Resisting Corporate Corruption, 3rd Edition

Case 9Write 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 ...