Banking titan Citigroup Inc. is paying $75 million to settle civil charges that it misled investors about its potential losses from subprime mortgages as the housing bust hit in 2007.

The Securities and Exchange Commission announced the settlement with Citigroup on Thursday. It said the company repeatedly made misleading statements in calls with analysts and regulatory filings about the extent of its holdings tied to high-risk mortgages. As borrowers defaulted, Citigroup's losses reached tens of billions of dollars on complex instruments linked to mortgages, pushing the bank to a financial precipice.

Citigroup earned $2.7 billion in the second quarter of this year. So the penalty represents less than 3 percent of its net income from April through June.

The settlement marked the second time in weeks that the agency reached an agreement on punitive action against a major Wall Street firm in connection with the financial crisis. Earlier this month, Goldman Sachs & Co. agreed to pay $550 million to settle civil fraud charges that it sold mortgage investments without telling buyers that the securities had been crafted with input from a client that was betting on them to fail.

Read the full article here on the Yahoo!News website.

Our friends over at Goodwin Procter have an update on some of the stock drop litigation arising out of the subprime crisis.

Numerous ERISA stock drop suits filed in the wake of the recent financial crisis continue to work their way through the system.  To date, no case has gone to trial, but several have resulted in notable decisions at the motion to dismiss and/or summary judgment stages – with victories for both plaintiffs and defendants.

For more information about the decisions coming out of Johnson v. Radian Group, Inc. and Dann v. Lincoln National Corp., please click here and check them out on the Goodwin Procter website.

With the FCIC holding two day's worth of hearings into derivatives, and both AIG leaders and Goldman Sachs executives on the witness list, Bloomberg Businessweek has run a timeline of the "contentious relationship" between the two companies.

From the article:

The relationship, in a two-year period when AIG posted the biggest quarterly loss in U.S. corporate history and Goldman Sachs recorded record profits, involved bets on subprime mortgages. FCIC Chairman Phil Angelides said the panel will today review trades between the two New York-based companies as it probes the role of derivatives in the 2008 credit freeze.

 

“Clearly there was a significant relationship between AIG and Goldman over the issue of derivatives, and it’s an issue we’ve explored to see what happened and what motivated the players, both Goldman and AIG, in that contentious relationship,” he said in a news briefing yesterday. Below is a timeline of key dates in the dealings between AIG and Goldman Sachs since 2008 when the insurer almost collapsed.

Click here to review the full timeline on the Bloomberg Businessweek website.

An overseer of the $700 billion financial sector bailout said Wednesday that insurer AIG defied regulation, leading to a taxpayer-funded rescue that "broke all the rules."

"The company was a corporate Frankenstein, a conglomeration of banking and insurance and investment interests that defied regulatory oversight," said Congressional Oversight Panel Chairwoman Elizabeth Warren at a hearing on American International Group's bailout held by the

Warren said the government's lack of oversight of AIG and the insurer's monstrous nature explain why the company got a $182 billion government bailout rather than a traditional bankruptcy proceeding.

"Its complexity, its systemic significance, and the fragile state of the economy may all arguably have been reasons for unique treatment," she said. "But no matter the justification, the fact remains that AIG's rescue broke all the rules, and each rule that was broken poses a question that must be answered."

Read the full story, and see a video interview with Hank Greenberg, here on the CNN Money website.

Goldman Sachs' legal headaches don't start and end with the Securities and Exchange Commission.

Reports surfaced late Thursday that federal prosecutors have opened a criminal investigation into Goldman and its employees, over whether it may have committed securities fraud in its mortgage trading operations.

A representative for the firm would not confirm reports of an inquiry, but said they were not surprised given the scrutiny the firm has endured in recent weeks, adding they would cooperate with any requests for information.

The latest legal action builds on the high-profile civil case brought against the company last month by the SEC, in which the agency charged the firm and one of its employees with defrauding investors in the sale of securities tied to subprime mortgages.

Read the full story here on the CNNMoney.com website.

Photo from Businessweek.

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 From the Associated Press - The government is accusing Wall Street powerhouse Goldman Sachs & Co. of defrauding investors in its disclosures about securities it sold tied to subprime mortgage securities as the housing market was faltering.

The Securities and Exchange Commission announced Friday civil fraud charges against Goldman Sachs and one of its vice presidents. The agency alleges that the company marketed complex subprime mortgage securities and failed to disclose to investors that a major hedge fund had bet against the securities.

http://www.msnbc.msn.com/id/36597290

Knowledge Today, Wharton's daily news update, has an interesting article about Ruth Porat.  Ms Porat, whose ascent next month to the role of chief financial officer at Morgan Stanley was announced Tuesday, directed the firm's financial-institutions investment-banking business as the financial crisis unfolded in the fall of 2008.

At the Wharton conference, Porat pointed to three factors that are critical to the ongoing process of recovery: First, keeping the economy going; second, enacting global regulatory reform without putting a drag on the economy; and third, unwinding the government intervention that was critical to stabilizing the economy in the initial stages of the crisis. She also noted that key data are already showing improvement. Key stock indices have rebounded and market volatility has settled. Debt spreads, which had “exploded, making it very difficult to finance businesses that relied so much on the debt markets,” have been reined in “materially."

You can read the full article here on the Warton website.

This Fox Business interview with Attorney Robert Profusek discusses what correlation, if any, exists between executive pay and banking risk.

Goldman Sachs has become the first bank to settle a legal investigation into the credit derivatives at the heart of the financial crisis, agreeing to paying $60m to the state of Massachusetts.

Martha Coakley, the state's attorney-general, had been examining if there was fraud or negligence when Wall Street traders packaged sub-prime loans into securities that could be sold on to other investors. Many sub-prime borrowers were never likely to be able to afford to pay back the loan, it has since become clear, and the insatiable demand for mortgages on Wall Street is blamed in part for the collapse in lending standards and the encouragement of fraudulent mortgage applications.

Read the full story here on the Indpendent website.

This is an interesting look back, provided by the New York Times, of the week that began the catastrophic downturn of the global economy.

Read the full article here on the New York Times website.

A federal judge in Manhattan has rejected an argument by Countrywide Financial seeking certain protections from investor lawsuits under new legislation intended to encourage modifications of home loans.

Countrywide, the big mortgage company, had argued that the legislation automatically voided its pledges to buy back loans from investors if those loans were modified for troubled borrowers.

The ruling is a win for holders of mortgage-backed securities who sued Countrywide in December after the company, now a unit of Bank of America, agreed to modify thousands of loans in a settlement with state attorneys general. The opinion, by Judge Richard J. Holwell of Federal District Court in New York, was made public on Tuesday.

Read the full story here on the New York Times Website.

In an official notice sent to Charles Schwab & Co. Friday, Attorney General Andrew Cuomo warned that his office plans to sue the largest online brokerage firm for civil fraud over its marketing and sales of auction-rate securities to clients. Emails and testimony cited in the letter show Schwab's brokers had little idea of what they were selling and later failed to tell clients that the market was collapsing.

Auction-rate securities -- short-term debt instruments whose prices reset in periodic auctions -- caused billions in losses for investors after the $330 billion market collapsed in early 2008.

Read the full story here on the Wall Street Journal website.

It is hard not to be dismayed by the fact that two years into our economic crisis so few perpetrators of financial misdeeds have been held accountable for their actions. That so many failed mortgage lenders do not appear to face any legal liability for the role they played in almost blowing up the economy really rankles. They have simply moved on to the next “opportunity.”

And what of the giant institutions that helped finance these monumentally toxic loans, or arranged the securitizations that bundled the loans and sold them to investors? So far, they have argued, fairly successfully, that they operated independently of the original lenders. Therefore, they are not responsible for any questionable loans that were made. But this argument is growing tougher to defend. Some legal experts point to a number of cases in which plaintiffs contend that firms involved in the securitization process, like trustees hired to oversee the pools of loans backing securities, worked so closely with the lenders that they should face liability as members of a joint venture. And these experts see a rising receptiveness to this argument by some courts.

Read the full story here on the New York Times website.

When it comes to bailouts of American business, Barney Frank and the Congress may be just getting started. Nearly two trillion tax dollars have been shoveled into the hole that Wall Street dug and people wonder where the bottom is.

As correspondent Scott Pelley reports, it turns out the abyss is deeper than most people think because there is a second mortgage shock heading for the economy. In the executive suites of Wall Street and Washington, you're beginning to hear alarm about a new wave of mortgages with strange names that are about to become all too familiar. If you thought sub-primes were insanely reckless wait until you hear what's coming.

See the full video from CBS 60 Minutes by clicking here.

American International Group, once the world's largest insurer, owes around $10 billion to other financial services firms for trades that have gone sour, the Wall Street Journal reported in its online edition on Tuesday.

The report, citing people familiar with the matter, says the trades have not been explicitly disclosed before, and are not covered by terms of a current $150 billion U.S. government rescue package.

The government's rescue package was meant to save AIG from collapse, but the Wall Street Journal report says the newly discovered trades raise further questions about how the insurer will raise money to pay the debts.

An extensive new complaint in a lawsuit against Citigroup charges that the banking giant misled investors about the size and risk of its housing-market wagers, raising questions about how early the bank knew it faced serious trouble from the assets that have plagued its balance sheet and stock price.

Laying out its arguments in detail over 500 pages, including a variety of charts, graphs, and tables, the lawsuit accuses Citi of "shamelessly fraudulent schemes" to hide the risk the company was taking on as it bought, repackaged, and sold mortgage debt and related securities. Among other allegations, the lawsuit says Citigroup ignored market indexes when pricing some securities, using instead a variety of methods that the company had called unreliable in valuation guides.

Read the full story here on the BusinessWeek website.

The Bush administration backed off proposed crackdowns on no-money-down, interest-only mortgages years before the economy collapsed, buckling to pressure from some of the same banks that have now failed. It ignored remarkably prescient warnings that foretold the financial meltdown, according to an Associated Press review of regulatory documents.

"Expect fallout, expect foreclosures, expect horror stories," California mortgage lender Paris Welch wrote to U.S. regulators in January 2006, about one year before the housing implosion cost her a job.

Bowing to aggressive lobbying -- along with assurances from banks that the troubled mortgages were OK -- regulators delayed action for nearly one year. By the time new rules were released late in 2006, the toughest of the proposed provisions were gone and the meltdown was under way.

Read the full story here on CNN.Com.

The government unveiled a bold plan Sunday to rescue troubled Citigroup, including taking a $20 billion stake in the firm as well as guaranteeing hundreds of billions of dollars in risky assets.

The action, announced jointly by the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp., is aimed at shoring up a huge financial institution whose collapse would wreak havoc on the already crippled financial system and the U.S. economy.

American Express Co. is seeking $3.5 billion in funds under the government's plan to directly invest in financial firms, according to a Wednesday report in The Wall Street Journal citing unnamed sources. Earlier this week, American Express received approval from the Federal Reserve to become a bank holding company, which is a similar structure to traditional commercial banks. The credit card company now has access to financing from the Fed and the ability to grow a large deposit base.

The increased funding opportunities through government programs, including the potential $3.5 billion investment, could be a huge boost to American Express as one of its primary sources of funding has nearly disappeared amid the ongoing credit crisis.

Read the full story here on the Yahoo! Business website.

Could the volume—and tone—of TV, Web, and print coverage of the market's gyrations actually be making things worse?

Wall Street has been through crises before—1907, 1929, the 1970s, and 1987 all tested investors as much as the financial crisis of 2008. But this time, something is different: Three cable business channels and countless web sites offer 24-hour coverage of financial markets seven days a week.

The sheer quantity of information available raises the question: Could the media actually be contributing to the very crisis it is covering?

During past crises, average investors needed to wait until the evening news or the next day's newspaper to learn how their investments had done.

Federal prosecutors and New York's attorney general said Monday they had taken the unusual step of joining forces to probe the multitrillion-dollar credit-default swap market, an unregulated area of finance blamed for helping to fuel the credit crisis.

The offices of U.S. Attorney Michael Garcia and New York Attorney General Andrew Cuomo acknowledged the unique arrangement in separate statements.

"The attorney general believes that these unprecedented times call for unprecedented levels of effort and cooperation to ensure that our markets are stable, free of fraud and purged of corruption," Cuomo spokesman Alex Detrick said.

He said the joint probe was "aimed at restoring and promoting confidence and stability in the market" and avoiding multiple competing investigations.

Yusill Scribner, a Garcia spokeswoman, said prosecutors wanted to determine if federal laws were violated.

The credit market crisis will shift the balance of power within the finance industry towards insurers and away from banks, the Chief Executive of the world's biggest reinsurer Munich Re said.

German insurers are also unlikely to make use of the 500 billion-euro ($683 billion) rescue package for the financial sector expected to be adopted by parliament this week, Nikolaus von Bomhard told the Hamburg business journalists' club late on Tuesday.

"We ourselves will have nothing to do with it, from today's point of view," von Bomhard said.

Fellow reinsurer Hannover Re has also said it does not plan to make use of the package, while Europe's biggest insurer Allianz says it is well capitalised and has "no direct need" to use the fund.

First the house of Lehman fell. Now the insurance bill is coming due.

Nearly three weeks after the Wall Street bank sank into bankruptcy, financial companies and investment funds that wrote what are effectively insurance policies on Lehman Brothers’ debts are being called on to pay hundreds of billions of dollars in claims.

Whether those claims can or will be paid, and the financial repercussions that could follow if they are not, will signify the biggest test yet for the vast, unregulated market in credit-default swaps.

The danger is that the claims on the Lehman default are so large — they are estimated at $400 billion to $600 billion — that settling them could leave some companies with large, perhaps even crippling, losses and heighten the turmoil in the financial markets.

The Federal Reserve Board said Wednesday that it would provide up to $37.8 billion to the embattled insurer the American International Group to help it deal with a rapidly dwindling supply of cash.

The additional assistance is on top of $85 billion in a bridge loan that the Federal Reserve extended to A.I.G. in September, but it will take a different form. A spokesman for A.I.G., Nicholas Ashooh, said the new assistance was intended to keep the company from having to draw down the Fed loan so quickly.

The Fed threw A.I.G. the $85 billion lifeline shortly after the collapse of Lehman Brothers, when the financial markets were reeling and there were doubts the system could weather the demise of another big financial services company. At the time, the Fed’s loan was the most radical intervention ever by the central bank in a company’s affairs.

Executives at American International Group Inc. hid the full range of its risky financial products from auditors as losses mounted, according to documents released Tuesday by a congressional panel examining the chain of events that forced the government to bail out the conglomerate.

The panel sharply criticized AIG's former top executives, who cast blame on each other for the company's financial woes.

``You have cost my constituents and the taxpayers of this country $85 billion and run into the ground one of the most respected insurance companies in the history of our country,'' said Rep. Carolyn Maloney, D-N.Y. ``You were just gambling billions, possibly trillions of dollars.''

AIG, crippled by huge losses linked to mortgage defaults, was forced last month to accept an $85 billion government loan that gives the U.S. an 80 percent stake in the company.

Read the full story here on the Netscape News website.

Europe's major stock markets hovered around the break-even point Tuesday even as lingering concerns over the credit crisis continued to haunt world markets and financial institutions.

Nearly three hours into the trading day, London's FTSE 100 was down 0.2%, the CAC 40 in Paris gained half a point, and the XETRA DAX in Frankfurt was off 0.6%.

Russia's two main stock exchanges -- the RTS and MICEX -- reopened several hours late on Tuesday, a day after suffering steep plunges. The RTS index fell about 20% Monday. The RTS exchange resumed normal trading at 1 p.m. (5 a.m. ET) and was up 2.6% to 889.1 points as of 2 p.m (6 a.m. ET). The MICEX, where most trading takes place, rose by 3% to 774.5 points. It opened at 1:15 p.m. (5:15 a.m. ET)

Read the full story here on the CNNMoney website.

A year ago, few people had heard of the term credit crunch, but the phrase has now entered dictionaries.

Defined as "a severe shortage of money or credit", the start of the phenomenon has been pinpointed as 9 August 2007 when bad news from French bank BNP Paribas triggered sharp rise in the cost of credit, and made the financial world realise how serious the situation was.

Click here to see an outstanding recap of the credit crunch from a global perspective. This is from the BBC News Website.

In the latest byproduct of the widening global financial crisis, Citigroup Inc. will acquire the banking operations of Wachovia Corp. in a deal facilitated by the Federal Deposit Insurance Corp.

Citigroup will absorb up to $42 billion of losses in the deal, with the FDIC covering any remaining losses, the government agency said Monday. Citigroup also will grant the FDIC $12 billion in preferred stock and warrants.

The deal greatly expands Citigroup's retail outlets and leaves it among the U.S. banking industry's Big Three along with Bank of America Corp. and J.P. Morgan Chase & Co.

The deal comes after a fevered weekend courtship in which Citigroup and Wells Fargo & Co. both were reportedly studying the books of Wachovia, which was suffering from mounting mortgage losses linked to its ill-timed 2006 acquisition of mortgage lender Golden West Financial Corp.

Read the full story here on the Yahoo! website.

Former American International Group Inc. chief executive Maurice "Hank" Greenberg intends to sell his AIG stock, according to a regulatory filing on Thursday.

Greenberg, who ran AIG for nearly four decades, said he plans to sell shares of the New York-based insurer for "liquidity and other purposes," according to a filing with the Securities and Exchange Commission.

Greenberg will sell the stock in the open market, and the sales may "materially" decrease the holdings that he controls, according to the filing.

Greenberg, through a personal stake, family trust and companies that he controls, owns more than 10% of AIG, making him its largest shareholder before the company agreed to a federal bailout that will give the government 80% ownership.

Late Tuesday, AIG said it signed a definitive agreement with the Federal Reserve Bank of New York for a two-year, $85 billion emergency loan at an interest rate of about 11.5%. AIG had teetered on the edge of failure because of stresses caused by the collapse of the subprime mortgage market and the credit crunch that ensued.

Shares of AIG fell 20 cents or 6% to $3.11 in afternoon trading Thursday.

This story is from the AP.

As the debate over a $700 billion bank bailout rages on in Washington, one of the nation's largest banks — Washington Mutual Inc. — has collapsed under the weight of its enormous bad bets on the mortgage market.

The Federal Deposit Insurance Corp. seized WaMu on Thursday, and then sold the thrift's banking assets to JPMorgan Chase & Co. for $1.9 billion.

Seattle-based WaMu, which was founded in 1889, is the largest bank to fail by far in the country's history. Its $307 billion in assets eclipse the $40 billion of Continental Illinois National Bank, which failed in 1984, and the $32 billion of IndyMac, which the government seized in July.

Read the full story here on the Yahoo! Website.

The FBI is investigating four major U.S. financial institutions whose collapse helped trigger a $700 billion bailout plan by the Bush administration, The Associated Press has learned.

Two law enforcement officials said Tuesday the FBI is looking at potential fraud by mortgage finance giants Fannie Mae and Freddie Mac, and insurer American International Group Inc. Additionally, a senior law enforcement official said Lehman Brothers Holdings Inc. also is under investigation.

The inquiries will focus on the financial institutions and the individuals that ran them, the senior law enforcement official said.

Read the full story here on the MSNBC website.

Morgan Stanley topped the list of major financial firms scrambling to find a buyer, while central banks rushed in $180 billion of extra liquidity to bring some calm to panicked stock and money markets.

Morgan Stanley was discussing a deal with U.S. regional banking powerhouse Wachovia, according to a source familiar with the matter, while CNBC said HSBC Holdings and China's CITIC Group were also eyeing Wall Street's second-largest investment bank.

Morgan Stanley shares were up 5 percent in trading before the New York Stock Exchange opened.

Despite a lot of skepticism early in the day from Congressmen, including Banking Committee Chair Senator Christopher Dodd the Federal Reserve Board is bailing out AIG. The Fed authorized the Federal Reserve Bank of New York to lend up to $85 billion to the strapped insurer. In a statement the board said that “in current circumstances, a disorderly failure of AIG could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth and materially weaker economic performance.”

In exchange for their largess, the U.S. government will receive a 79.9 percent equity interest in AIG.

Stocks turned higher Tuesday after CNBC reported that the government is considering extending aid to troubled insurer American International Group Inc.

A partial recovery in shares of AIG and several other financial companies helped the sector show signs of life a day after leading Wall Street to its worst session in years. Investors also grew hopeful about a Federal Reserve interest rate cut.

The insurance business is all about risk—understanding it, minimizing it, pricing to compensate for it. But American International Group, the biggest insurance company in the world, seems to have had very little concept of the risk it held in its own businesses.

Now, AIG has emerged as the latest victim of the meltdown in the credit markets, reeling from a seemingly endless escalation in what it could owe on transactions involving mortgage-backed securitizations. On Sept. 15, management spent the day in a desperate bid to get help covering those obligations from government sources and other institutions. As the markets closed, its stock slid to $4.76 a share, down from a 52-week high of $70 a share, representing the evaporation of $176 billion in market value in less than one year. While regulators were racing to find some kind of capital infusion that could keep the company standing, ratings agencies slashed AIG's credit rating, making it much more expensive for the insurer to do business.

Three major credit agencies lowered their ratings Monday for American International Group Inc. (AIG), dashing hopes to save one of the one world's biggest insurance companies amid a burgeoning financial crisis.

The downgrades likely looked to sound the death knell for AIG, making it harder for the U.S. insurance giant to raise the cash needed to deal with its own liquidity crisis.

Standard & Poor's Ratings Services lowered its long-term counterparty rating to 'A-' from 'AA-' and its short-term counterparty credit rating on AIG to 'A-2' from 'A-1+,' according to a statement.

When Wall Street woke up Monday morning, two more of its storied firms had fallen.

Lehman Brothers, burdened by $60 billion in soured real-estate holdings, filed a Chapter 11 bankruptcy petition in U.S. Bankruptcy Court after attempts to rescue the 158-year-old firm failed. Bank of America Corp. said it is snapping up Merrill Lynch & Co. Inc. in a $50 billion all-stock transaction.

The demise of the independent Wall Street institutions came as shock waves from the 14-month-old credit crisis roiled the U.S. financial system six months after the collapse of Bear Stearns.

The world's largest insurance company, American International Group Inc., also was forced into a restructuring.

Countrywide Financial Corp. has been sued by New Mexico's investment and pension funds, which accuse the company of misleading investors.

The lawsuit — filed on behalf of the state Investment Council, the Educational Retirement Board and the Public Employees Retirement Association — accuses the mortgage lender of duping investors about the value and safety of mortgage-backed securities.

The lawsuit, filed Friday in state district court in Santa Fe, also names a number of Countrywide affiliates as defendants.

New York Attorney General Andrew M. Cuomo is turning up the heat on some of the largest banks in an apparent effort to convince them to voluntarily agree to work out amends with the customers of auction rate securities.

On Monday, his office announced that it is expanding its investigation into the ARS scandal and has sent letters to JPMorgan Chase, Morgan Stanley and Wachovia alerting the banks that his office will look into the firms' behavior "pertaining to misrepresenting auction rate securities to investors as safe, cash-equivalent products, when in fact they faced increasing liquidity risk."

Also on Monday, Morgan Stanley informed Cuomo's office, as well as the Securities and Exchange Commission and other regulators that it would buy back $4.5 billion worth of ARS to pay back investors. The securities are being held in Morgan Stanley retail accounts and were purchased through the bank prior to February 13, 2008.

The deepening toll from the global financial crisis could trigger the failure of a large US bank within months, a respected former chief economist of the International Monetary Fund claimed today, fuelling another battering for banking shares.

Professor Kenneth Rogoff, a leading academic economist, said there was yet worse news to come from the worldwide credit crunch and financial turmoil, particularly in the United States, and that a high-profile casualty among American banks was highly likely.

“The US is not out of the woods. I think the financial crisis is at the halfway point, perhaps. I would even go further to say the worst is to come,” Prof Rogoff said at a conference in Singapore.

Read the full story here on the TimesOnline.

Ticor Title, one of the largest title insurance firms in the country, is suing Countrywide Home Loans, the nation's largest home lender, saying it shouldn't have to pay out on a title policy because of Countrywide's gross negligence.

The suit, filed last month in Cook County Chancery Court, concerns just one Chicago mortgage made by Countrywide in 2007, but the implications are enormous, say real estate and title insurance experts.

If title insurers refuse to honor their policies, "You would have chaos," predicts Chicago real estate attorney Tom McNulty of Neal, Gerber & Eisenberg. The fate of tens of thousands of troubled properties around the country would be thrown into limbo while lenders and title insurers duke it out. Other deals would be held up because buyers and sellers would be reluctant to move forward without title insurance to protect their investment.