Thanks to a courageous whistleblower, Sherry Hunt, Citigroup must pay $153 million to settle a civil suit alleging that the bank directed its mortgage supervisors to look the other way as tens of thousands of loans were signed, many without proper documentation. The allegations in the Complaint don’t paint a pretty picture—to say the least—of the goings-on at CitiMortgage:
Among other things, Citi failed to conduct the required full review of all early payment defaults (i.e., loans defaulting in the first six months), failed to report to HUD findings of fraud and other serious deficiencies in its loans, and encouraged its business employees to manipulate the reports of its quality control department to conceal the number and severity of deficiencies in Citi’s loans.
We commend you Sherry Hunt. Management at CitiMortgage and possibly CitiBank put profits before ethics and the law, but you did not. You saw a crime being committed and you blew the whistle. You risked your job, and possibly a career in banking to simply do the right thing. If more people had your courage and tenacity, financial institutions would play by the rules. They would not have to be hit over the head with a 2×4 wielded by the U.S. Attorney’s Office.
But what of the sanction? Sure, it’s a tremendous amount of money. But who really pays? The shareholders of Citibank, that’s who; those pension funds and other institutional investors who own the stock of an entity that has already agreed to pay $2.2 billion to settle the nationwide case against dishonest mortgage lenders. Where did these guys go wrong?
Let’s transport ourselves into the bowels of Citigroup a few years ago, as CEO Vikram Pandit hires Sanjiv Das to run CitiMortgage. Here’s how the conversation might have transpired…
Pandit: Welcome to the team, Mr. Das. We trust you understand our directive. You are a team player.
Das: Absolutely, it’s crystal clear. No questions, just keep signing away. We want a set of employees that doesn’t wonder why, but rather how. As in, “How can I process more loans in less time?” In a word, we want to be as unscrupulous as possible.
That’s brilliant. You’ve become even smarter since our time together in the one percent at Morgan Stanley. We’ve been doing this for years and with you at the helm, I trust we can make even more money.
Why thanks. I agree, I’m the man for the job. But I have one question: Won’t this eventually catch up with us? These new laws encouraging and incentivizing whistleblowers scare me. When someone stands to gain millions from ratting us out—well, won’t that eventually incentivize someone enough, no matter how unquestioning my employees are?
Mr. Das, what’s the worst they could do to us? $100 million? $500 million? We’ll be raking in billions from these mortgages. This promises to be one of the most successful units at Citi. One day, no doubt, we’ll have to pay for our transgressions, but nowhere close to what we’ll rake in between now and then. The regulators are softies, and they know the banks really wield the power. They’ll choose a number that looks impressive to the public, and that’ll be that.
Hmm, well you’re the boss. Your wish is my command. I’ll find the—how many is it?—10,000 most robotic, yes-man employees I can conjure and we’ll be off and running in no time.
I can see the email now, congratulating CitiMortgage for becoming the most profitable of Citigroup’s ventures. It’d be hard to screw this one up, Sanjiv. It’s as simple as, well, spelling your name correctly.
Assisted by David T. Martin