Yesterday, I acknowledged and came within inches of praising an SEC resolution with Citigroup on a $1 billion mortgage-backed securities deal. They got $285 million in the settlement, all of which went to investors burned on the deal, which was similar to the setup of deals like Abacus or Magentar: end-bubble deals of synthetic CDOs that the bank knew would fail, where they had outside people with an interest in taking the other side of the bet construct the mortgage pool. This was rampantly illegal, and given some of the other settlements in this area, I thought a 28.5% return on the deal was noticeably higher.

But it turns out I was way premature in citing the SEC settlement as anything but craven. According to Pro Publica, Citi settled ALL its liability with the SEC from this one deal, even though they made plenty of other synthetic CDO deals at that time. They get this on the record from a Citi executive:

In the run-up to the global financial collapse, Citigroup’s bankers worked feverishly to create complex securities. In just one year, 2007, Citi marketed more than $20 billion worth of deals backed by home mortgages to investors around the world, most of which failed spectacularly. Subsequent lawsuits and investigations turned up evidence that the bank knew that some of the products were low quality and, in some instances, had even bet they would fail.

The bank says it has settled all of its potential liability to a key regulator – the Securities and Exchange Commission — with a $285 million payment that covers a single transaction, Class V Funding III. ProPublica first raised questions about the deal in August 2010. In announcing a case, the SEC said it had identified one low-level employee, Brian Stoker, as responsible for the bank’s misconduct.

It made no mention of the dozens of similar collateralized debt obligations, or CDOs, Citi sold to investors before the crash.

A bank spokesman said the SEC would not be examining any of those deals. “This means that the SEC has completed its CDO investigation(s) of Citi,’’ the spokesman asserted in an e mail.

Felix Salmon goes further, looking at all of the SEC’s CDO prosecutions. In all cases, they have made only one enforcement action for each bank investigated. That means that they make a high-profile and largely symbolic settlement on one deal, take back a thimble-full of cash, and ignore the dozens of other deals made under exactly the same premises for which they investigated and fined the bank.

I think Felix uses the right word – collusion. This is regulatory capture of the first order. It’s different from constructing deliberately complex and confusing rules that will never be administered, or just looking the other way at misconduct. This generates the illusion of regulatory enforcement while letting off the offending parties for next to nothing. The exact same premise is at work with the Obama Justice Department’s attempted get out of jail free card for foreclosure fraud. It certainly makes the banks happy, but it’s also a primary reason why there are protesters in Zuccotti Park and across the country.

The SEC denied any wink-and-a-nod deal with the banks, and said in a statement that “we will not hesitate to bring further charges where we determine that there has been unlawful conduct.” But the proof is pretty damning, not only in the bank officials’ statements but in the fact that the SEC has enforced exactly one CDO deal from each financial institution. Obviously the SEC needs some level of proof to bust banks for built-to-fail CDO construction, but the fact that the structures of these deals are so similar across multiple financial institutions suggests that such evidence is in abundance. Pro Publica lists six other deals from Citi that exhibit the same properties as the one for which the SEC busted them. It’s completely arbitrary, and the investors in one deal that the SEC deigns to prosecute are treated far differently than the investors in the ones the SEC essentially indemnifies.

Felix asks, “Is the SEC trying to protect the banks it’s meant to be prosecuting?” It sure looks that way.