a piece of Octonion. A third CDO, Class V Funding III,also bought some of Octonion. Octonion,in turn, bought a piece of Class V Funding III. How did Citi and the collateral managers involved in these deals justify this daisy chain of buying?


Originally published  20 Oct. 2011, 2:21 p.m.

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