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New York Attorney General forces Citigroup to give back $7 billion.
August 7, 2008 12:32 PM

Since Ronald Reagan became president in 1980, the word "government" has become a four letter word, especially when it comes to the private sector. The past eight years has been a particularly fruitful period for big business running rampant over us citizens, taking from the "commons" and exploiting investors.

One particularly egregious example is in the Auction Rate Securities market. If you haven't heard of Auction Rate Securities, it's probably because you had no need for them. But this $200 billion market seized up earlier in the year when the credit crises hit, and millions of investors have been unable to retrieve their money from big banks across the nation even though they were told that the money was good as cash:

Beginning on Thursday, February 7th, 2008, auctions for these securities began to fail when investors declined to bid on the securities. The four largest investment banks who make a market in these securities (Citigroup, UBS AG, Morgan Stanley and Merrill Lynch) declined to act as bidders of last resort, as they had in the past. This was a result of the scope and size of the market failure, combined with these own firm's need to protect their capital during the 2008 financial crisis.[citation needed]

On February 13 (2008) 80% of auctions failed. On February 20th, 62% failed (395 out of 641 auctions). As a comparison, from 1984 until the end of 2007, there were a total of 44 failed auctions.

Essentially, what had been a normal market, where investors could redeem their money at any time turned into a nightmare because most of the banks that provided liquidity in the past decided not to provide that service anymore. Hence, the Attorney General of New York, Mario Cuomo, had to step in and sue Citigroup in order to make them cough up the dough:

Citigroup Inc. (C) (C) will buy back more than $7 billion in auction-rate securities and pay $100 million in fines as part of settlements with federal and state regulators announced Thursday.

Citigroup will buy back the securities from tens of thousands of investors nationwide under separate accords with the Securities and Exchange Commission, New York Attorney General Andrew Cuomo and other state regulators. The buybacks will have to be completed by November.

The nation's largest financial institution also will pay a $50 million civil penalty to New York state and a separate $50 million civil penalty to the North American Securities Administrators Association, which represents securities regulators in the 50 states and the District of Columbia.

The SEC also will consider levying a fine on Citigroup, the agency's enforcement director Linda Thomsen, said at a news conference.

So here we have an example of government stepping in to protect and retrieve the people's money, since there was no law that stated that Citigroup had to pony up the money to redeem the auction rate securities.

Thank god we have government on our side working for us, right?

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