of those referrals.
In 2012 the law firm Kirby McInerney agreed to settle a lawsuit against Citigroup on behalf of shareholders for $590 million. The lawsuit charged that Citigroup had lied to shareholders about its financial condition, including its losses from off-balance-sheet accounting tricks. The plaintiffs wrote this about Citigroup’s Collateralized Loan Obligations (CLOs), which were loans to lower credit-rated companies that were then pooled together:
“After purchasing insurance on a CLO tranche, Citigroup would book the difference in the cost of the insurance and the payments of the loan for the entire life of the loan immediately as if the loan had been sold…Additionally, Citigroup engaged in negative basis trades with the billions of dollars of CLO exposure remaining on the Company’s balance sheet. These trades allowed Citigroup to book immediate gain for the entire term of loans by purchasing insurance on their default and, thereby, treat the purchase of insurance as a sale of the loans when, in fact, those loans (or rather, those CLO tranches) never left Citigroup’s books…In addition to the high fees for CLO creation, the ability to create instant gain through these trades was a powerful incentive for Citigroup to issue ever riskier leveraged loans. While revenue from fees and negative-basis trades inflated Citigroup’s earnings on leveraged loans and CLOs, Citigroup kept its shareholders unaware of the artificial source of the gains or the inherent risks in continuing to operate its ephemeral money-making machine.”
