bloomberg markets magazine -- citifraud july 2012
TRANSCRIPT
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7/27/2019 Bloomberg Markets Magazine -- Citifraud July 2012
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Blowig
Wislo
Cii
Sher
ryhun
texp
osed
wro
ngd
oing
atthe
bank
andwon
$31m
illionfo
rher
self
.
Blowig
Wislo
Cii
Sher
ryhun
texp
osed
wro
ngd
oing
atthe
bank
andwon
$31m
illionfo
rher
self
.
the goldman guyrunning
londons olympics
J UlY 20 1 2
ceos: highpay, lowreturns
reinventingthe reallysmall car
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By BoB Ivry
Citi
Whistle
photographs by wesley mann
The
COVER STORY
Blowing
On
Sherry hunt, a country
muSIclovIng manager
at the BankS maSSIve
mortgage unIt, expoSed
eIght yearS of mISdeedS
rIght up Into 2012and won $31 mIllIon
for herSelf.
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Ju ly 20 11 BloomBerg marketS 27
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previousspread:groomingbyemilymiller;bowen:brenthumphreys
28 BloomBerg marketS Ju ly 20 12
Michigan by a dad who taught her to
fish and a mom who showed her how
to find wild mushrooms. She listened to
Marty Robbins and Buck Owens on the
radio and came to believe that God has
a bigger plan, that everything happens
for a reason. She got married at 16 and
didnt go to college. After she had her
first child at 17, she needed a job. A
friend helped her find one in 1975, pro-
cessing home loans at a small bank
in Alaska.
Over the next 30 years, Hunt moved
up the ladder to mortgage-banking po-sitions in Indiana, Minnesota and Mis-
souri. On her days off, when she wasnt
fishing with her husband, Jonathan,
she rode her horse, Cody, in Wild West
shows. She sometimes dressed up as
the legendary cowgirl Annie Oakley,
firing blanks from a vintage rifle to en-
tertain an audience. She liked the mort-
gage business, liked that she was
helping people buy houses.
In November 2004, Hunt, now 55,
joined Citigroup Inc. as a vice presidentin the mortgage unit. It looked like a
great career move. The housing market
was booming, and the New Yorkbased
bank, the sixth-largest lender in the
U.S. at the time, was responsible for
3.5 percent of all home loans. Hunt su-
pervised 65 mortgage underwriters at
CitiMortgage Inc.s sprawling head-
quarters in OFallon, Missouri, 45 min-
utes west of St. Louis.
Hunts team was responsible for pro-
tecting Citigroup from fraud and badinvestments. She and her colleagues in-
spected loans Citi wanted to buy from
outside brokers and lenders to see
whether they met the banks standards.
The mortgages had to have properly
signed paperwork, verifiable borrower
income and realistic appraisals. Citi
would vouch for the quality of these
loans when it sold them to investors or
approved them for government mort-
gage insurance.
Investor demand was so strong formortgages packaged into securities
that Citigroup couldnt process them
fast enough. The Citi stamp of approval
told investors that the bank would
stand behind the mortgages if borrow-
ers quit paying.
At the mor tga ge- pro cessin g fac -
tory in OFallon, Hunt was working on
an assembly line that helped inflate
a housing bubble whose implosion
would shake the world. The OFallon
Sherry Hunt never expectedto be a senior manager at a
Wall Street bank. She was acountry girl, raised in rural
ric bwn, fly hn, w f ling
Cii xciv xnf in ln.
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illustrationbyandreamanzati
mortgage machinery was moving too
fast to check every loan, Hunt says. By
2006, the bank was buying mortgages
from outside lenders with doctored tax
forms, phony appraisals and missing
signatures, she says. It was Hunts job
to identify these defects, and she did, in
regular reports to her bosses.
Executives buried her findings, Hunt
says, before, during and after the finan-
cial crisis, and even into 2012. In March
2011, more than two years after Citi-
group took $45 billion in bailouts from
the U.S. government and billions more
from the Federal Reservemore in
total than any other U.S. bankJeffery
Polkinghorne, an OFallon executive in
charge of loan quality, asked Hunt and
a colleague to stay in a conference room
after a meeting.
The encounter with Polkinghorne
was brief and tense, Hunt says. The
number of loans classified as defective
would have to fall, he told them, or it
would be your asses on the line.
Hunt says it was clear what Polking-
horne was askingand she wanted no
part of it. All a dishonest person had to
do was change the reports to make
things look better than they were,
Hunt says. I wouldnt play along.
Instead, she took her employer to
courtand won. In August 2011, five
Sour ces: U.S. Just ice D epart ment ,Citigroup, Sherry Hunt and
Bloo mberg
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Ju ly 20 11 BloomBerg marketS 29
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30 BloomBerg marketS Ju ly 20 12
months after the meeting with Polking-
horne, Hunt sued Citigroup in Manhat-
tan federal court, accusing its
home-loan division of systematically
violating U.S. mortgage regulations.
The U.S. Justice Department decided tojoin her suit in January. Citigroup
didnt dispute any of Hunts facts; it
didnt mount a defense in public or in
court. On Feb. 15, 2012, the bank agreed
to pay $158.3 million to the U.S. govern-
ment to settle the case. Citigroup ad-
mitted approving loans for government
insurance that didnt qualify under
Federal Housing Administration rules.
Prosecutors kept open the possibility
of bringing criminal charges, without
specifying targets.Citigroup behaving badly as late as
2012 shows how a big bank hasnt yet
absorbed the lessons of the credit crisis
despite billions of dollars in bailouts,
says Neil Barofsky, former special in-
spector general of the Troubled Asset
Relief Program. This case demon-
strates that the notion that the bailed-
out banks have somehow found God
and have reformed their ways in the af-
termath of the financial crisis is pure
myth, he says.As a reward for blowing the whistle
on her employer, Hunt, the country girl
turned banker, got $31 million out of
the settlement paid by Citigroup.
Hunt still remembers her first im-pressions of CitiMortgages OFallon
headquarters, a complex of three con-
crete-and-glass buildings surrounded
by manicured lawns and vast parking
lots. Inside are endless rows of cubicles
where 3,800 employees trade e-mails
and conduct conference calls. Hunt
says at first she felt like a mouse in a
maze. You only see peoples faces
when someone brings in doughnuts
and the smell gets them peeking over
the tops of their cubicles, she says.
Over time, she came to appreciate
the camaraderie. Every month, work-
ers conducted the so-called Jean Char-
ities. Employees contributed $20 forthe privilege of wearing jeans every day,
with the money going to local nonprofit
organizations. With so many workers,
it added up to $25,000 a month. Citi is
full of wonderful people, conscientiouspeople, Hunt says.
Those people worked on different
teams to process mortgages, all of them
focused on keeping home loans moving
through the system. One team bought
loans from brokers and other lenders.
Another team , called underwriter s,
made sure loan paperwork was com-
plete and the mortgages met the banks
and the governments guidelines. Yet
another group did spot-checks on loans
already purchased. It was such a high-
volume business that one groups as-
signment was simply to keep loans
moving on the assembly line. Still an-
other unit sold loans to Fannie Mae,
Freddie Mac and Ginnie Mae, the
government-controlled companies
that bundled them into securities forsale to investors. Those were the types
of securities that blew up in 2007, ignit-
ing a global financial crisis.
Workers had a powerful incentive to
push mortgages through the process
even if flaws were found: compensa-
tion. The pay of CitiMortgage employ-
ees all the way up to the divisions chief
executive officer depended on a high
percentage of approved loans, the gov-
ernments complaint says.
By 2006, Hunts team was pro-cessing $50 billion in loans that Citi-
Mortgage bought from hundreds of
mortgage companies. Because her
unit couldnt possibly review them
all, they checked a sample. When a
mortgage wasnt up to federal stan-
dardswhich could be any error rang-
ing from an unsigned document to a
false income statement or a hyped-
up appraisalher team labeled the
loan as defective. In late 2007, Hunts
Ciimgg qin oFlln, mii, iw hn wk wi3,800 nk ly.
All a dishonest person had to do was changethe reports to make things look better,Sherry Hunt says. I wouldnt play along.
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cItIgroupS Share prIceS have dropped By 92 percent
SInce vIkram pandIt waS named ceo.
cItIgroupS SlIdeassets: $1.94 illin rank aMong u.s. banks: 3 total nuMber of eMployees worldwide: 263,000
pandits pay paCkage for 2011*
$14.9 million
BaIlout detaIlS
$4 5 billion + $301 billion in asset guarantees
tarp
ciTi Took morE monEy From ThE
govErnmEnT Than any oThEr u.s. bank. iT
has paiD back all oF iT, wiTh inTErEsT.
* Citigroup shareholders on April 16 voted down
Pandits compensation package by a vote of
about 55 to 45 percent. The final decision
rests with the board of directors, which says it
will consider the shareholders opinions.
2009 20112008 2010 2012
Sour ces: Citi grou p, U.S. Trea sury Depar tment , U.S. Justi ce Dep artm ent, Mortg age Ba nkers Assoc iati on, B loom berg
group estimated that about 60 per-
cent of the mortgages Citigroup was
buying and selling were missing some
form of documentation. Hunt says she
took her concerns to her boss, Richard
Bowen III.Bowen, 64, is a religious man, a for-
mer Air Force Reserve Officer Training
Corps cadet at Texas Tech University
in Lubbock with an attention to de-
tail that befits his background as a cer-
tified public accountant. When he saw
the magnitude of the mortgage de-
fects, Bowen says he prayed for guid-
ance. In a Nov. 3, 2007, e-mail, he
alerted Citigroup executives, includ-
ing Robert Rubin, then chairman of
Citigroups executive committee and aformer Treasury secretary; Chief Finan-
cial Officer Gary Crittenden; the banks
senior risk officer; and its chief auditor.
Bowen put the words URGENTREAD
IMMEDIATELYFINANCIAL IS-
SUES in the subject line.
The reason for this urgent e-mail
concerns breakdowns of internal con-
trols and resulting significant but pos-
sibly unrecognized financial lossesexisting within our organization,
Bowen wrote. We continue to be sig-
nificantly out of compliance.
There were no noticeable changes in
the mortgage machinery as a result of
Bowens warning, Hunt says.
Just a week after Bowen sent his e-
mail, Sherry and Jonathan were driv-
ing their Toyota Camry about 55 miles
(89 kilometers) per hour on four-lane
Providence Road in Columbia, Mis-
souri, when a driver in a Honda Civichit them head-on. Sherry broke a foot
and her sternum. Jonathan broke an
arm and his sternum. Doctors used
four bones harvested from a cadaver
and titanium screws to stabilize his
neck. You come out of an experience
like that with a commitment to mak-
ing the most of the time you have and
making the world a better place,
Sherry says.Three months after the accident, at-
torneys from Paul, Weiss, Rifkind,
Wharton & Garrison LLP, a New York
law firm representing Citigroup, inter-
viewed Hunt. She had no idea at the
time that it was related to Bowens
complaint, she says. The lawyers ques-
tions made her search her memory for
details of loans and conversations with
colleagues, she says. She decided to
take notes from that time forward on a
spreadsheet she kept on her homecomputer.
Bowens e-mail is now part of the ar-
chive of the Financial Crisis Inquiry
Commission, a panel created by Con-
gress in 2009. Citigroups response to
the commission, FCIC records show,
came from Brad Karp, chairman of Paul
Weiss. He said Citigroup had reviewed
Bowens issues, fired a supervisor and
changed its underwriting system, with-
out providing specifics.
One change resulting from Bowense-mail affected Bowen himself. He
went from mana ging 220 people to
overseeing two, according to the FCIC
report. By January 2009, Bowen no
longer worked for Citigroup, he told
the FCIC.
More people havent come forward
because they saw what happened to
me, says Bowen, whos now an ac-
counting and finance professor at the
University of Texas at Dallas. He says
Hunt is the exception. Sherry is an ab-solutely fantastic lady who knows what
shes doing. She has a conscience. I have
the highest regard for her.
Bowen declined to comment on the
circumstances of his departure from
Citigroup. The bank denies any retalia-
tion against him.
After Bowen left, Hunt had only one
person she could confide in: her hus-
band. She and Jonathan, 51, met in
1998 at a Minnesota casino. He trained
Ju ly 20 11 BloomBerg marketS 31
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jenniFers.altman/getty
32 BloomBerg marketS Ju ly 20 12
Ciimgg Ceo snivd, in i mnnffic, y fi iviin ific wk.
search-and-rescue dogs for a living.
They share a love of animals, especially
horses. She says she was attracted to his
sense of humor. He would quote coun-
try songs to make her laugh. They were
married in 1999.When Sherry worked for U.S. Ban-
corp in Missouri, she and Jonathan
bred and raised horses. As members of
the Old West Society of Minnesota, the
couple performed in re-enactments of
19th-century events, such as the shoot-
out at the O.K. Corral. Sometimes she
dressed up as a society woman, wearing
a bustle. When she played Annie Oak-
ley, she wore a buckskin outfit with a
bullwhip coiled around her shoulder.
She galloped into the arena on herhorsebut never too fast, her husband
says. Sherry and speed on a horse
dont get along, he says with a grin.
Every workday for eight years before
winning her lawsuit, Sherry Hunt left
their house on its 10-acre (4-hectare)
lot and drove along a dirt road where
cows and horses grazed in pastures. She
turned onto a two-lane county highway
that passed over a river bridge barely
wide enough for two cars. About 45
minutes later, shed arrive at the office.After Bowen went public with her
findings, Hunt says she was transferred
to the quality-control group on April 1,
2008. She went from supervising 65people to managing none. What I saw
there was 10 times worse, she says.
Every time I turned over a rock, I
found a snake.
One place where she uncovered
flaws was in the fraud prevention and
investigation group. Thats where
Hunts team shipped questionable
loans, with issues such as obviously
forged signatures, whited-out income
lines on tax forms or misspelled bank
names on borrower bank statements.
The group was supposed to investigate
the mortgages for fraud and notify the
FHA within a month when it found it.In November 2009, Hunt says, she
came across a list of about 1,000 loans
that the quality-control team had iden-
tified for possible fraud. The fraud pre-vention and investigation group had
left some of the mortgages in the queue
for more than two years without check-
ing them, Hunt says. Not one notifica-
tion went to the FHA before July 2011,
when the U.S. Attorneys Office in Man-
hattan issued a subpoena to the
OFallon office, the governments com-
plaint says.
In 2009, different teams began feud-
ing, internal e-mails made public in the
Justice Department case show. Thats
when CitiMortgage created yet another
team whose mission was to challenge
the findings of Hunts quality-control
group and persuade her and her col-
leagues to change their decisions on
the suitability of loans.In November 2010, Ross Leckie, a se-
nior director of CitiMortgages retail
bank mortgage unit, sent an e-mail or-
dering 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.CitiMortgage defect rates did plum-
met, according to notes Hunt kept. It
wasnt because there were fewer bad
mortgages, she says. Its because they
were beating us up over the quality-
control reports, she says.
In late 2010, Hunt began studying
the new federal whistle-blower rules
that Congress had just enacted in July
as part of the Dodd-Frank Wall Street
Reform and Consumer Protection Act.
This urgent e-mail concerns breakdowns ofinternal controls, CitiMortgage executiveRichard Bowen wrote in November 2007. Wecontinue to be significantly out of compliance.
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34 BloomBerg marketS Ju ly 20 12
The stress had been mounting for
Sherry and Jon. Conflicts at the office,
the physical pain that lingered from the
car wreck and growing anxiety over
Citis bad mortgages were taking a toll.
The Hunts say the laughter they oftenshared had faded.
Sherry says she drew inspiration
from a country song by Rascal Flatts
called Stand. Decide youve had
enough, it goes. You get mad. You get
strong. Wipe your hands, shake it off,
then you stand.
Hunt says she pinned the lyrics to
her cubicle wall. It made me stronger,
she says.
Hunt needed the strength on March
22, 2011. Thats the day Polkinghorne,who was three levels above her in the
chain of command, called her and a col-
league aside and told them their asses
were on the line if the defec t rates
didnt fall. Polkinghorne couldnt be
reached for comment, and Citigroup
declined to make him available for an
interview. That night, she and Jon
agreed the time had come for her to
take a stand. So Hunt decided to follow
the first step prescribed by Dodd-
Frank: formally complaining to thecompany. The prospect kept her awake
at night. I was ready to give up my
career and my life savings to get this
done, she says.
On March 29, 2011, Hunt walked intoCitiMortgages human resources de-
partment in OFallon and told them
everything: how the bank had been rou-
tinely buying and selling bad mortgages
for years, how the fraud unit wasnt do-
ing its job and how the quality-control
people were being pressured to change
their ratings.
Wh is tl e- bl ow er ru le s ma nd at e
that Hunt had to notify the Securi-
ties and Exchange Commission, the
government regulator that oversees
Citigroups mortgage business, within
90 days of reporting her concerns in-
ternally. I am afraid of what I know,
she wrote the SEC on May 24, 2011.
I do not want to know what I know. I
have nothing to gain from coming for-
ward and have no hidden agenda.Hunt hired a lawyer, Finley Gibbs of
Rotts & Gibbs LLC in Columbia, Mis-
souri. He had represented the Hunts
after their car accident. Starting on
June 27, 2011, Hunt and Gibbs shareddetails from her spreadsheet in four
conference calls with Justice Depart-
ment investigators. The officials made
no promises about whether they would
take action against Citigroup.
For two months, Sherry and Jon
sweated over what could happen if she
sued Citigroup without help from the
government. They concluded she had
to do it, Hunt says. On Aug. 5, 2011,
Hunt filed a false-claims complaint in
U.S. District Court in Manhattan.
I still had to go into work, Hunt
says. Because the complaint was sealed,
no one in her office knew about it. She
pinned a postcard of Leonardo da Vin-
cisMona Lisa next to the Rascal Flattslyrics. Like Mona Lisa, Sherry Hunt
had a secret.
She knew her chances of winning
were slim because she couldnt match
the resources of a big bank. Just 20 per-
cent of whistle-blowers get help from
government prosecutors, and without
that, success is rare, according to the
National Whistleblowers Center in
Washington.
After filing the lawsuit, Hunt says,
she felt like a ghost navigating the cubi-cles of CitiMortgage. Nobody knew, she
says, yet she felt vulnerable, as if she
could lose her job at any moment.
Sherry and Jon were elated on Jan.
3, 2012, when she got a call from her
lawyer: U.S. Attorney Preet Bharara in
Manhattan had decided to join her on
behalf of the Justice Department in
the case.
There was no testimony and no trial.
Citigroup admitted wrongdoing on
Feb. 15 and paid the $158.3 million tosettle. In a press release the same day,
Citi said it was pleased to resolve the
matter. We take our quality-assurance
processes seriously and have proac-
tively undertaken process improve-
ments to ensure that they are as robust
as possible, the bank wrote. The state-
ment didnt mention Hunt.
Citigroup isnt the only bank thats
been held accountable for processing
bad mortgages. In February, Char-
lotte, North Carolinabased Bank ofAmerica Corp. settled a false-cla ims
case with the government for $1 bil-
lion, without admitting wrongdoing.
In May, Frankfurt-based Deutsche
Bank AG agreed to pay $202.3 million
for endorsing unqualified mortgages
for FHA insurance, and admitted
wro ngdoing. What cont inues to set
Citigroup apart is that the bank ap-
proved flawed loans well past the 2008
financial crisis. A battleground over
u.s. any p b in mnn inhn lwi n wn n iin f Cii.
BlowIng the whIStle on cItI
Citi created a team to rebut Hunts groupsfindings of flawed loans. They were beating usup over the quality-control reports, she says.
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36 BloomBerg marketS Ju ly 20 12
Parsons says. Getting our arms around
the problem and getting it fixed has
been a top priority.
Hunt says she hopes her victory in-
spires others to take a stand. I want
people to know they can come for-
ward, she says. If I can do it, they cando it. We need to change whats wrong
in our own backyards, and thats how
we end up changing the big things.
After they received their share of the
settlement, the Hunts decided to do-
nate their house in Missouri to the
Troy First Baptist Church and move to
a warmer climate. Sitting at the kitchen
counter, Jon calls Sherry over to watch
a video on his tablet. Its the Zac Brown
Band doing a song called Knee Deep,
which is about the dream of a perma-nent vacation.
Listen, Jon tells his wife, pointing
to the video. Then he sings along: Only
worry in the world is the tide gonna
reach my chair.
Sherry Hunt tips her head back and
hoots.
BoB Ivry Is a projeCts anD InvestIgatIonsreporter at bloomberg news In new [email protected]
t wi l i, n n -il [email protected] y mag .
in compensation for 2011. The pay
was tied to Pandits push for ethical
conduct, the bank said in a March 8
regulatory filing. The filing specifi-
cally cited Pandits success in improv-ing Citigroups U.S. mortgage unit. On
April 16, in an unprecedented move,
Citi shareholders voted to r eject Pan-
dits compensation by about 55 to 45
percent. The vote was nonbinding, and
the banks board of directors has final
say on pay.
We gave this guy a pretty substan-
tial incentive award, and theres a basis
for it, says Richard Parsons, who was
Citigroups chairman and a member of
its compensation committee until heretired in April. Our view was, under
Vikrams leader ship, we did a pretty
good job of moving Citigroup forward
in the year 2011, but there was still
progress to be made.
The amount Citigroup paid in the
settlement amounts to 1.4 percent of its
2011 net income of $11.2 billion.
Its about more than dollars; its
about the reputational risk of the en-
terprise and how we do business,
loan quality persisted at CitiMortgage
even as the settlement was signed in
February, the complaint says.
Just months after Citigroup settled
with the Justice Department, another
big financial institution, JPMorganChase & Co., announced a multibillion-
dollar trading losshelping to rekindle
the debate over regulation of so-called
too-big-to-fail banks. President Barack
Obama invoked the JPMorgan loss as
more evidence of the need for tighter
regulation of Wall Street. Mitt Romney,
the presumptive Republican presiden-
tial nominee, has meanwhile continued
to call for the repeal of Dodd-Frank, the
law Sherry Hunt followed when she
blew the whistle on her employer.If Citigroup has learned anything
from Sherry Hunt, its not clear from
the comments of CitiMortgage CEO
Sanjiv Das, whos based in New York.
He says his division does terrific work.
We are focused on making sure we
manufacture loans the right way, he
says. This is a complex industry. Its a
complex process. It takes time. Were
heading down a trajectory that Im in-
credibly proud of. Is there something
that is systemically wrong? Absolutelynot. Absolutely not.
Citigroup CEO Vikram Pandit de-
clined to comment for this story. In a
video recorded in 2010 and posted by
Citi on the Internet, Pandit pledged that
his bank was turning over a new leaf.
Were going to stand for the financial
services company that practices respon-
sible financemaking sure were trans-
parent, making sure were honest,
making sure we manage our sharehold-
ers money prudently, he says.Citigroup repaid with interest the
$45 billion in government bailout loans
it took in 2008 and reported profits
during each of the nine quarters ended
in March 2012. Yet shareholders re-
main restive. Citis stock fell 92 percent
from Dec. 11, 2007, when Pandit be-
came CEO, to May 18.
Three weeks after Citigroup settled
the Hunt case, the banks board of di-
rectors awarded Pandit $14.9 million
hn n n, jnn, in nig y, y y gniz v ciin Cii.
BlowIng the whIStle on cItI