Citigroup Settles Charges of Widespread Theft of Customer Funds

We can imagine how a large company might rationalize the actions that led to these charges. Customers have positive credit balances on their cards for a variety of reasons. Why not just "sweep" the cash into your own bank account, and use it as part of your leveraged reserves? The customer does not really need the money, right? Especially if they are "poor or recently deceased." You are merely 'borrowing it' with no harm done. Right? Clever. We're the Master's of the Universe, the smartest boys in the room.

We hate to use this example of Citigroup's bad behaviour when there are much better ones. Not all that long ago Citi was caught consciously manipulating the european bonds markets. They would come into a quiet market, sell a remarkably large amount of government bonds all at once to drive the prices down and run the stops of other traders, and then cover their shorts reaping a tidy little profit. Citigroup Embroiled in Bond Selling Scandal Sounds like standard operating procedure for the US futures and commodity markets to us.

But Citi is not an outlier. Anyone who thinks the brokerage and investment industry can be self-regulated, relying upon mature and enlightened self-interest, is either naive, corrupt, disingenuous, or misinformed. Wall Street has proven time and again that the lure of quick profits will cause them to subvert any and all oversight and prudent business principles. And there are many scams and frauds in the markets from a variety of smaller players as we all know. But it is the systemic frauds, the price manipulation and naked shorting, that is particularly insidious and destructive of free markets.

Strong independent regulators capable of investigating potentially criminal activity are needed and not a bunch of propeller heads or captive regulators. The Fed is utterly unequipped and incompetent to rein in these sharks as principle regulator. It would be like sending in the Schoolyard Safety Patrol to maintain order at a pedophiles convention.


AP
Citi pays $18M for questioned credit card practice
Tuesday August 26, 3:05 pm ET
By Madlen Read

NEW YORK (AP) -- Citigroup Inc. will pay nearly $18 million in refunds and settlement charges for taking $14 million from customers' credit card accounts, California's attorney general said Tuesday....

"The company knowingly stole from its customers, mostly poor people and the recently deceased, when it designed and implemented the sweeps," said Brown in a statement. "When a whistleblower uncovered the scam and brought it to his superiors, they buried the information and continued the illegal practice."

Citigroup, however, said in a statement that it voluntarily stopped the computerized "sweeping" practice in 2003, and that it also voluntarily began refunding customers before the settlement.

"We take issue with the state's characterization of our conduct and the parties' voluntary settlement," Citigroup said in a statement. "This agreement affirms our actions, and we are continuing to make full refunds to all affected customers," Citigroup said.

Citigroup shares rose 2 cents to $17.63 in afternoon trading.


Citigroup settles with California over credit card skimming
By Wallace Witkowski
MarketWatch
12:22 p.m. EDT Aug. 26, 2008

SAN FRANCISCO (MarketWatch) -- Citigroup Inc. settled charges that it stole from its customers using a computer program that skimmed positive credit card balances into the bank's general fund, according to the California Attorney General's office Tuesday. Under the settlement, Citigroup will return more than $14 million to customers with 10% interest, and pay California $3.5 million in damages and civil penalties.

Abu Dhabi Bank Sues Morgan Stanley, Bank of NY and Ratings Agencies for Fraud

Abu Dhabi bank sues in U.S. over risky investments
Mon Aug 25, 2008 6:36pm EDT

NEW YORK, Aug 25 (Reuters) - A United Arab Emirates bank sued Morgan Stanley, the Bank of New York Mellon Corp and ratings agencies Moody's and S&P on Monday, accusing them of fraud in operating a fund that collapsed in the U.S. credit crisis.

The lawsuit filed by Abu Dhabi Commercial Bank in U.S. district court in Manhattan said a complex deal known as the Cheyne Structured Investment Vehicle (SIV) was marketed by the defendants as highly rated and reliable, but they had hidden the risks.

"Instead of protecting the SIV and its investors as promised, defendants exposed the SIV to significant undisclosed risks," the lawsuit said. "Defendants knew the assets purchased and held by the SIV were risky and of poor quality. They further knew the models used to generate the high rates were flawed."

SIVs, which once held some $350 billion in assets, have played a major role in the U.S. credit crisis, after proving unable to refinance their short-term debts.

A series of SIVs are now selling off bank debt and assets such as asset-backed securities to try to pay back investors, a move that many see as further pressuring credit markets.

A deal was announced last month to restructure Cheyne, which at receivership was a $7 billion fund. Many investors who elected to stay in the restructured fund now have assets worth less than one-half of their former value, and the Abu Dhabi Commercial Bank's investment is worth zero now, the complaint said.

A spokeswoman for Morgan Stanley and a spokesman for Bank of New York Mellon declined to comment.

A spokesman for S&P parent McGraw-Hill Cos Inc declined comment, saying the company had not yet been served with the complaint.

A spokesman for Moody's Corp was not immediately available for comment.

SIVs used short-term funding, such as asset-backed commercial paper, to buy longer-term assets such as bank debt and asset-backed securities.

The bank brought the action on behalf of all investors who bought investment grade Mezzanine Capital Notes issued by Cheyne Finance PLC and its wholly owned subsidiary Cheyne Finance Capital Notes from October 2004 to October 2007.

"The ratings agencies intentionally, recklessly or negligently misled investors in Cheyne," according to the suit. "But for the ratings agencies violations of law, the capital notes never would have been issued."

Just a Pause for the Commodity Bull Market in the Collapse of Bretton Woods and the Pax Americana

The author of this thoughtful piece rests his argument for a resurgence in commodity prices on three pillars: oil is the heart of the commodity price bull market, oil is peaking in production, and overall demand for all commodities will continue to stress against supply levels even with reduced demand for the short term. Commodities trends and production increases are long cycle phenomena.

We have come to a similar conclusion but from a different path. The eye of the commodities storm has not been oil, and peak oil, but rather a collapsing international trade system based on the US dollar.

The heart of the problem is that trading increasingly worthless dollars for hard goods has been a nice protection racket with an amazingly long run under the Pax Americana. The non-G7 countries will stop accepting this arrangement, and the world will adjust.

The markets are searching for a replacement for the Bretton Woods II arrangement of dollars for oil and military protection. Increased demand and peaks in supply will merely accelerate and intensify the storm.

We think that this is already well underway, thanks in great part to the Clinton-Bush Administrations and their careless disregard for the stewardship which the US accepted with the world's reserve currency. The heightened sense of risk and volatility is because the world's markets do not yet see a viable, sustainable solution.

A new equilibrium that will underpin international trade will be discovered. But given the length and breadth of the status quo the seismic shocks of the adjustment may be quite convulsive, taking down more than a few major institutions. The epicenter for this global earthquake is somewhere between New York and Washington DC.


Commodity Bull's Not Dead, Just Resting
Vijay L Bhambwani
Daily News & Analysis - India
August 23, 2008 03:57 IST

Once the deliberate downward pressure on these assets eases, there will be a resurgence in prices

Recent days have seen an intense debate within the analyst community on the hot topic of the year — commodity prices. Many have started writing obituaries for the commodity bull and pronounced an end to the ascent in commodity prices. The impact on the corporate sector was advocated to be salutary and it was widely expected to signal an end to the woes of the equity investors....

I expect the post-US election year to be particularly tough on the global energy front as the supply-side constraints choke the optimists. Once the deliberate downward pressure on these hard assets is eased, there will be a resurgence in prices.

I am afraid the following rally may just surpass the recent one. In my humble opinion, the commodity bull is just taking a breather, forget his obituary for now. The future shock will lie not in rising commodity prices, but in not preparing for it.

A Perfect Storm of a Global Recession - Roubini

Roubini's analysis has been better than most. A worldwide recession is highly probable.

At some point we will most likely see competitive devaluations of currencies as countries vie for exports. We will see a de facto trade war, not explictly until much later in the cycle perhaps, but implicitly through policies and barriers more subtle than overt tariffs. The industrial policies of Japan and China are just a taste of things to come.

A currency devaluation is a very effective means of erecting trade barriers and encouraging exports. But without a global reference point the situation can quickly deteriorate into a relative competition with commodities assuming the more narrow prior position of gold, which would rise with the general tide of commodities. This will break the Central Bank's scheme to maintain Bretton Woods II.

This may be the fuel for the continuing stagflation despite flagging demand in the G7. The BRIC's will slow, but still maintain a positive growth. As currencies devalue the commodities may ironically become more expensive. We may see a repeat of the 1970's but on a global scale. That might be something for the economics professors to puzzle on for a few years as their models get marked to the markets.

The Perfect Storm of a Global Recession
by Nouriel Roubini
Project Syndicate

NEW YORK – The probability is growing that the global economy – not just the United States – will experience a serious recession. Recent developments suggest that all G7 economies are already in recession or close to tipping into one. Other advanced economies or emerging markets (the rest of the euro zone; New Zealand, Iceland, Estonia, Latvia, and some Southeast European economies) are also nearing a recessionary hard landing. When they reach it, there will be a sharp slowdown in the BRICs (Brazil, Russia, India, and China) and other emerging markets.

This looming global recession is being fed by several factors: the collapse of housing bubbles in the US, United Kingdom, Spain, Ireland and other euro-zone members; punctured credit bubbles where money and credit was too easy for too long; the severe credit and liquidity crunch following the US mortgage crisis; the negative wealth and investment effects of falling stock markets (already down by more than 20% globally); the global effects via trade links of the recession in the US (which still counts for about 30% of global GDP); the US dollar’s weakness, which reduces American trading partners’ competitiveness; and the stagflationary effects of high oil and commodity prices, which are forcing central banks to increase interest rates to fight inflation at a time when there are severe downside risks to growth and financial stability.

Official data suggest that the US economy entered into a recession in the first quarter of this year. The economy rebounded – in a double-dip, W-shaped recession – in the second quarter, boosted by the temporary effects on consumption of $100 billion in tax rebates. But those effects will fade by late summer.

The UK, Spain, and Ireland are experiencing similar developments, with housing bubbles deflating and excessive consumer debt undercutting retail sales, thus leading to recession. Even in Italy, France, Greece, Portugal, Iceland, and the Baltic states, frothy housing markets are starting to slacken. Small wonder, then, that production, sales, and consumer and business confidence are falling throughout the euro zone.

Elsewhere, Japan is contracting, too. Japan used to grow modestly for two reasons: strong exports to the US and a weak yen. Now, exports to the US are falling while the yen has strengthened. Moreover, high oil prices in a country that imports all of its oil needs, together with falling business profitability and confidence, are pushing Japan into a recession.

The last of the G7 economies, Canada, should have benefited from high energy and commodity prices, but its GDP shrank in the first quarter, owing to the contracting US economy. Indeed, three quarters of Canada’s exports go to the US, while foreign demand accounts for a quarter of its GDP. (This is why the loon will track US performance more closely than other commodity currencies as we have noted before - Jesse)

So every G7 economy is now headed toward recession. Other smaller economies (mostly the new members of the EU, which all have large current-account deficits) risk a sudden reversal of capital inflows; this may already be occurring in Latvia and Estonia, as well as in Iceland and New Zealand.

This G7 recession will lead to a sharp growth slowdown in emerging markets and likely tip the overall global economy into a recession. Those economies that are dependent on exports to the US and Europe and that have large current-account surpluses (China, most of Asia, and most other emerging markets) will suffer from the G7 recession. Those with large current-account deficits (India, South Africa, and more than 20 economies in East Europe from the Baltics to Turkey) may suffer from the global credit crunch. Commodity exporters (Russia, Brazil, and others in the Middle East, Asia, Africa, and Latin America) will suffer as the G7 recession and global slowdown drive down energy and other commodity prices by as much as 30%. Countries that allowed their currencies to appreciate relative to the dollar will experience a sharp slowdown in export growth. Those experiencing rising and now double-digit inflation will have to raise interest rates, while other high-inflation countries will lose export competitiveness.

Falling oil and commodity prices – already down 15% from their peaks – will somewhat reduce stagflationary forces in the global economy, yet inflation is becoming more entrenched via a vicious circle of rising prices, wages, and costs. This will constrain the ability of central banks to respond to the downside risks to growth. In advanced economies, however, inflation will become less of a problem for central banks by the end of this year, as slack in product markets reduces firms’ pricing power and higher unemployment constrains wage growth.

To be sure, all G7 central banks are worried about the temporary rise in headline inflation, and all are threatening to hike interest rates. Nevertheless, the risk of a severe recession – and of a serious banking and financial crisis – will ultimately force all G7 central banks to cut rates. The problem is that, especially outside the US, this monetary loosening will occur only when the G7 and global recession become entrenched. Thus, the policy response will be too little, and will come too late, to prevent it.