Citibank’s $158.3M Settlement With Feds…Just Banks Being Banks

“This case demonstrates that the notion that the bailed-out banks have somehow found God and have reformed their ways in the aftermath of the financial crisis is pure myth,” Neil Barofsky, former special inspector general of the Troubled Asset Relief Program.

There’s an interesting story on the May 30, 2012 Bloomberg website.  It involves Sherry Hunt, who is a country girl, has a working class background, married at 16, and no college degree.  Growing up, she fished, hunted, raised horses and was a fan of Marty Robbins[1] and Buck Owens.[2]   She spent 30 years working her way up the corporate ladder. She has now found herself the recipient of a $31,000,000 reward under the federal False Claims Act.  Perhaps the story doesn’t have the sex appeal of a Karen Silkwood movie, but at least Sherry Hunt lived to receive her money.  Here’s the Cliff Q-Notes summary of the Bloomberg article.

On November 2004, Ms. Hunt joined Citigroup as a vice president in the mortgage unit. This move occurred just as the housing market was approaching critical mass.  She supervised 65 underwriters at Citi’s O’Fallon, Missouri headquarters. Her team reviewed loans Citi wanted to buy from outside brokers and lenders to see whether the paperwork met the bank’s standards. All of the paperwork needed to be properly signed, applicant income verified, and have legitimate appraisals.  Once vetted, Citi either sold the loans to investors, Fannie, Freddie and Ginnie Mae, or approved them for FHA insurance.

But Citi’s business was just too good – it became impossible to vet all the paperwork to assure these loans were safe for GSE investors or met FHA standards. It soon became clear to Ms. Hunt that some of the mortgages Citi was buying were junk; some borrowers had submitted doctored income tax forms; some loans were based on inflated appraisals; on some paperwork the necessary signatures were missing – on others there was evidence of forgery.  It was Ms. Hunt’s responsibility to identify these defects and submit reports to her bosses.

In late 2007, Ms. Hunt’s group “…estimated that about 60 percent of the mortgages Citigroup was buying and selling were missing some form of documentation.”  She relayed her concerns to her boss, Richard Bowen III. According to the Bloomberg article, when he saw the magnitude of the mortgage defects, he informed his superiors…

“…including Robert Rubin, then chairman of Citigroup’s executive committee and a former Treasury secretary; Chief Financial Officer Gary Crittenden; the bank’s senior risk officer; and its chief auditor.  Bowen put the words ‘URGENT — READ IMMEDIATELY — FINANCIAL ISSUES’ in the subject line. ‘The reason for this urgent e-mail concerns breakdowns of internal controls and resulting significant but possibly unrecognized financial losses existing within our organization,’ Bowen wrote. ‘We continue to be significantly out of compliance.’”  

However, according to Ms. Hunt, there were no readily apparent changes in the risk management controls – except one:  Mr. Bowen, the supervisor that sent the “URGENT” emails, went from managing 220 people to two.  By January 2009, he was gone from Citibank.

In November 2009, Ms. Hunt said she discovered a list of approximately 1,000 loans that had been identified as possibly fraudulent. Citi’s fraud prevention and investigation group had “…left some of the mortgages in the queue for more than two years without checking them*** Not one notification went to the FHA before July 2011, when the U.S. Attorney’s Office in Manhattan issued a subpoena to [Citi’s] O’Fallon office.” 

In March 2011 [after Citi had received $45 billion in taxpayer funded bailout money two years earlier]  Ms. Hunt and another colleague had a meeting with a loan quality executive.  The essence of his message to them was that they were classifying too many loans as “defective.”  They were to push that number down.  Quoting from the Bloomberg article:

“Workers had a powerful incentive to push mortgages through the process even if flaws were found: compensation. The pay of CitiMortgage employees all the way up to the division’s chief executive officer depended on a high percentage of approved loans, the government’s complaint says.”


“In November 2010, Ross Leckie, a senior director of CitiMortgage’s retail bank mortgage unit, sent an e-mail ordering his staff to meet its goal of a maximum 5 percent defect rate on home loans. Quality-control employees had identified 10 loans with severe flaws from a pool of 138, Leckie said, for a rate of 7.25 percent. ‘Drive this rate down by brute force,’ he wrote. ‘We need three loans to be removed to get to 5.07 percent.’”  

Ms. Hunt refused to play along.  In August 2011, she sued Citigroup for “systematically violating U.S. mortgage regulations.” The U.S. Justice Department joined the suit in January, 2012.  Deciding that Discretion is the Better Part of Valor Humiliation, Citi put up no public or legal defense.  On February 15, 2012, Citi quickly settled, agreeing to pay $158.3 million to the U.S. government, and admitted that it had approved loans for government insurance that didn’t qualify under FHA.

The remarkable thing about this story is that it shows Big Bank Hubris continues unabated and unrepentent, even after taking billions of bailout money in 2009.  Remember that fraud on the FHA, Fannie and Freddie is fraud on us – the American Taxpayer.  We have subsized Fannie and Freddie ever since they were taken over in receivership in 2008.  Some believe we will also have to bail out FHA soon.  One would think that after being tossed a lifeline from the American taxpayers, Citi would have shown some appreciation by mending its ways.  Apparently not.  Instead, it persisted in its illegal, unethical and immoral activities – with no remorse, no apology, and apparently, no regret – except that it got caught.  Kudos to Ms. Hunt for speaking up!

[For another report on the Sherry Hunt case, see the February 16, 2012 Pro Publica article: “How Citibank Dumped Lousy Mortgages on the Government.” – PCQ]

[1]  Marty Robbins two greatest songs: El Paso and Devil Woman.

[2] Buck Owens was an early country singer [his  group, predictably, was “The Buckaroos”]. He was country long before “country was cool.”  But for anyone who watched 70’s – 80’s television, Buck Owens and Roy Clark were the highly talented regulars on the infectiously funny “Hee Haw.” [Alright, the jokes were kinda dumb, but it was fun in a good, clean way.]