Citigroup a Victim? Doesn't Make Sense to This Banker

Bob Wilmers, the chairman and chief executive of M&T Bank Corp., gave me a call after my column last week about some of the bizarre allegations in the Justice Department's lawsuit against Standard & Poor's and its parent, McGraw-Hill Cos.

Before I get to his comments, a little backstory: The government's lawsuit last week listed about two dozen collateralized-debt obligations issued in 2007 as examples where S&P allegedly defrauded banks and credit unions. Citigroup was identified as a defrauded investor in nine CDOs that were created and sold by Citigroup itself. Bank of America Corp. was listed the same way for two CDOs it underwrote.

The Justice Department suit also named Buffalo, New York-based M&T as one of S&P's victims, in connection with the bank's purchase of subprime mortgage bonds through a deal called Gemstone CDO VII Ltd. However, M&T's fact pattern was much different than Citigroup's or Bank of America's. The notion that M&T might have gotten ripped off by someone other than itself actually makes sense.

Gemstone was underwritten by Deutsche Bank AG -- not M&T. After the bonds defaulted in April 2008, M&T sued Deutsche Bank. M&T last year said it settled the case andreceived $55 million. The government's lawsuit against S&P said M&T "based its decision to invest in Gemstone VII in part on S&P's ratings of the CDO." (M&T hasn't sued S&P.)

So I asked Wilmers: Did it seem right to him that Citigroup and Bank of America were listed among the defrauded investors on CDOs that they themselves underwrote? Here's what he said:

On one hand, it's gratifying to see the government take action against one of the key enablers of the transactions that sparked the financial crisis. Rather than sounding a timely alarm, the credit rating agencies were part of the problem, and we cannot allow organizations that got so many important things so wrong for so long to continue unchallenged.

On the other hand, when you consider all the investors that ended up with worthless CDOs because they relied on AAA ratings, it's hard for me to figure out why the Wall Street banks show up on this list so frequently. I guess you have to be a lawyer to fully understand their case.

Or maybe you have to be a government lawyer.

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