Case 9
Write to Rubin? – Pressure on Underwriting Standards at Citigroup
“As long as the music is playing, you’ve got to get up and dance.”1 Charles O. Prince III, CEO Citigroup
RICHARD BOWEN HAD HAD JUST ABOUT ENOUGH. Since 2005 Bowen had been Business Chief Underwriter for Correspondent Lending at Citigroup’s Consumer Lending Group (CLG). In this capacity he was responsible for supervising hundreds of underwriters. Their primary job was to ensure that the mortgages purchased were in compliance with Citi’s credit standards. Since moving into this position, Bowen had watched Citi’s adherence to standards steadily erode. Bowen was now convinced that Citi had exposed itself to tens of billions of dollars in losses.
This concern was not theoretical. Bowen’s worries involved assurances, “representations and warranties” in Wall Street parlance, that Citi was giving to investors. Citi repackaged mortgages into securities. When it sold these securities, it warranted that the underlying mortgages adhered to Citigroup’s standards. If, in fact, the loans did not comply and later ran into trouble, investors could “put” their securities back to Citi. Should they be put back, they’d likely be worth only a fraction of their original par value.
Citi’s underwriting practices had decayed despite Bowen’s efforts to stop the slide. Since mid-2006 he had been issuing warnings in all directions. Bowen had convinced his boss that the risks were serious. Together they contacted members of management as well as the CLG Chief Risk Officer. Their message advised that many purchased mortgage pools had defective credit files. The flawed files would evidence the fact that Citi’s representations were not true. Bowen’s boss had warned that “there will be serious long term consequences for failing to take action.”2 In response, his duties were assigned to other executives. Bowen’s boss then retired early in 2007.3
Bowen continued to document that Citi was violating its underwriting standards. He also advised his bosses that subprime mortgage deliquencies were mounting. It was now November 2007. The rating agencies had recently downgraded many subprime securities. Citigroup was shuddering under the impacts of the mortgage market’s unraveling. A major reckoning might be closer than anyone suspected.
Having issued many unheeded warnings, Bowen was wondering how to get his organization’s attention. Citigroup is a huge and complex organization. Power and authority do not always follow the organization chart. Bowen observed, for example, that mortgage “turned down” decisions were being reversed by the Chief Wall Street Risk Officer. On what basis had these underwriting decisions been reversed? Bowen didn’t know. The action had occured well away from him and much higher up.
Recent events intensified matters. Two hedge funds that invested in subprime securities had gone bust. Next had come the raft of ratings downgrades.4 With a crisis seemingly on the doorstep, Bowen wondered if the time for routine warnings had passed. He had drafted an e-mail to Citi Chairman Robert Rubin. The note (Attachment 1) laid out Citi’s legal exposures, giving essential details.
Now that the e-mail was drafted, Bowen was having second thoughts. Going to the firm’s chairman was a bit of a “Hail Mary” pass. Rubin, the former U.S. Treasury Secretary, was a legendary figure. Perhaps Rubin would get interested and intervene. Perhaps he would assign Bowen’s note to some subordinate for handling.
Before hitting the “send” button, Bowen decided to review his options one last time. Perhaps he could still find someone within Citi’s byzantine structure willing to act.
National City Bank Becomes a Giant Financial Conglomerate
Part of Bowen’s problem concerned the organization that Citi had become. By 2007, Citi had grown far beyond its banking roots. Citi was now so huge that it was hard for business unit executives to get messages to top management. Similarly, top managers had only a vague understanding of what was happening at the grassroots level.
Founded in 1812 as City Bank of New York, Citi started as a lender to New York’s commercial interests. For most of the 19th century, it focused on lending to the burgeoning industrial companies headquartered around the city. It also had an active international trade finance business. As the 19th century closed, the bank began opening overseas branches in major U.S. trading partners.5
During the first half of the 20th Century, National City Bank acquired more foreign operations, creating one of the world’s largest international networks. This expansion gave it a hard to duplicate ability to service American multinationals. National City also became a leader in financial innovation. Citi introduced certificates of deposit to attract funding and credit cards for retail and business accounts. The bank also became a leading player in London’s growing Eurodollar market.6
The 1970s inaugurated a period of rapid change for Citibank. On one hand, the bank’s international position was unparalleled. Citibank led the way in recycling petrodollars into loans to governments and helped develop the Eurobond and Yen capital markets. On the downside, Citibank saw many of its industrial clients move away from bank borrowing. Increasingly these name credits turned to investment banks to help them sell bonds in the capital markets.
Facing a threat to its core business, Citibank decided to invade investment bankings’ turf. This effort was crafted by the bank’s aggressive CEO Walter Wriston. For starters, Citibank formed a holding company called Citicorp. This organization would own many subsidiaries, one of which was the historic Citibank. Citicorp launched subsidiaries that bit into investment banking’s domain. The first involved leasing and the issuance of asset-backed securities. Others would follow.
At the same time Citicorp launched a lobbying effort to overturn the Glass-Steagall Act (GSA). This depression-era law prohibited institutions that took retail deposits from selling securities or insurance. Citi’s ambition was to operate like the European “Universal Banks.” Institutions like Barclays and Union Bank of Switzerland (UBS) faced no such prohibitions on permissable lines of business. For Citi to duplicate their approach, Glass-Steagall had to be repealed.
Under Wriston and his successor, John Reed, Citicorp relentlessly expanded the breadth of its financial services. Reed helped lead commercial banks into electronic banking, ATM services and information systems. Acquisitions also played a part. Citi swallowed up regional banks and mortgage lenders. In the process, Citi evolved from a New York bank into a continent-wide bank serving both retail and business customers. Using the Citicorp holding company, Citi also built a network of subsidiaries conducting investment banking business outside the U.S. Citi was now one step away from crossing the “GSA Line.” That line would soon be crossed.
Citi Demolishes Glass-Steagall
The events which led to the crossing were not straightforward. Citicorp itself fell victim to the banking consolidation process it had helped foster. Sandy Weill, the former Shearson Lehman CEO, had his eyes on Citi. A master dealmaker, Weill had taken an obscure firm, Primerica, and used it to capture the Travelers and Aetna insurance firms, plus Smith Barney and Salomon Brothers. In 1998, Weill proposed that Primerica and Citicorp merge.
Weill’s proposal was clearly illegal under the provisions of Glass-Steagall. However, the law permitted Citicorp five years to divest prohibited operations. Weill was confident Citi would not need to do so. Shortly after the announcement, Weill stated that Citicorp had completed the merger assuming that GSA would be abolished. He was right. The following year Congress passed the Gramm-Leach-Bliley Act eliminating the prohibition on cross-ownership among commercial and investment banks and insurance.
Citicorp and Primerica completed their merger with Weill and Reed emerging as co-CEOs. That unlikely power-sharing arrangement did not last. Weill soon emerged as the sole CEO. The implications of handing Citicorp’s keys to this compulsive dealmaker would soon become apparent.
Organizational Challenges at Citigroup
Weill’s new entity, now dubbed Citigroup, was a financial goliath. Citi became the largest bank in the world with $700 billion in assets. It operated 16,000 offices worldwide in 140 countries. Global employment totaled 357,000.7 Weill combined Salomon Brothers and Smith Barney (SB) with Citi’s investment banking, creating a strong presence in underwriting, trading and brokerage. The stage was now set to test whether financial “supermarkets” were the wave of the future. In Weill’s vision, Citibank would provide financial products, e.g., swaps, options and mortgages, for SB to securitize, market and trade. Citi subsidiaries would also sell insurance and promote SB’s investment banking services.
With Citi’s now impressive scale and diversity came three major challenges. The first involved blending radically different cultures. SB and Salomon were historic competitors. Both tended to look down on commercial banking and insurance as financial backwaters. Investment bankers enjoyed pay scales which were the stuff of dreams for branch managers and insurance salesmen.
Just as challenging was the task of integrating the merged companies. The new Citigroup was an organizational beast. Weill’s financial supermarket contained aisle after aisle of product and sub-product lines. To take one example, in mortgages Citi originated loans through its U.S. branch network. It had other units which bought mortgages from brokers. It had a third line that bought pools of mortgages from Wall Street firms. These units provided mortgage products to the investment bank for securitization and marketing. Another unit traded mortgage bonds in the secondary market. Parallel activities were carried out in Citi’s foreign branches, its London office and in other major financial centers. Attachment 2 provides a rough schematic of Citigroup’s organization post-merger. Attachment 3 provides a more detailed organizational breakdown of the U.S. mortgage business.
Citi’s unique franchise allowed it to post impressive results in the immediate post-merger years. Attachment 4 provides an overview of financial results and stock price performance for the years 2001–05. Weill retired in 2006 believing his vision for Citi had been realized. His handpicked successor, Charles Prince, would discover otherwise.
Hidden in the organizational complexity bequeathed by Weill was a third challenge: financial control and risk management. Citibank already had a checkered history in this area. The bank was almost brought to its knees by the Latin American debt crisis in the 1980s. Convinced that “countries didn’t go bankrupt,” Citi led the way in recycling petrodollars as “Balance of Payments” loans to oil-importing nations. Countries may not declare bankruptcy, but they proved capable of not paying their bills, and Citi took huge losses. The bank’s stock price fell below $2/share in 1991. Management promised to revamp internal risk management.
Unfortunately, Citi’s complexity kept outpacing its reforms. Sudden entrances into investment banking and brokerage didn’t fit neatly into the frameworks designed to manage risky bank loans. Citigroup’s ever-increasing size and diversity presented other problems. Were there enough financial control resources to respond to the new entity’s scale? For example, could a results-oriented bank afford much controls overhead in its historic product lines, e.g., branch banking? Did Mexico’s unique financial control environment require more or less risk management attention? The questions posed by Weill’s creation were new and many.
Foremost among them was this problem—how would Citigroup’s control culture deal with the conflict-of-interest potential inherent in becoming a financial supermarket? To give one example, if Citi’s investment bankers wanted to bring a new company to market via IPO, but the firm’s brokerage research arm thought the new shares overpriced, what role did control practices play in refereeing this conflict?
The difficulties posed by such control issues and Citi’s ever-expanding complexity were not easily solved. As a result, Citi found itself dealing with one embarrassing scandal after another. Some were SEC complaints and resulted in settlements. Others were shareholder suits. Many times the settlements were expensive. Citigroup would pay out almost $5 billion to extract itself from complaints and lawsuits associated with its lending to Enron and WorldCom. Attachment 5 provides a sequential summary of Citi’s complaints and settlements from 2001–2007.
This checkered history resulted in a bifurcated Citigroup controls structure. By 2005, Citi had an elaborate formal controls system. There were comprehensive procedures and an elaborate system of risk officers and audits. The density of this system tended to reflect past problems. On the other hand, a deal making rather than an operating culture dominated at the top. Weill’s personality reinforced a culture that thrived on pressure to produce quick results. Moreover, there were now many layers of management between Citigroup’s 399 Park Avenue headquarters, and the operations out dealing with customers.
For Dick Bowen, Citigroup’s organizational complexity explained both his problem and his difficulty in solving it. Increasingly, CitiMortgage’s operating management seemed capable of overriding the CLG’s risk management systems. How had this happened?
Growth and Controls within Citigroup’s Mortgage Operations
As America’s housing boom took off, Citigroup set aggressive targets for mortgage lending. In 2001 it ranked 13th in mortgage origination. Thereafter all Citi mortgage units received quarterly updates on market share progress. By third quarter 2006, Citi had risen to #3.
Like the bank’s organization, Citi’s mortgage control system was complex. Bowen’s direct responsibilities were a case in point. Bowen’s area, Correspondent Flow, was one of four mortgage acquisitions channels reporting into Real Estate Lending (REL). Each had a Chief Underwriter, as did REL. Above the REL Underwriter was a Chief Risk Officer for the CLG. Separate from this structure were two other control units, Business Risk and Control (BRC) and Internal Audit.8 These units had their own reporting lines to higher management. Attachment 6 depicts this structure and its relationship to Citi’s mortgage business units.
In early 2006, Bowen became chief underwriter for CLG correspondent lending. This business purchased mortgages from originators and brokers. Correspondent lending was huge; it annually purchased $90 billion in mortgages from 1600 correspondents. Some $50 billion of these was repackaged into securities sold to investors like Fannie Mae and Freddie Mac. Some of the remainder was sold to Ginnie Mae after Citi had obtained necessary FHA/VA insurance. A third activity involved pools of mortgages purchased from other Wall Street firms. Bowen was in charge of 220 underwriters overseeing all of these activities.9
Mortgage underwriting involves vouching for the credit quality of the loan. The mortgage underwriter’s job is to assure that sound credit practices are followed. This includes assuring that the borrower has a job, that the stated income is correct, and that there is no history of prior defaults or bankruptcies. Citi did not actually do this work for the mortgages it purchased from correspondents. Instead, those institutions “represented” that they had followed Citi credit standards in making the loan. When, in turn, Citi repackaged the loans and sold mortgage securities to investors, it would represent that Citi credit policies had been followed on the underlying mortgages.
Bowen’s group sampled the purchased mortgages to assure compliance with Citi’s credit policies. This was necessary because of the representations Citi made to the ultimate investors. Often the investors were Fannie Mae and Freddie Mac. If mortgage securities sold by Citi ever defaulted and the investors could show that Citi’s representations were false, Citi was liable for damages. In a severe case Citi might be forced to repurchase the defaulted securities at par. Given the volume Citi was underwriting, the potential liabilities for false representations were huge.10
When Bowen’s underwriting group reviewed credit files for the sampled mortgages, they checked for credit policy compliance and for documentary completeness, e.g., did the file contain proof of income? The underwriters then rendered a verdict on each file sampled: (1) Agree; (2) Disagree; or (3) Agree, Contingent. The latter meant that the file was missing key documents and approval was contingent on the originator supplying them.11
Shortly after taking his new assignment, Bowen discovered a number of control weaknesses. For starters, his underwriters’ results, submitted monthly to a Third Party Origination Committee (TPC), were required by the TPC to demonstrate a 95% “Agree” verdict. Bowen considered this mandate to be fundamentally at odds with properly evaluating the mortgages. He then learned that his group was meeting this mandate by reporting all “Agree, Contingent” files as part of “Agree.” The “Agree, Contingent” finding was actually the case for 55–60% of all sample files.12
To Bowen, this reporting practice would either mislead the TPC, eviscerate quality control, or both. Most importantly, Bowen judged that the practice exposed Citi to major investor liability. Should the originator fail to produce the missing documents, Citi’s representations could be shown to be false. Billions in bonds could come pouring back. Bowen also determined that the same documentary problems could invalidate the FHA/VA insurance that Citi wrapped around sales to Ginnie Mae.13 In that event, Ginnie Mae could sue Citi for selling it uninsured mortgage products.
Since June 2006, when Bowen began to warn management that Citi was accruing potential liabilities. Citi kept increasing its purchased mortgages. Meanwhile, underwriting standards continued to slip. By mid-2007, defective new mortgage files had risen to 80% of all files sampled.14
Since routine warnings had failed, Bowen began to review his options for getting Citi management to take his warnings seriously.
Bowen Considers His Next Step – Write to Rubin?
As Bowen fingered his draft e-mail to Rubin, he reflected that senior management was now under great pressure. Third quarter 2007 financial results were sharply negative. The news was so bad that Citi had taken an unusual step, issuing a “Warning” press release on October 1. Among other disclosures, that document included the following:
“Citigroup Inc. announced today that dislocations in the mortgage-backed securities and credit markets, and deterioration in the consumer credit environment are expected to have an adverse impact on third quarter financial results. Citi currently estimates that it will report a decline in net income in the range of 60% from the prior-year quarter, subject to finalizing third quarter results …
The following accounts for a significant portion of the expected decline in third quarter results:
Global Consumer
• An increase in credit costs of approximately $2.6 billion pre-tax versus the prior-year quarter due to continued deterioration in the credit environment, organic portfolio growth, and acquisitions. Approximately one-fourth of the increase in credit costs was due to higher net credit losses and approximately three-fourths was due to higher charges to increase loan loss reserves …”15
The earnings release issued on October 15 confirmed a 60% earnings decline versus the prior quarter. This report was immediately followed by widespread press articles speculating on further losses. Citi Securities and various banking activities were cited as areas of special concern.
Capping the uncertainty, reports surfaced that a Citigroup Board meeting had been scheduled for Sunday, November 4, at which it was speculated that CEO Charles Prince III would resign.
Bowen thought that these dramatic events altered the context in which his warnings might be considered. Senior management was now sorely distracted. Indeed, their ongoing employment might be at risk. Could they handle having another hand grenade dropped on their desks? On the other hand, Bowen’s earlier warnings now seemed prescient. That should lend credibility to his effort to get Rubin’s attention. Citigroup was likely to have to change course. Perhaps as part of this shake-up, senior managers might even welcome Bowen’s bringing potential dangers to their attention.
Bowen next considered whether these new events might reopen more normal channels for his concerns. Reviewing his options, Bowen identified alternative routes for reviewing his concerns:
- Bowen could renew the discussion with the CLG Chief Risk Officer, arguing that the subprime securitization business was shutting down and that attention should now shift to reducing Citi’s exposures of all sorts—including the exposures related to Citi’s representations
- Bowen could take his case to the BRC, and through them to Audit. Possibly in the new environment Audit might investigate. This could lead to independent confirmation of Bowen’s concerns. Audit also had a direct reporting line to Citi’s Board Audit Committee. A concerned Audit could get the issue to the top of Citigroup without Bowen having to send a message outside of channels.
- Bowen could also approach Citigroup’s Law department. The exposures he had discovered were of a legal nature. If they resulted in actual liability, Law would end up fighting the suits and settling the claims. There also were disclosure issues, especially since the potential liabilities were material under securities laws. A concerned Law function could buttress Bowen’s findings with opinions from outside counsel.
There was one other option that crossed Bowen’s mind. He could quietly pass the information to the financial journalists writing about Citi’s hidden exposures. This course had several downsides. It could intensify pressure on Citi at a delicate time. It had a flavor of disloyalty about it—after all, Bowen would be abandoning working within the Citi management structure.
On the other hand, Citi’s management had yet to show a willingness to face up to unpleasant news. Bowen’s warnings had been stoutly ignored. There was also the risk that management would “shoot the messenger.” Quiet outside disclosure might be the only way to get his concerns taken seriously and still hold onto his career.
Reviewing his options, Dick Bowen realized he had arrived at a pivotal crossroads. Whatever he did was liable to affect the bank in a major way. He also might be betting his career on the outcome. On the other hand, what was the point of being an underwriter if that meant staying silent in the face of obvious policy breaches?
Bowen held off hitting the e-mail send key, and decided to go through the alternatives one more time.
Attachment 1
Bowen, Dick [GCG-REO]
| From: | Bowen, Dick [GCG-REO] |
| Sent: | Saturday, November 03, 2007 4:47 PM |
| To: | Rubin, Robert E [CCC]: Bushnell, David C [CCC]; Crittenden, Gary [CCC]; Howard, Bonnie [CCC] |
| Cc: | Bowen, Dick [GCG-REO] |
| Subject: | URGENT – READ IMMEDIATELY – FINANCIAL ISSUES |
| To: | Robert, Rubin – Chairman of Executive Committee |
| David Bushnell, Senior Risk Officer | |
| Gary Crittenden, Chief Financial Officer | |
| Bonnie Howard, Chief Auditor |
Gentlemen:
I am currently (since early 2006) the Business Chief Underwriter for the Real Estate Lending Correspondent channel, which is within the Consumer Lending Group. From 2002 to 2006 I was SVP and Chief Underwriter for the Correspondent and Acquisitions channel within CitiFinancial Mortgage. I am also licensed as a Certified Public Accountant in the State of Texas.
The reason for this urgent email concerns breakdowns of internal controls and resulting significant but possibly unrecognized financial losses existing within our organization.
Since mid-2006, I have continually identified these breakdowns in processes and internal controls. The REL Chief Underwriter (my 2006 manager) and I have widely communicated these breakdowns, with possible ramifications, in weekly reports emails, and discussions (which included the CLG Chief Risk Officer). There have also been two special investigations by CLG Business Risk and Control (the first initiated by me), with the findings confirming these breakdowns.
However, to my knowledge, these breakdowns have not been communicated to or recognized by either Audit or Finance.
I have been agonizing for some time over these issues, and in all good conscience feel I must now communicate these concerns outside of the Consumer Lending Group. I sincerely regret the delay.
CONCERN #1 – CORRESPONDENT FUNDINGS THROUGH DELEGATED AUTHORITY
- We currently purchase from mortgage companies and sell to third party investors approximately $50 billion annually ($42 billion YTD 2007) of mortgage loans which have not been underwritten by us but which we rep and warrant to the investors (primarily Fannie/Freddie) that these files are complete and have been underwritten to our policy criteria.
- Our internal Quality Assurance function, which underwrites a small sample of these files post-purchase, has reflected since 2006 (when this function started reporting to me) that 40–60% of these files are either outside of policy criteria or have documentation missing from the files. QA for recent months indicate 80% of the files fall into this category.
- If any of the mortgages in this category default, the investor may require that Citi repurchase the defaulted files based upon our reps and warrants. Under seller reps and warrants Citi may then force the selling mortgage company to repurchase the files, if the seller mortgage company remains financially viable at that time. (As one example QA results indicate that Citi may be responsible for in excess of 50% of the losses associated with files purchased from the failed Aegis Mortgage–$2.5 billion purchased since Jan’06).
- A CLG BRC investigation, requested by me, confirmed the breakdowns associated with the QA process and the fact that the QA findings were significantly out of compliance with QA Risk Policy. The Chief Underwriter responsible for this function was terminated and a new QA Risk Policy was approved in 2006.
Attachment 1 a)
We continue to be significantly out of compliance with the new QA Risk Policy.
- I do not believe that our company has recognized the material financial losses inevitably associated with the above Citi liability.
CONCERN #2 – CORRESPONDENT FUNDINGS THROUGH WALL STREET BULK PURCHASES
- During 2006–07 there were pools of mortgage loans aggregating $10 billion which were purchased from large mortgage companies with significant numbers of files identified as “exceptions” (higher risk and substantially outside of our credit policy criteria). These exceptions were approved by the Wall Street Channel Chief Risk Officer, many times over underwriting objections and with the files having been turned down by underwriting. These pools involved files aggregated and originated by Merrill Lynch, Residential Funding Corp, New Century, First NLC and others.
- The purchase decisions on many of these pools were approved even though execution rates and other criteria established by the CLG Bulk Acquisition Policy were not met.
- Because of the initial high losses associated with any of these pools, CLG BRC investigated and reviewed correspondence which documented underwriting objections to purchasing identified pools.
- BRC conducted an investigation of one Merrill Lynch pool, identifying generic breakdowns of process required by policy and recommended needed changes.
- Changes were made in the bulk purchase process, but I do not know if the expected material financial losses from these pools have been recognized.
I know that this will prompt an investigation of the above circumstances which will hopefully be conducted by officers of the company outside of the Consumer Lending Group, and I pledge my full cooperation.
As a professional, as well as a shareholder of this company, I am deeply distressed with having to report the above. I will be in the office Monday, and can be available by cell phone, if needed, this weekend.
Dick Bowen
469-220-1151 office
214-497-xxxx cell
Attachment 2
Attachment 3
Attachment 4
| Citibank Financial Results 2001–05 | |||||
| In Millions of the trading currency, except per share items. | |||||
| Key Financials | |||||
| For the Fiscal Period Ending | Dec 2001 | Dec 2002 | Dec 2003 | Dec 2004 | Dec 2005 |
| Total Revenue | $60,567.00 | $62,472.00 | $63,548.00 | $73,402.00 | $75,713.00 |
| Net Income | $14,126.00 | $15,276.00 | $17,853.00 | $17,046.00 | $24,589.00 |
| Total Assets | $1,051,450.00 | $1,097,590.00 | $1,264,032.00 | $1,484,101.00 | $1,494,037.00 |
| Total Debt | $316,083.00 | $341,552.00 | $402,287.00 | $467,835.00 | $479,462.00 |
| Total Equity | $735,367.00 | $756,038.00 | $861,745.00 | $1,016,266.00 | $1,014,575.00 |
| Total Debt to Capital | 30.1% | 31.1% | 31.8% | 31.5% | 32.1% |
| Stock Price | $50.48 | $35.19 | $48.54 | $48.18 | $48.53 |
| EPS Excluding Extra Items | 2.55 | 2.59 | 3.27 | 3.07 | 3.82 |
Source: www.capitaliq.com
Attachment 5
Citicorp/Citigroup Complaints & Settlements, 2001–2007
Citibank, State Bank of India agree to cease alleged securities law violations
Associated Press Archive – November 19, 2001
Federal regulators have alleged that U.S. giant Citibank and India’s largest commercial bank violated securities laws in 1998 by selling $532 million of Indian bonds in the United States without registering them. The action Monday by the Securities and Exchange Commission came less than a week after the Federal Reserve and other U.S. banking regulators fined the government-owned State Bank of India $7.5 million for allegedly unsafe banking practices.
Source: http://nl.newsbank.com/nl-search/we/Archives
Victims of alleged predatory lending practices may receive partial refunds under a $240 million settlement announced Thursday.
Article ID: 871791
Date: September 20, 2002
Publication: Oakland Tribune, The (CA)
In what would be the largest consumer protection settlement ever, Citigroup Inc., parent company of CitiCorp Inc., Citibank and CitiFinancial Credit Co., agreed to pay $215 million to resolve a nine-count Federal Trade Commission complaint accusing Associates First Capital Corp., a firm Citigroup acquired in November 2000, of bilking consumers with unfair lending.
Source: http://nl.newsbank.com/nl-search/we/Archives
SEC Settles Enforcement Proceedings against J.P. Morgan Chase and Citigroup
FOR IMMEDIATE RELEASE
2003–87
As to Citigroup, the Commission instituted an administrative proceeding and issued an order making findings and imposing sanctions. Without admitting or denying the Commission’s findings, Citigroup consented to the issuance of the Commission’s Order whereby Citigroup (i) was ordered to cease and desist from committing or causing any violation of the antifraud provisions of the federal securities laws, and (ii) agreed to pay $120 million as disgorgement, interest, and penalty. Of that amount, $101 million pertains to Citigroup’s Enron-related conduct and $19 million pertains to the Dynegy conduct.
Source: http://www.sec.gov/news/press/2003-87.htm
Citigroup Settles WorldCom Case
The bank agrees to pay $2.65 billion to bond and stock buyers hurt in the telecom company’s accounting fraud.
May 11, 2004 From Associated Press
In one of the largest securities-fraud settlements ever, banking giant Citigroup Inc. will pay $2.65 billion to settle a lawsuit brought by WorldCom investors who lost billions when the company filed for bankruptcy protection in an accounting scandal. The deal announced Monday was the first of what could be several large WorldCom settlements. New York State Comptroller Alan G. Hevesi, who is leading the class-action case, said he was pursuing similar deals with 17 other banks that could result in $2.8 billion more for WorldCom investors.
Source: http://articles.latimes.com/2004/may/11/business/fi-citi11
Global Crossing Investors Settle With Citigroup
By REUTERS
Published: March 3, 2005
Citigroup said yesterday that it would pay $75 million to settle a lawsuit from investors over its role in the collapse of the telecommunications company Global Crossing. Citigroup, which had been one of Global Crossing’s bankers, was accused in the three-year-old class-action suit of issuing exaggerated research reports and failing to disclose conflicts of interest. It said the settlement, equivalent to $46 million after taxes, covered those who invested in Global Crossing and an affiliate, Asia Global Crossing, from Feb. 1, 1999, to Dec. 8, 2003.
Source: http://www.nytimes.com/2005/03/03/business/03citigroup.html
Citigroup to Pay $208 Million to Settle Charges Arising from Creation of Affiliated Transfer Agent to Serve Its Proprietary Mutual Funds
FOR IMMEDIATE RELEASE
2005-80
Washington, D.C., May 31, 2005 — The Securities and Exchange Commission announced settled fraud charges against two subsidiaries of Citigroup, Inc. relating to the creation and operation of an affiliated transfer agent that has served the Smith Barney family of mutual funds since 1999. The two subsidiaries named as respondents in the action are Citigroup Global Markets, Inc. and Smith Barney Fund Management LLC, the investment adviser to the mutual funds.
Source: http://www.sec.gov/news/press/2005-80.htm
Citigroup to Settle With Enron Investors
By Carrie Johnson
Washington Post Staff Writer
Saturday, June 11, 2005
Citigroup Inc. yesterday agreed to pay $2 billion to settle a class-action lawsuit filed by investors who argue the world’s largest bank helped a faltering Enron Corp. disguise billions of dollars in debt. The settlement is among the largest ever – following closely behind a $2.65 billion payment Citigroup made last year to wipe away a lawsuit involving its underwriting work for WorldCom Inc.
Source: http://www.washingtonpost.com/wp-dyn/content/article/2005/06/10/AR2005061000532.html
SEC Finalizes ARS Settlements With Citigroup And UBS, Providing Nearly $30 Billion in Liquidity to Investors
FOR IMMEDIATE RELEASE
2008-290
Washington, D.C., Dec. 11, 2008 — The Securities and Exchange Commission today finalized settlements with Citigroup Global Markets, Inc. (Citi) and UBS Securities LLC and UBS Financial Services, Inc. (UBS) that will provide nearly $30 billion to tens of thousands of customers who invested in auction rate securities before the market for those securities froze in February.
Source: http://www.sec.gov/news/press/2008/2008-290.htm
Attachment 6
Citigroup Mortgage Business: Organizational + Controls Structure
Author’s Note
This case focuses on Richard Bowen’s discovery of large potential liabilities within CitiMortgage and takes up his challenge to find a way to get management’s attention. The challenge for students is to identify the best internal path for bringing forward Bowen’s findings.
Students must also face a larger question—was Citigroup even manageable at this time? Citigroup led the lobbying effort that sought the demise of Glass-Steagall. This case offers a close up of what that demise ushered in. By 2007, Citi is every bit the financial supermarket that Sandy Weill sought to create. Its internal structure was so complex that it defeats attempts to reduce it to manageable charts. Citigroup’s financial control structure was no less complex. The case thus poses the question—did this complexity, and the culture of deal making that spawned it, make it ungovernable? If so, did this lack of governance also cause controls to be inadequate?
To frame this question, the case provides considerable background on Citi’s growth, business strategy, and its crusade to overturn Glass-Steagall. There is much circumstantial evidence to support the view that Citi became ungovernable. For starters there is the sheer breadth of the enterprise, a complexity so vast it can only be hinted at in Attachment 2. More telling is the multiplicity of layers found in Attachment 3’s schematic of Citi’s mortgage business. When one realizes that this chart was essentially replicated in several foreign countries, and that the mortgage business was one of several business lines inside real estate lending, which was one line among several in consumer lending, which was one geographic business among many inside the global consumer business, which then competed for attention with all of Citigroup’s other global businesses, one begins to sense how difficult it must have been for CEO Prince, Chairman Rubin and CFO Crittenden to keep their fingers on the pulse of the firm.
Citi’s organizational complexity was replicated in its controls structure, charted for the mortgage business in Attachment 6. Intuitively, one can sense the difficulties with this structure. Lines of authority are so complex that it is difficult to determine who is in charge, and even more difficult for such a structure to summon the will to face difficult issues. Independence is also in question. Control officials seem in the grasp of business managements more concerned with “producing now” than with sound controls. Almost certainly, Citigroup’s management would disagree with this assessment. They, in turn, must answer for Citi’s record of serial controls busts and legal violations, only a part of which is documented in Attachment 5.
This is the context which Richard Bowen confronted, and which students of this case must consider. Bowen’s challenge before he hit the key sending his e-mail was to review whether there was a viable channel left to use. Sending an e-mail to the Chairman is always a “Hail Mary” pass. Doing so as a financial tsunami approaches might make it even more of one. Is it truly a time for desperate measures, or is there a better way forward?
This case is based primarily upon Richard Bowen’s testimony before the Financial Crisis Inquiry Commission, supplemented by discussions with Mr. Bowen. The author also reviewed various articles and Mr. Bowen’s interview with CBS’ 60 Minutes. Public information is somewhat limited, and Bowen did not file a lawsuit against Citi. His testimony before the Commission was also redacted. The essence of the story, however, gains credibility from subsequent revelations in the lawsuit filed by Sherry A. Hunt (see Case below). Ms. Hunt worked for Bowen. She successfully sued Citi under the False Claims Act, a suit which contains many collaborating details about weak control practices within CitiMortgage. The case was settled without Citi ever contesting Ms. Hunt’s claims in open court.
Although Citi’s top management has changed, the organization and business model remain largely unchanged. Indeed, Citi later failed a Federal Reserve stress test due to financial control issues. It remains to be seen whether Citi’s new team, headed by Michael Corbat, will be any more successful at governing the huge enterprises.