Here are two stories from last week that I think are outrageous:
- Citigroup paid a settlement of $7 billion for selling high-risk mortgages as no-risk mortgages.
- A jury in Florida awarded Cynthia Robinson (and son) $16 million in punitive damages, and $24 billion in compensatory damages, for the death of her chain-smoker husband in 1996. The defending losers were R. J. Reynolds Tobacco Co.
To begin, let’s just ignore the fact that Citigroup played a key role in causing a global financial crisis that affected almost everyone, while Cynthia Robinson’s husband was just one man, however tragic his demise. And that Citi paid $7 billion, while RJR has been told to pay $24 billion…
What Citigroup did
- Citi did some due diligence on some home loans that it was repackaging to sell to investors.
- The results of that due diligence were not so hot. In the words of one Citibank employee: “We should start praying.”
- In the words of another “I would not be surprised if half of these loans went down… It’s amazing that some of these loans were closed at all.”
- But whatevs – Citi sold them as solid-gold mortgages anyway.
- Because profit.
What the Department of Justice did
It said to Citigroup:
- Looks like you’re profitable again, chaps.
- Time to pay up.
- Here’s how we’re going to do it.
- We’ll take $4 billion for us, because we’re the Department of Justice. And that’s what we do – collect money.
- Then there are all the lawyers. We’d like half a bil for them. Because lawyers.
- Finally, because you sold defaulting loans to those poor investors – we’d like you to pay $2.5 billion to the defaulters.
And what of the investors that were sold the bad stuff?
And why on earth are the defaulters getting compensated? For doing what, exactly?
What R.J. Reynolds Tobacco Company did
- It knew that cigarette smoking could be both harmful and addictive.
- But sold the cigarettes anyway.
- Specifically to Michael Robinson, a hotel shuttle bus driver, who smoked one to three packs a day for more than 20 years.
- He started when he was 13.
- Cynthia married him in 1990, and he passed away six years later.
What the Florida Jury did
- It was outraged by some video footage of tobacco execs claiming that cigarettes didn’t cause cancer, while an (ironically) smoking-gun internal memo suggested that they knew otherwise.
- So they awarded $23.6 billion in punitive damages.
The Trouble With Both Of These
I realise that this is becoming a bit of a steady complaint from me, but why are people punishing shareholders?
When you come down to it, here is who is responsible for both of the above:
- In Citi’s case, it was those managers and traders that knew they were selling bad investments, but lied about them.
- In R. J. Reynolds’ case, it was the tobacco executives that knew they were selling addictive and harmful substances, but decided to pretend that they were safe.
Here is who is actually paying for the above:
- Pension funds.
- Other institutional and mutual funds.
Here’s the ownership profile of Citigroup:
And this is the institutional ownership of Reynolds American Inc. (the owner of R.J. Reynolds Tobacco Company):
Whose money do the big institutions invest? Yours (if you’re American). And mine (if I’ve invested in an Exchange-Traded Fund that tracks global equities). These fines punish pensioners and savers and people that almost certainly had nothing to do with the decisions that were made.
And where are the people that were actually responsible for the deception?
There’s a phrase for this in the world of finance: “IBGYBG“.
I’ll be gone and you’ll be gone – by the time the punishment needs to be dealt with.
Oh, and it’s also telling the currently employed “Go right ahead with whatever you’re doing – if the company gets caught, someone else will pay for it.”
Is it any wonder that these situations keep repeating themselves? With ever more global consequence?