Citi’s Richard Bowen Exposes Wall Street’s ‘Garbage In, Garbage Out’

Does anybody have any doubt that massive fraud within our mortgage industry played a large part in our current economic crisis? America continues to suffer from the fakers and phonies within our financial regulatory structure (including Alan Greenspan) who fail to accept responsibility for their shortcomings and the resultant frauds.

The mortgage fraud grew over time in order to feed the Wall Street machine the collateral it needed to execute a wide array of structured transactions. This need for increasing volume of mortgage originations was a critical point in one of my earliest blog posts written in November 2008, The Wall Street Model is Broken… and Won’t Soon be Fixed!!. I wrote,

Wall St. needed to find more and more collateral to continue to feed this profit monster. Some Wall St. firms either purchased or made strategic alliances with originators…

I further highlighted this growing demand for mortgage originations in pointing out,

At the turn of the century, the Wall Street model was a pure “originate to distribute” model with little to no residual risk on behalf of the originators or underwriters. When there is no residual risk, those who “WIN” are the players that can purely process the most volume. Well, how does one get volume? Lower the credit standards, put fewer restrictions on borrowers, little to no covenants (NINA Loans: no income, no asset check). WOW!!! What were we thinking?? Well, Wall St. felt, “let’s worry about it tomorrow or maybe not at all because we are making too much money today.”

Obviously ‘tomorrow’ has come and has been with us for the last two years. That said, few if any participants in the mortgage origination schemes have been exposed. Is that changing? I am not holding my breath but I was heartened to see testimony today from Richard Bowen, former chief underwriter of Citigroup’s consumer lending group. Bloomberg once again distinguishes itself in its reporting, Citigroup Underwriter Warned of Mortgage Lapses,

Citigroup Inc. executives were warned as early as 2006 that the bank routinely bought mortgages that violated its own standards, the former chief underwriter for Citigroup’s consumer-lending group testified.

Richard Bowen determined in mid-2006 that more than 60 percent of mortgages bought from other firms and sold to investors such as Fannie Mae and Freddie Mac were “defective,” according to his prepared remarks today before the Financial Crisis Inquiry Commission. The panel is probing causes of the 2007 mortgage-market collapse and ensuing bank bailouts.

“I started issuing warnings in June 2006 and attempted to get management to address these critical risk issues,” said Bowen, who was chief underwriter for correspondent lending in Citigroup’s consumer-lending group. “These warnings continued through 2007 and went to all levels of the consumer-lending group.”

In a November 2007 e-mail headlined, “URGENT-READ IMMEDIATELY-FINANCIAL ISSUES,” Bowen said he warned top managers including then Executive-Committee Chairman Robert Rubin of “possibly unrecognized financial losses” among other risks.

“I know that this will prompt an investigation of the above circumstances which will hopefully be conducted by officers of the company outside of the consumer-lending group,” Bowen wrote in the e-mail, a copy of which he included in the prepared remarks. The missive was copied to then-Chief Financial Officer Gary Crittenden and David Bushnell, Citigroup’s chief risk officer.

I have one question. Will Rubin, Crittenden, Bushnell be given a pass by regulators and Congress after this extremely incriminating testimony from Mr. Bowen?

I have one comment. Although Bowen’s statistic of 60% does not necessarily mean that all those mortgages were fraudulently underwritten, that statistic should send shock waves across America as to the depth of underlying problems in our housing industry today.

Garbage in, garbage out…..and the American taxpayers are left to pick up the tab!!

Speaking of garbage….thanks a lot Bob.

About Larry Doyle 522 Articles

Larry Doyle embarked on his Wall Street career in 1983 as a mortgage-backed securities trader for The First Boston Corporation. He was involved in the growth and development of the secondary mortgage market from its near infancy.

After close to 7 years at First Boston, Larry joined Bear Stearns in early 1990 as a mortgage trader. In 1993, Larry was named a Senior Managing Director at the firm. He left Bear to join Union Bank of Switzerland in late 1996 as Head of Mortgage Trading.

In 1998, after 15 years of trading and precipitated by Swiss Bank’s takeover of UBS, Larry moved from trading to sales as a senior salesperson at Bank of America. His move into sales led him to the role as National Sales Manager for Securitized Products at JP Morgan Chase in 2000. He was integrally involved in developing the department, hiring 40 salespeople, and generating $300 million in sales revenue. He left JP Morgan in 2006.

Throughout his career, Larry eagerly engaged clients and colleagues. He has mentored dozens of junior colleagues, recruited at a number of colleges and universities, and interviewed hundreds. He has also had extensive public speaking experience. Additionally, Larry served as Chair of the Mortgage Trading Committee for the Public Securities Association (PSA) in the mid-90s.

Larry graduated Cum Laude, Phi Beta Kappa in 1983 from the College of the Holy Cross.

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