Citigroup Settlement's Fine Print: Government Housing Hubris

The $7 billion Citigroup settlement with the Department of Justice, the largest civil fraud penalty in U.S history, has rightfully drawn criticism for failing to compensate the alleged victims of the bank’s pre-financial crisis mortgage securitization practices: those investors stuck with non-performing securities who were insufficiently warned of the latter’s risks.

But the lengthy penalty agreement deserves scrutiny for other reasons, too—notably, its requirement that Citi dedicate $2.5 billion for “consumer relief” that includes financing for affordable housing, as defined by the government. Notwithstanding Justice Department confidence that the funds will benefit low-income households, the diktat is better understood as merely the latest installment of federal housing policies based on bureaucratic hubris; as likely to hurt the poor, as to help.

The details, spelled out in the agreement, are these. Citigroup’s settlement requires it to finance “affordable housing developed through (the Low Income Housing Tax Credit).” The requirements—which, if fulfilled, allow Citi to reduce its corporate tax liability—reflect Washington’s idea of a proper housing development: 20 percent of units set-aside for households with incomes half, or less, of their area’s median income, and 40 percent set aside for those at 60 percent or below. Citi must, moreover, finance “critical need housing,” with 40 percent of units having two or more bedrooms, and another 10 percent having three or more. Such requirements reflect the received wisdom in affordable (read, subsidized) housing circles today: mixed-income developments, made possible through subsidies, will succeed where previous generations of housing for the poor (such as public housing) failed.

All this offers plenty of cause for concern. First, there is the lesson about the implications of a high (35 percent) corporate tax rate. Citi’s tax exposure makes it possible for Washington to effectively pressure the company into a decision about how to allocate scarce capital. That’s what tax credits, such as the $6.7 billion low-income housing tax credit, are all about: favoring one use of capital over another. Unconsidered in such decisions as the Justice settlement is the opportunity cost: what new businesses Citi might have invested in, what jobs will not be created. Indeed the government, unconcerned about whether the housing finance investment will pay off for Citi, is effectively treating the mega-bank as a sort of not-for-profit, reflecting the blurring of sectors that accompanies hyper-regulation.

Then there is Washington’s confidence that a specific division of income groups within a single housing development is best for all concerned. Such tax-subsidized developments, however, call on taxpayers of modest means around the country to support what are often costly apartment complexes for a select few lower-income households. Nor is there evidence to support the idea that poorer households will do better—economically, educationally—in such mixed-income settings. Indeed, HUD-supported evaluation research of similar programs has shown no such positive effects.

Indeed, as with early utopian promises of public housing projects, bureaucratic ideas of how Americans should live—such as those which Citi’s billions will support—tend to go awry. Consider the story of the Portland, Oregon subsidized development New Columbia, built ten years ago, as the Portland Oregonian recently reported, “as a replacement for the run-down crime-ridden Columbia Villa”, a 1942 public housing project in North Portland. The replacement community was to bring together “2,500 residents…from 22 countries and mixed incomes, a diversity” meant to “create a vibrant cross-pollination,” in the words of the “resident services supervisor” of the new complex. Instead, reports the Oregonian, over time “residents rarely mingled. Gang violence made many neighbors feel unsafe. Language and income differences left other residents feeling distant from their neighbors.” (Management today hopes that new, organized social activities, including a weight-loss club, will help bring residents together.)

It is worth noting, further, that the sort of mandate which the Justice department has pushed on Citibank is not unrelated to the array of housing finance mandates (such as the affordable housing goals of Fannie Mae and Freddie Mac) which, as I’ve argued in the New York Times, played a role in precipitating the financial crisis (much to the detriment of the low-income households in whose name they were promulgated). Settlements like that of Citibank’s (and, in all likelihood, the one looming with Bank of America) perpetuate an entire series of misguided housing policy ideas—for which public officials, in contrast to Citi shareholders, never seem to be held accountable.

This piece originally appeared in Forbes

This piece originally appeared in Forbes