Bloomberg View: A Congressional Character Exits the Stage; Rakoff Strikes Again

A Congressional Character Exits the Stage ● Rakoff Strikes Again

A Congressman Like No Other

After 16 terms in Congress, Barney Frank will be remembered for three things. First, for being an out-of-the-closet gay man at a time when there weren’t any others holding national elected office. (Frank was first elected in 1980 and came out in 1987.) Second, for being the co-author of the Dodd-Frank financial reform bill, passed in response to the near-collapse of the nation’s financial system in 2008. Dodd-Frank will either save us from a new financial catastrophe or bring one on, depending on whom you talk to. We hold something closer to the former view.

Third, but not least, Frank will be remembered as the author of some of the great wisecracks in the history of American politics, including his remark that anti-abortion Republicans believe life begins at conception and ends at birth. Other barbs were aimed at his nemesis, Newt Gingrich. At the news conference announcing his retirement, Frank said he didn’t think he’d led a good enough life to see Gingrich win the Republican nomination for President, but he still had hopes.

Nevertheless, it’s unavoidably poignant that Frank has announced his retirement at the same moment that Gingrich is enjoying his 15 minutes—or more?—as a front-running Presidential candidate.

There aren’t many characters left in American politics, at least at the national level. The label, when applied to a politician, can be double-edged, though it needn’t be. The late Senator Daniel Patrick Moynihan of New York was a character, although he wrote books that transformed the debate on a dauntingly wide range of subjects. (Frank, by contrast, has an unfinished PhD thesis awaiting him at Harvard. Also, he is a hard-working legislator, which Moynihan was not.)

Eccentricity of dress helps to identify a character; this can include the suspiciously dapper, like Moynihan, or the determinedly sloppy, like Frank, shirttails hanging out and glasses perched at a jaunty angle. A bizarre accent is also useful, be it Moynihan’s (straight out of Oxbridge but picked up, somehow, in the slums of Hell’s Kitchen in Manhattan) or Frank’s (learned in New Jersey and never unlearned despite decades in Massachusetts). But the essential quality of characters is that they live their own lives and say what’s on their minds, and they don’t especially care that other people may disagree.

Barney Frank is just such a character. He retires with the satisfaction of knowing not only that he has many friends in both parties, but also that he is cordially disliked by some of the worst people in politics.

A Settlement That Defies Logic Meets a Judge Who Does Not

U.S. District Judge Jed S. Rakoff intimated in October that he wasn’t happy with the Securities and Exchange Commission’s proposed settlement with Citigroup over the creation and sale of a security that cost investors $700 million.

On Nov. 28, Rakoff made it official: The proposed $285 million penalty seemed disproportionately small when compared with the alleged losses, and the agreement would keep secret crucial details of the risky instrument Citigroup was selling. What’s more, Rakoff said, the proposed settlement didn’t serve the public interest because it didn’t do anything to restore faith in the financial markets. The judge ordered Citigroup and the SEC to prepare for a trial in July.

It may never come to that. The SEC and Citigroup will surely try to work out another agreement, but Rakoff still made the right call, and he should stick by it unless the SEC comes back with a much-improved deal.

A little history: In 2007, just as the housing market was about to crash, Citigroup cooked up a $1 billion collateralized-debt obligation known as Class V Funding III. This mind-numbing concoction included other CDOs based on subprime mortgages. Once Citigroup sold it to investors, the bank bet against it and made a profit of at least $160 million. According to the SEC, the CDO was designed to fail.

In his ruling, Rakoff offered a point of comparison in CDO shenanigans. He said Goldman Sachs Group paid $535 million to settle SEC allegations that it created a self-destructing CDO for the benefit of a client, hedge fund manager John Paulson. Goldman’s failing, the SEC said, was in not telling buyers who lost money that Paulson had a hand in picking the securities that went into the CDO.

In Rakoff’s view, Goldman paid a proportionally bigger penalty than Citigroup; Goldman’s $15 million profit was less than a tenth of Citigroup’s haul. The SEC responded that Goldman had acted with scienter, or intent to commit securities fraud. Similar intentions were absent in the actions of Citigroup, which was merely negligent, the SEC said.

Which raises the question: Was the SEC even reading its lawsuit against Citigroup? Unlike Goldman, Citigroup wasn’t doing the traditional work of an investment bank by serving a client; the bank created a toxic security merely to trade against it, believing an implosion was imminent. Goldman, Rakoff said, admitted that it erred in not telling buyers about Paulson’s role and agreed that employees would cooperate with the SEC and offer testimony in court, if needed. Citigroup made no comparable concessions.

It’s possible the SEC was trying to go easy on Citigroup because it’s big and fragile. Citigroup needed multiple infusions of federal bailout money after the 2008 financial crisis. If the SEC’s intent was to protect the bank, then it’s misguided. Too big to fail should never mean too big to punish.

If the SEC’s allegations are true, it should seek a settlement in which Citigroup admits wrongdoing and pays a penalty equal to investor losses and harm done to markets. Otherwise, both sides are probably in for a long march to Judge Rakoff’s courtroom next summer.


    To read Simon Johnson on secret bailouts and William D. Cohan on Hank Paulson’s secret meetings, go to:

    Before it's here, it's on the Bloomberg Terminal.