We've written before about the seemingly corrupt deal the SEC cooked up to "punish" Citibank for unspecified wrong-doing, which in turn would never have to admit doing anything wrong — all cozily out of public view.
(For background, see here for the Citibank scam, and here for Judge Rakoff's decision overturning the SEC "deal.")
If you followed this story (or read the first link above), you know that a Federal judge finally put the kibosh on the string of sweetheart deals engineered by the SEC — in this case by nixing a deal between SEC’s head of enforcement Robert Khuzami and Citibank that came before him for approval. He didn't approve.
Well, neither the SEC nor Citibank (whose interests are perfectly aligned) are taking that sitting down. So they got a Pulitzer Prize–winning writer, James B. Stewart, to make their disingenuous case in the pages of the New York Times.
Why "disingenuous"? Here's Yves Smith from Naked Capitalism (my emphasis and reparagraphing, because our columns are narrow):
There is nothing more useful to people in authority than when a writer with an established brand name does their propagandizing for them.Smith then details those cases, and along the way exposes Robert Khuzami's serious conflicts of interest:
Harvard Law graduate and Pulitzer Prize winning author James B. Stewart penned a remarkable little piece in the New York Times over the weekend. Titled “Few Avenues for Justice in the Case Against Citi,” it contends that Judge Jed Rakoff’s ruling against a proposed $285 million SEC settlement with Citigroup over a $1 billion CDO (Class V Funding III) that delivered $700 million in losses to investors and $160 million in profits to Citi is misguided.
Stewart argues, based on “some reporting,” that the SEC is unlikely to do better in the trial that Rakoff has forced on the agency by nixing the settlement.
We will look at the caliber of Stewart’s “reporting” in due course, since his article reads like dictation from the SEC’s head of enforcement Robert Khuzami (the SEC’s interests are aligned with Citi’s in wanting the settlement to go through). Stewart either did not read or chose to ignore critical information in the underlying complaints, which the Rakoff ruling cites, and he also overlooked relevant cases.
But let’s first examine the dead body in the room that Stewart and other commentators have conveniently managed to overlook.I don't want to quote any more of this startling piece; you should read it for yourself.
Why hasn’t the SEC been tough on CDOs, even though they were at the heart of the crisis?
As we discussed at length in ECONNED, it was the collapse in the value of AAA tranches of so-called asset backed CDOs (ones based heavily on subprime-related exposures) that blew holes in bank balance sheets around the world. ...
Look no further for an answer than the SEC chief of enforcement, Robert Khuzami, Stewart’s primary and probably sole source for this article. He was General Counsel for the Americas for Deutsche Bank from 2004 to 2009. That means he had oversight responsibility for the arguable patient zero of the CDO business, one Greg Lippmann, a senior trader at Deutsche, who played a major role in the growth of the CDOs, and in particular, synthetic or hybrid CDOs ... (Readers of Michael Lewis’ The Big Short will remember Lippmann featured prominently. That is not an accident of Lewis’ device of selecting particular actors on which to hang his narrative, but reflects Lippmann’s considerable role in developing that product).
Any serious investigation of CDO bad practices would implicate Deutsche Bank, and presumably, Khuzmami. Khuzami simply can’t afford to dig too deeply in this toxic terrain[.]
Bottom line — Khuzami is damaged goods. He moved from Wall Street manager of "patient zero" in the world-wide CDO collapse, to chief of enforcement of the SEC. And his SEC has the goods, including evidence of fraud, on Citibank, and won't go after them. Nice. Presumably his next job is on Thank You Street?
On the media side, Khuzami has Pulitzer Prize journalist James B. Stewart carrying his water (and only his), as Smith amply shows. (Start reading at "Now let’s turn to Stewart’s brazen and remarkably fact free assertions" for a list of his sins.)
Again, please do read. It will take a few minutes, but it's nicely done. All you need to know to understand why we don't have nice things — like Rule of Law.
GP
