Citigroup was “negative” on subprime mortgages at least as early as 2006. Despite that, Citigroup continued to originate subprime mortgages and underwrite subprime mortgage-backed securities in large quantities. In 2007, Citigroup originated $19.7 billion in subprime mortgages and underwrote $13.4 billion in subprime mortgage-backed securities. Senior management says it did not have a clue what was going on. See April 8, 2010 article in the Huffington Post by Shahien Nasiripour, “Citi ‘Negative On Subprime mortgages As Early As 2006, Yet Firm Continued to Pump Out Subprime Mortgage Products.”
This kind of activity ? Wall Street selling customers something it is betting against ? is one reason why we need a consumer financial protection agency. “[T]hat’s why you have a consumer agency to ride along with the prudential regulator,” you want independent examiners looking out for less sophisticated investors, one administration official was quoted as saying.
“We were negative on subprime,” Thomas Maheras, former chief trader for Citigroup and co-CEO of Citi Markets and Banking, reportedly admitted to Congresses’ Financial Crisis Inquiry Commission. “We were, from the very earliest part of ’07 and the end of ’06, we were in most of our business areas reducing our risk around subprime.”
Citigroup was also negative on housing prices. “We had in our base case that housing was going down during ’07 and would likely continue,” Maheras was quoted as saying.
The Financial Crisis Inquiry Commission publicly grilled current and former top Citi officials over their roles in creating one of the biggest disasters on Wall Street.
Charles “Chuck” Prince, the firm’s CEO from 2004 to 2007, reportedly told the Financial Crisis Inquiry Commission that the subprime mortgage origination was contrary to his policies but he did not know that Citigroup was involved in that until near end of his term. “I found out at the end of my tenure, I did not know it before, that we had some warehouse lines out to some originators,” Prince reportedly stated. “And I think getting that close to the origination function being that involved in the origination of some of these products is something that I wasn’t comfortable with and that I did not view as consistent with the prescription I had laid down for the company not to be involved in originating these products.”
Prince told the SEC: “[A]s more and more of these subprime mortgages were created as raw material for the securitization process, ‘[a]t the end of that process, the raw material going into it was actually bad quality, it was toxic quality, and that is what ended up coming out the other end of the pipeline. Wall Street obviously participated in that flow of activity.”
Given these facts ? that the right hand and the brain apparently did not know that the left hand was engaged in harmful activities ? it is the view of the Financial Crisis Inquiry Commission and others that Citigroup is too big to manage.
A Citigroup spokesman reportedly declined to comment for the article.
Citigroup received $45 billion of taxpayer bailout money after losing nearly $30 billion over the past two years, according to the article. Citigroup also took advantage of a little-noticed bailout for banks that lets them borrow money cheaply while putting taxpayers on the hook for potential losses, by issuing, as of April, nearly $65 billion in Federal Deposit Insurance Corp.-guaranteed debt.
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