Citigroup Exec Warned Chairman of Mortgage Risk
Updated at 6:11 p.m. ET
A former mortgage executive from Citigroup Inc. has accused bank executives of violating their own risk management policies and ignoring his warnings about the coming financial crisis.
Richard Bowen on Wednesday told a panel investigating the roots of the crisis that he raised concerns about mortgage risk starting in 2006. He said he sent an e-mail about it to former Chairman Robert Rubin and others in November 2007.
Bowen sent weekly messages to managers raising concerns about his group's risk management. But he wrote to Rubin and other executives in 2007, "These breakdowns have not been communicated to or recognized by" Citi's top audit or finance executives.
Bowen said at the hearing that he doesn't know whether any executives acted on his warnings about the bank's purchase of suspect mortgages.
In testimony to the Financial Crisis Inquiry Commission, Bowen said he discovered in mid-2006 that more than 60 percent of the mortgages bought and resold by subprime subsidiary Citifinancial Mortgage didn't meet Citigroup's underwriting standards.
Bowen was a chief underwriter for the division. He was responsible for loans bought from other lenders. Many of these loans were bundled and sold as complex investments.
Citigroup disputed his account. Spokeswoman Molly Meiners said in a statement that the issues Bowen raised were "promptly and carefully reviewed when he raised them and corrective actions were taken."
Bowen's testimony came on the first of three days of hearings by the FCIC. Earlier Wednesday, Alan Greenspan defended his tenure as head of the Federal Reserve in the years leading up to the crisis. As he has in the past, Greenspan disputed critics who say he kept interest rates too low for too long, encouraging risky lending.
The three days of hearings will feature testimony focused on high-risk mortgage lending and the way trillions of dollars in risky mortgage debt was spread through the financial system. The hearing is designed to provide a firsthand accounting of decisions that inflated a mortgage bubble and triggered the financial crisis.
The panel is using Citigroup as a case study because the bank was heavily involved in every stage of that process. The megabank was a major subprime lender through its subsidiary CitiFinancial. Other divisions of Citigroup pooled those loans and loans purchased from other mortgage companies and sold the income streams to investors.
As borrowers defaulted, Citigroup took losses on mortgage-related investments it held on and off its books. Mortgage troubles at Citi, defunct investment bank Bear Stearns and elsewhere exposed cracks in the financial system. In late 2007 and throughout 2008, those fissures grew into a full-fledged credit crisis that crippled the global economy.
The FCIC aims to dissect the bank's structure and show how its functions interacted. Wednesday's witness list includes current and former executives from CitiMortgage, parent company Citigroup Inc., and the division of Citi Markets & Banking that created the most notorious mortgage-backed investments.
Rubin and the bank's former CEO Chuck Prince are due to appear Thursday.
The panel also will hear this week from a former risk officer with failed subprime lender New Century Financial Corp., a current and a former Comptroller of the Currency and former executives and regulators from government-backed mortgage giant Fannie Mae.
Fannie Mae's close ties to some leading Democrats and its so-far $75.2 billion bailout have made it a political lightning rod.
Congress created the FCIC last year to examine the causes of that crisis. It is structured like the 9/11 panel that examined intelligence failures preceding the terrorist attacks of Sept. 11, 2001.
Like that panel, the commission has authority to issue subpoenas to compel witnesses to testify or force companies to turn over documents. The commission is charged with examining 22 topics - from executive compensation to tax policy - in a report it must issue Dec. 15.
AP A former mortgage executive from Citigroup Inc. has accused bank executives of violating their own risk management policies and ignoring his warnings about the coming financial crisis.
Richard Bowen on Wednesday told a panel investigating the roots of the crisis that he raised concerns about mortgage risk starting in 2006. He said he sent an e-mail about it to former Chairman Robert Rubin and others in November 2007.
Bowen sent weekly messages to managers raising concerns about his group's risk management. But he wrote to Rubin and other executives in 2007, "These breakdowns have not been communicated to or recognized by" Citi's top audit or finance executives.
Bowen said at the hearing that he doesn't know whether any executives acted on his warnings about the bank's purchase of suspect mortgages.
In testimony to the Financial Crisis Inquiry Commission, Bowen said he discovered in mid-2006 that more than 60 percent of the mortgages bought and resold by subprime subsidiary Citifinancial Mortgage didn't meet Citigroup's underwriting standards.
Bowen was a chief underwriter for the division. He was responsible for loans bought from other lenders. Many of these loans were bundled and sold as complex investments.
Citigroup disputed his account. Spokeswoman Molly Meiners said in a statement that the issues Bowen raised were "promptly and carefully reviewed when he raised them and corrective actions were taken."
Bowen's testimony came on the first of three days of hearings by the FCIC. Earlier Wednesday, Alan Greenspan defended his tenure as head of the Federal Reserve in the years leading up to the crisis. As he has in the past, Greenspan disputed critics who say he kept interest rates too low for too long, encouraging risky lending.
The three days of hearings will feature testimony focused on high-risk mortgage lending and the way trillions of dollars in risky mortgage debt was spread through the financial system. The hearing is designed to provide a firsthand accounting of decisions that inflated a mortgage bubble and triggered the financial crisis.
The panel is using Citigroup as a case study because the bank was heavily involved in every stage of that process. The megabank was a major subprime lender through its subsidiary CitiFinancial. Other divisions of Citigroup pooled those loans and loans purchased from other mortgage companies and sold the income streams to investors.
As borrowers defaulted, Citigroup took losses on mortgage-related investments it held on and off its books. Mortgage troubles at Citi, defunct investment bank Bear Stearns and elsewhere exposed cracks in the financial system. In late 2007 and throughout 2008, those fissures grew into a full-fledged credit crisis that crippled the global economy.
The FCIC aims to dissect the bank's structure and show how its functions interacted. Wednesday's witness list includes current and former executives from CitiMortgage, parent company Citigroup Inc., and the division of Citi Markets & Banking that created the most notorious mortgage-backed investments.
Rubin and the bank's former CEO Chuck Prince are due to appear Thursday.
The panel also will hear this week from a former risk officer with failed subprime lender New Century Financial Corp., a current and a former Comptroller of the Currency and former executives and regulators from government-backed mortgage giant Fannie Mae.
Fannie Mae's close ties to some leading Democrats and its so-far $75.2 billion bailout have made it a political lightning rod.
Congress created the FCIC last year to examine the causes of that crisis. It is structured like the 9/11 panel that examined intelligence failures preceding the terrorist attacks of Sept. 11, 2001.
Like that panel, the commission has authority to issue subpoenas to compel witnesses to testify or force companies to turn over documents. The commission is charged with examining 22 topics - from executive compensation to tax policy - in a report it must issue Dec. 15.
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It's derivatives that blew up the financial industry in this and other countries.
The idea is that when taxes are not raised the Govt is forced to live within it's budget instead of increasing it's wild spending once it expects more revenue from higher taxes.
What actually happened is the Federal and State Govt's saw increased revenue from the booming economy and got used to the spending, see these graphs:
http://www.ritholtz.com/blog/2009/11/economy-state-tax-revenues-1964-2009/
In the tax collection chart you can see that State tax revenues skyrocketed AFTER the "No New Taxes" policy was implemented in 2003.
Now you made a tidy little sum of $54,000 when times were good, did you put that aside for the downturn? if you did, your smart, cause the States did not. Everyone tried to ride the profit wave when they could just like you, but now that times are tougher you have to cut back your spending, Right?
Well so does the Government!