Thursday, September 3, 2015

A Summer Tale of a Very Big Bank

It is interesting to contemplate an entangled bank . . .and to reflect that these elaborately constructed forms, so different from each other. . .and dependent on each other in so complex a manner, have all been produced by laws acting around us.
— (With apologies to) Charles Darwin, On the Origin of the Species

It’s déjà vue all over again. Just the amounts and types of offenses have changed. It began July 21, 2015. That was the day the U.S. Consumer Financial Protection Bureau ordered Citigroup Inc’s consumer bank to pay $770 million to consumers because of the bank’s illegal credit card practices. As if that wasn’t enough to spoil Citigroup’s summer, on August 17, 2015 there was more bad news for the institution. That bad news relates to an Administrative proceeding brought by the Securities and Exchange Commission (SEC) against Citigroup Alternative Investments LLC (CAI) and Citigtroup Global Markets Inc. (CGMI). At the conclusion of that proceeding the two Citigroup entities (which for convenience we will refer to as Citigroup) agreed to pay $180 million in order to satisfy the SEC.

The first thing we must note in fairness to Citigroup is that although it agreed to pay $180 million, it didn’t admit it had done anything wrong. All it admitted was that the SEC had jurisdiction over the bank and “the subject matter of these proceedings.” In response to that admission the SEC could have issued a two-sentence order reciting Citigroup’s admissions and concluding that as a result, Citigroup had agreed to pay the SEC $180 million. Of course, not even a very big bank agrees to pay $180 million to the SEC just because the SEC has jurisdiction over the bank and the subject matter. The SEC knew that many people would wonder why the bank would pay so much if those were the only questions before it. Therefore, in order to explain why the bank agreed to pay that amount, the SEC wrote an eight page order in which it recited all the things Citigroup didn’t admit it had done. Here are a few of them..

It did not admit that it had raised “approximately $2.898 billion from approximately 4,000 investors” to invest in funds that were described by Citibank financial advisers as being suitable for traditional bond investors even though the marketing documents specifically said the funds “should not be viewed as a bond substitute.” Citigroup did not admit that it led investors to believe that the funds in which they were investing were better than the bonds Citigroup did not admit it encouraged investors to sell in order to generate funds to buy the securities Citigroup did not admit it was offering to those investors. Citigroup did not admit that it told investors that the investment it did not admit it was selling had “the same risk profile as a municipal bond investment but with a slightly higher return.” Citigroup did not admit it continued to misrepresent the quality of the investments it did not admit it was selling “even as the funds’ performance significantly declined and the risk of investor losses increased.” It did not admit that it failed to “adopt and implement policies and procedures to prevent misrepresentations made to investors. Other activities in which Citigroup did not admit engaging in can be found by reading the eight page Order that can be found on line.

At the conclusion of the eight-page recital of the things that Citigroup did not admit it had done was the Order of the SEC for Citigroup’s future reference in case it ever decided again not to do them. Paragraph A of Section IV tells CAI and CGMI to “cease and desist from committing or causing any violations and future violation” of the kind CAI and CGMI never admitted having done. Paragraph B is intended to make Citigroup feel bad. It simply says, “Respondents CAI and CGMI are censured.” Paragraph C is meant to be helpful. It tells Citigroup how to pay the $180 million. It says Citigroup can transmit payment electronically to the commission, can pay using or, lastly, by sending in a certified check, bank cashier’s check, or United States postal money order. It is not altogether clear why the government would not be willing to accept a plain old check since Citibank is very unlikely to send the SEC a check that would be returned for insufficient funds.

In addition to the fact that the Order spends eight pages describing what Citibank says it didn’t do, there is one other aspect of the Order that was commented on by a reporter for the New York Times. Gretchen Morgenson observed that the settlement document did not provide the names of any of the Citibank employees who were involved in doing the things Citibank did not admit it had done. Although the observation is accurate and the Order repeatedly refers to a “fund manager,” since Citigroup did not admit that any of the matters in which the fund manager was described as having participated took place, it probably made sense to the person writing the Order, that the fund manager remain anonymous. After all, he or she hadn’t done anything. Go figure.

Thursday, August 27, 2015

The Citizen and The Court

Give me your tired, your poor,
Your huddled masses yearning to breathe free. . . .
— Emma Lazarus, Inscription for the Statue of Liberty

It is easy to make fun of Donald Trump just because we have never before had a candidate for president who had orange hair. But most commentators realize that when someone is hoping to become the president of the United States we should ignore his appearance and focus on more substantive matters. We should be especially grateful when a suggestion a candidate makes gives us historical pause and cause to review U.S. Supreme Court decisions. Mr. Trump’s suggestion about repealing the Fourteenth Amendment gives us the opportunity to not only examine the case that gave rise to the Fourteenth Amendment but to compare that case with a more recent U.S. Supreme Court decision. Both decisions involve citizenship and the rights accompanying that status. One expands the notion of what rights certain citizens have whereas the other restricts the rights of individuals born in this country.

The Fourteenth Amendment was passed in response to the 1857 U.S. Supreme Court decision in the case of Dred Scott, a black slave. Like the U.S. Supreme Court in 2010, the 1857 Court comprised Justices who had peculiar ideas of who citizens were and what rights were accorded them. In the case of Citizens United vs. Federal Election Commission, the question the Court considered was whether in the political speech context (which includes spending money to advance causes it supports) the government could impose restrictions on certain disfavored speakers such as corporations or whether that violated their First Amendment free speech rights. Five of the Justices concluded that the First Amendment to the United States Constitution invalidated laws that treated corporations as political citizens different from human beings as political citizens when considering limits on how much money the corporations could spend furthering their interests in elections. Justifying the decision Justice Kennedy explained: “Corporations and other associations, like individuals, contribute to the ‘discussion, debate and the dissemination of information and ideas’ that the First Amendment seeks to foster.” As a result he concludes, many thousands of words later, limits on how much corporations can spend in elections are invalid. As Justice Stevens observed in his dissent: “The basic premise underlying the Court’s ruling is its iteration, and constant reiteration, of the proposition that the First Amendment bars regulatory distinctions based on a speaker’s identity, including its “identity” as a corpo¬ration. While that glittering generality has rhetorical appeal, it is not a correct statement of the law. . . . The conceit that corporations must be treated identically to natural persons in the political sphere is not only inaccurate but also inadequate to justify the Court’s disposition of this case. . . .Under the majority’s view, I suppose it may be a First Amendment problem that corporations are not permitted to vote, given that voting is, among other things, a form of speech. “

Whereas Citizens United found that corporate citizens had rights that for many years had only been accorded human-type citizens, the 1857 case of Dred Scott v. Sandford went the other way. It made clear that Negroes were not citizens for any purpose. Dred Scott brought a lawsuit in federal court for damages as a result of physical abuse he had suffered when a slave. He alleged that he had the right to have his case considered by the Federal Court under the rule that says citizens of different states may sue one another in Federal Court. Chief Justice Roger B. Taney of the United States Supreme Court wrote the opinion in which he said that neither Mr. Scott nor any other Negro whose ancestors were imported into this country, and sold as slaves could ever become citizens. “We think they are not [citizens] and. . . were not intended to be included, under the word “citizens” in the Constitution. . . . It appears affirmatively on the record that he [Scott]is not a citizen, and consequently his suit against Sandford [the defendant]was not a suit between citizens of different States, and the court had no authority to pass any judgment between the parties. The suit ought, in this view of it, to have been dismissed by the Circuit Court, and its judgment in favor of Sandford is erroneous, and must be reversed.”

Following the end of the civil war the Fourteenth Amendment was enacted. It overturned the Dred Scott decision. That Amendment begins by stating that: “All persons born or naturalized in the United States, and subject to the jurisdiction thereof, are citizens of the United States and of the State wherein they reside.” It is that Amendment that Mr. Trump plans to repeal when elected. It is beyond the scope of this column to describe the procedure involved in amending the United States Constitution. It is not beyond the scope of this column, however, to hope that just as the Fourteenth Amendment to the Constitution was passed to overturn a patently absurd decision made in 1857, perhaps a similar amendment will be passed to overturn an equally absurd decision made in 2010 by a group of Justices every bit the intellectual equal of Chief Justice Taney and his colleagues.

Thursday, August 20, 2015

Many Happy Returns

When the end of the world comes, I want to be living in retirement. —Karl Kraus, Aphorism

This column is about a birthday present for Social Security. It is the present that Social Security wants more than anything in the world. And it’s the present Republicans have the hardest time figuring out how to give—money.

The reason Social Security wants money is not because it is 80 years old and forgot to prepare for its old age. It’s because of demographics over which it had no control. More and more baby boomers are attaining retirement age and qualifying for Social Security payments and Social Security is finding itself having to support a lot more people than it anticipated when it began. Furthermore, there are fewer workers paying Social Security taxes and more people are getting benefits. The result is that by 2033 the Social Security trust fund which is now covering shortfalls will be depleted and its income from taxes paid by the reduced number of workers in the work force will enable it to recoup no more than $.77 on each dollar it pays out. There is nothing future retirees can do to solve the problem but there are things Congress can do. Here are some of the solutions being considered by Congress. Readers may come up with others. The question you will be asked to answer at the conclusion of this piece is what is the best solution. Here are the options:

(a) Cut the benefits for present and future beneficiaries by 17%. People who rely on Social Security as their only source of income could adjust to this cut by lowering their spending by 17%. People with large retirement accounts or other wealth would not even notice the cut. That makes it an attractive solution for all but those who consider Social Security an important part of their retirement planning. One analysis says that this proposal would reduce the shortfall by 100%, funding the program for the next 75 years.

(b) Raise the retirement age. Instead of permitting people to begin collecting benefits at 67, as is the case for everyone born after 1960, increase the retirement age to age 68 for five years beginning in 2023 and then raise it to age 70 for the period between 2023 and 2069. As with the preceding proposal, the people this affects the most are those who cannot afford to quit working until they qualify for Social Security. Those whose retirement is not tied to when their Social Security payments begin won’t notice the change. That would reduce the shortfall by only 20%, not much of a birthday present for Social Security.

(c) Change the cost-of-living adjustments. Instead of increasing monthly payments by corresponding changes to the consumer price index, use a different way of calculating the increase that would increase more slowly. This would very likely only affect the monthly payments that retirees get by a very few dollars and will only be noticed by those without outside savings or sources of income. Those people will probably notice if their checks are reduced by a few dollars but they can adjust by lowering their standard of living ever so slightly. That would reduce the shortfall by 20%.

(d) Institute means testing for recipients of Social Security. Means testing is a way of reducing benefits for those who do not rely on Social Security as their sole source of support and would be seen by those who do as leveling the playing field since it affects those seen as better off. An arbitrary figure could be selected with the provision that anyone whose outside income is above a specified amount would lose a percentage of his or her Social Security benefits and someone with an outside income of an even greater amount would lose all his/her benefits. Whereas the other proposals described above are unpopular primarily with those who rely on monthly payments for security, this proposal is disliked by rich and poor alike. According to one report 64 per cent of Republicans and 60 percent of Democrats opposed this idea. Why those who usually are in favor of helping the poor oppose it is unclear.

(e) Eliminate the tax cap. Today all wage earners pay Social Security taxes on 12.4% of their wages up to $118,500 of earned income. Here is how that works. Jamie Dimon is the president of JPMorgan Chase. He earned approximately $20 million in 2014. He paid $7347 in Social Security taxes in 2015 and his employer paid the same amount. A worker who only earns $118,500 will pay exactly the same amount as Mr. Dimon. If there were no cap and all of Mr. Dimon’s compensation were subject to the Social Security tax, he would have paid $1,240,000 into the Social Security Trust Fund in 2015. The bank would have paid the same amount. Those and similar payments like them would make the trust fund solvent forever.

There are of course proposals in addition to those set out above that might give Social Security a happy birthday and readers will come up with their own. Here, however, is the quiz: if you were a member of Congress and had to vote on one of the preceding ways of helping to restore solvency to the Social Security Trust Fund, which one would you choose? If you selected (e) you should continue doing whatever it was you were doing before you started reading this column since there is no future for you in politics. If you voted for one of the other solutions you should consider a career in Congress. You have what it takes to serve.