Jed Rakoff is quite the hero. A New York District judge, he has done what the rest of us would love to do, and busted a cosy deal between bankers and their regulators. In early 2007, just when everything was starting to slide, the caring, sharing boys at Citigroup assembled a $1 billion fund of, ahem, less-than-prime mortgage-backed securities. As Judge Rakoff explained.

“That allowed [the bank] to dump some dubious assets on misinformed investors. This was accomplished by Citigroup’s  misrepresenting that the fund’s assets were attractive investments rigorously selected by an independent investment adviser, whereas in fact Citigroup had arranged to include in the portfolio a substantial percentage of negative projected assets and had then taken a short position in those very assets it had helped select.”

 Sounds familiar? Everyone was doing it and, like everyone else, Citi will neither admit nor deny wrongdoing. It doesn’t quarrel with figures which show a profit of $160 million for the bank, and losses of $700 million for the hapless punters. The SEC got on the case, and Citi has “disgorged” the $160 million, plus $30 million in interest. The bank has paid a “civil penalty” of $95 million and – get this – promised not to do what it doesn’t admit to have done, for at least another three years.
  It’s easy to see why the judge’s gorge rose when the bank and its semi-captive regulator asked him  to rubber-stamp this shabby little deal. He described the sums as “pocket change” for Citigroup. As for the bank’s pledge of future good behaviour, he decribed it as “recidivist”, adding that even if the allegations of wrongdoing were themselves wrong, the penalties were merely a modest addition to the cost of doing business.

This is surely the point. The banks behaved dreadfully in the boom years, booking collossal profits. The bankers may have suspected that these profits were illusory, but as bonuses the size of a small country rolled in, why say so? The SEC may huff about the difficulty of a formal prosecution, and how Rakoff’s judgement is is overturning long-standing precedent but, as the judge put it, this is “hallowed by history, but not by reason”. Citicorp’s punishment for bad behaviour is manifestly insufficient to prevent it doing something similar, since the bankers get the rewards, and the buyers take the risk. Thanks to Judge Rakoff, all the dirty linen is now going to get aired. Throwing the deal out, he set the case down for next July. It should be a cracker.