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Citi’s Richard Bowen Exposes Wall Street’s ‘Garbage In, Garbage Out’

Posted by Larry Doyle on April 7, 2010 3:41 PM |

Does anybody have any doubt that massive fraud within our mortgage industry played a large part in our current economic crisis? America continues to suffer from the fakers and phonies within our financial regulatory structure (including Alan Greenspan) who fail to accept responsibility for their shortcomings and the resultant frauds.

The mortgage fraud grew over time in order to feed the Wall Street machine the collateral it needed to execute a wide array of structured transactions. This need for increasing volume of mortgage originations was a critical point in one of my earliest blog posts written in November 2008, “The Wall Street Model is Broken… and Won’t Soon be Fixed!!” I wrote:

Wall St. needed to find more and more collateral to continue to feed this profit monster. Some Wall St. firms either purchased or made strategic alliances with originators…

I further highlighted this growing demand for mortgage originations in pointing out:

At the turn of the century, the Wall Street model was a pure “originate to distribute” model with little to no residual risk on behalf of the originators or underwriters. When there is no residual risk, those who “WIN” are the players that can purely process the most volume. Well, how does one get volume? Lower the credit standards, put fewer restrictions on borrowers, little to no covenants (NINA Loans: no income, no asset check). WOW!!! What were we thinking?? Well, Wall St. felt, “let’s worry about it tomorrow or maybe not at all because we are making too much money today.”

Obviously, ‘tomorrow’ has come and has been with us for the last two years. That said, few if any participants in the mortgage origination schemes have been exposed. Is that changing? I am not holding my breath, but I was heartened to see testimony today from Richard Bowen, former chief underwriter of Citigroup’s consumer lending group. Bloomberg once again distinguishes itself in its reporting, Citigroup Underwriter Warned of Mortgage Lapses:

Citigroup Inc. executives were warned as early as 2006 that the bank routinely bought mortgages that violated its own standards, the former chief underwriter for Citigroup’s consumer-lending group testified.

Richard Bowen determined in mid-2006 that more than 60 percent of mortgages bought from other firms and sold to investors such as Fannie Mae and Freddie Mac were “defective,” according to his prepared remarks today before the Financial Crisis Inquiry Commission. The panel is probing causes of the 2007 mortgage-market collapse and ensuing bank bailouts.

“I started issuing warnings in June 2006 and attempted to get management to address these critical risk issues,” said Bowen, who was chief underwriter for correspondent lending in Citigroup’s consumer-lending group. “These warnings continued through 2007 and went to all levels of the consumer-lending group.”

In a November 2007 e-mail headlined, “URGENT-READ IMMEDIATELY-FINANCIAL ISSUES,” Bowen said he warned top managers including then Executive-Committee Chairman Robert Rubin of “possibly unrecognized financial losses” among other risks.

“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,” Bowen wrote in the e-mail, a copy of which he included in the prepared remarks. The missive was copied to then-Chief Financial Officer Gary Crittenden and David Bushnell, Citigroup’s chief risk officer.

I have one question: will Rubin, Crittenden, and Bushnell be given a pass by regulators and Congress after this extremely incriminating testimony from Mr. Bowen?

I have one comment: although Bowen’s statistic of 60% does not necessarily mean that all those mortgages were fraudulently underwritten, that statistic should send shock waves across America as to the depth of underlying problems in our housing industry today.

Garbage in, garbage out . . . and the American taxpayers are left to pick up the tab!!

Speaking of garbage . . . thanks a lot, Bob.


  • Fred

    Another Citi blunder that gets no press. We refinanced from a 30 year fixed to a 15 year fixed back in 2004-2005 when rates hit their lows. 0ur original mortgagor was unwilling to write the mortgage and retain it in it’s portfolio because it expected rates to rise. Citi was glad to take on the business and has been under-water on our mortgage until only very recently. The mortgage was not high risk nor have we ever missed a payment.

  • GIGO

    You are absolutely on the right track if you consider it Mortgage Fraud when Citi KNEW what they were doing buying loans in the Blind from shoddy correspondent lenders, and selling defective loans to their Investors. Of course they could say they didn’t know, but Mr. Bowen has proof otherwise.

  • George

    Rates are going up now. That will eventually stop anyone from buying homes. Those that need to be indicted include anyone who either received anything from Freddie, Fannie etc. including help with a mortgage, money, donations to their campaigns. On top of that if it were up to me I would look at every one holding an office in Washington. Everyone!

  • Barry Marcus

    Based on Bowen’s testimony, Rubin should be prosecuted for fraud: (a) He knew that the subprime mortgages that Citi collateralized and sold to investors were rated AAA solely because Citi bought the rating (from S&P, Fitch and Moody); (b) He knew that the mortgages did not meet the Citi underwriting standards (60% in 2006 and 80% in 2007); (c) He knew that Citi represented and warranted to the investors who bought the garbage securities that the CDOs did meet Citi underwriting standards; and (d) He personally received over $100 million from Citi, presumably to insure that the Fed regulators did not interfere with Citi’s lucrative fraud. If Rubin did not already know about Citi’s fraudulent practices before, he certainly knew about it when Bowen pointed it out to him in 2006 and requested an internal investigation. The SEC should have prosecuted Citi’s management for securities fraud and Rubin should be investigated for perjury based on his testimony before Congress. In retrospect it seems clear that Citi hired Rubin because of his connections to the administrative agencies that regulated Citi (i.e. Treasury Dept., Fed. Reserve, SEC) and influential members of Congress which should have been exercising oversight over the agencies. (Rubin’s close associate Larry Summers was Sec. of Treasury and Greenspan was head of Fed.) The earlier testimony of the presidents of the rating agencies clearly showed that they, in effect, sold the AAA rating to Citi, knowing that the rating was fraudulent.

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