Hunt still remembers her first impressions of CitiMortgage’s O’Fallon headquarters, a complex of three concrete-and-glass buildings surrounded by manicured lawns and vast parking lots. Inside are endless rows of cubicles where 3,800 employees trade e-mails and conduct conference calls. Hunt says at first she felt like a mouse in a maze.
Accountability is a tough thing to manage when companies get to this stage. The larger the institution, the less accountable every individual within that institution tends to act. Organizational architecture pushes the risk downstream while pulling the reward upstream.
Workers had a powerful incentive to push mortgages through the process even if flaws were found: compensation. The pay of CitiMortgage employees all the way up to the division’s chief executive officer depended on a high percentage of approved loans, the government’s complaint says.
How does this organizational structure differ from the pyramid scheme, or MLM? With scrutiny, it really doesn't. This organizational structure is what has kept the Realtor-Broker model perpetuating for as long as it has: risk essentially becomes decoupled from the reward for Brokers; they can push their Realtors to pursue risky prospects because they get a cut every time. Furthermore, when Realtors collude with their Brokers, they have collective incentive to both negotiate prices upward and take as large of a cut as possible of that inflated amount. Missing from the equation is a system of checks and balances.
CitiMortgage mortgage brokers' compensation being tied to volume means that turnover in the housing market is something they aim(ed) for. There is something seriously wrong with this model.
The fact that nobody in the NAR or mortgage industry is being held accountable is puzzling.
> The larger the institution, the less accountable every individual within that institution tends to act.
I'm reading Liars and Outliers, by Bruce Schneier, and this is one of the big points he makes in his discussion of how trust and security balance to allow society to function.
There is a huge difference between personal morality and organizational morality, for instance. Even if every person working for Citigroup had been basically moral (in the sense that they wouldn't have committed fraud alone) this still could have happened, and probably would have.
The argument that gets repeated ad nauseum, that things like this are the fault of "a few bad apples", is just plain false. The bad apples certainly exist (especially given that our society and economy reward anti-social behaviors), but the incentive structure is the real problem. It's systemic, there's no getting around that fact.
It isn't three buildings. It's a three story building (and half a basement where they stuck me).
Almost all CitiMortgage employees get merit based bonuses. My department, on the other hand, gets shafted. Seven years working there and two years programming for them and running Oracle reports and I didn't even get a raise last year. (And now I see why since we lost so much money.)
Business has really slowed down and most people work in Lost Mitigation now.
I need out!
</rant> =) Sorry, just had to get that off my chest. Working at the O'Fallon headquarters of CitiMortgage is not where I want to spend my career. It's not even where I want to spend my Friday.
The total fine of $158 million, after Citi got billions in support, is nothing, a mere rounding error on one of their quarterly reports. A simple cost of doing business...
The key take-away is: no one at Citi went to jail for fraud.
Bingo! Give this man a cookie. It's bullshit that these guys perpetrated outright fraud like this, and - at the end - nobody was really punished, even though they basically admitted they were guilty.
This shit is what gives capitalism a bad name... I'm as much a proud anarcho-capitalist, Ayn Rand reading, Ludwig von Mises quoting, Gary Johnson supporting libertarian as the next guy, and it pains me to get beat up for believing in capitalism because of these crooks at Citi and BoA, when nobody is being punished for their fraud. Capitalism does not inherently entail accepting fraud like this, but every time these asshats get away with this kind of behavior, it reinforces all the negative images that people have about capitalism.
If we're going to accept the idea that government (or something like government) is to protect property rights and enforce a "rule of law" that protects against this kind of fraud, then our government needs to step the %$!# up and prosecute some of these assholes.
Here's a question: If Citi was selling out-of-compliance loans to Fannie and Freddie and the FHA, why aren't those institutions forcing Citi to buy those loans back? Likewise JP Morgan, Bank of America, etc.
I don't know the answer and there might be a good one.
But I can't help noticing that these institutions were "too big too fail", that substantial sums were advanced and pledged to keep them afloat, and that their preservation has been an important consideration of Fed policy for going on five years.
It isn't too hard to imagine a decision to accept additional losses among the GSEs and federal housing agencies for the higher purpose of keeping the US financial system afloat. Please note that Fannie and Freddie are something like $100 billion in the hole to the Federal government, financial catastrophes that dwarf any bailout extended and yet have somehow escaped the public attention proportionate to their amazing losses. (Indeed we have politicians advocating still greater losses for them as part of efforts to settle the housing market.)
These banks are big beyond the wisdom or fortitude of public officials to conduct prudent and and equitable policy. If banks that big exist, they'll earn rents based on their regulatory position, and their executives' compensation be essentially free from any market discipline. And those banks and executives will provide political contributions and favors and soft landings to politicians and regulators whose views will matter so much to their profitability. It's an "iron triangle" secured by the governments' regulatory monopoly and the flow of capital through the system.
The expansion of the government into housing finance through the GSEs and various guarantors only makes the situation worse.
There is no doubt that smaller banks lead to higher capital costs and accepting lower slower economic growth. There are real economies of scale in these businesses. But realizing that potential contribution requires an intelligence and integrity of regulation, over sustained periods of time, that is simply beyond the institutional capacities of public institutions. They thus accumulate excess risks, which translate to costs, which ultimately consume their promised potential and leave us with net losses. And political distortions to boot.
There are few on this board more conservative than I. But US banking policy must be put into a place where no one can fail to know that the failure of any US financial institution will result in losses for its capital providers, equity and debt, with no possibility of public intervention on any basis. The freedom of our economy and polity must be distorted to the extent of our deviation from that state.
You understand what the fraud being perpetrated is right?
Citi passed fraudulent mortgages on to investors. That is, either homeowners or third party mortgage brokers fraudulently obtained loans to which they otherwise would not have been able to get. The victim of this fraud is not the homeowner, but the lender.
Citi became culpable only when they bought loans that a prudent man would have recognized as obtained through fraud and packaged and sold them as securities.
Now if you're willing to send officers of Citi to jail for complicity in a fraud perpetrated by and large by home owners and small time mortgage brokers, who also were the primary beneficiaries, you've got to be willing to send them to jail as well.
It sickens me that Citigroup acknowledged they fraudently bought loans without the required documentation and even in some cases said documentation was forged or incomplete and all they got was a $185 million slap on the wrist. What makes matters worse is that the people who have these mortgages are completely oblivious as to what is going on. What makes the whole situation even more laughable is the fact they got billions in bailout cash and yet were only fined $185 million.
They didn't deny the allegations, why didn't someone go to jail over this? They breached mortgage regulations and by the sounds of it most of their purchased loans were fraudelent. Disgusting.
Even after the housing bubble popped it surprises me that banks are still doing these kinds of things. The saying history repeats itself couldn't be more true even if it tried.
It's a great story however skeptical of these retrospective views. I wonder how much of her motives were driven by protecting the mortgage holders and the economy; or protecting her career prospects.
Saying this, Hunt seems much more deserving than the former banker in this article:
Can we get a version of this story with a less editorialistic headline?
This is clearly a "fits the narrative" type headline, hardy individual versus big bad bank; and I don't trust stories when they fit popular narratives.
Tell me the facts of the case, Bloomberg, I'll make up my own mind how I want to feel about it.
Actually that won't be possible. You are coming to this story at the end of the narrative which has taken years to reach this far.
It's also a tortured story - complex, with one narrator actively trying to cover his tracks. And This article is more for adding a human angle to what is extremely tortured and boring reading.
For you to get the facts at this stage is not going to happen from an article like this. You would need to google gumshoe a bit to read up for that.
[+] [-] shawnee_|13 years ago|reply
Accountability is a tough thing to manage when companies get to this stage. The larger the institution, the less accountable every individual within that institution tends to act. Organizational architecture pushes the risk downstream while pulling the reward upstream.
Workers had a powerful incentive to push mortgages through the process even if flaws were found: compensation. The pay of CitiMortgage employees all the way up to the division’s chief executive officer depended on a high percentage of approved loans, the government’s complaint says.
How does this organizational structure differ from the pyramid scheme, or MLM? With scrutiny, it really doesn't. This organizational structure is what has kept the Realtor-Broker model perpetuating for as long as it has: risk essentially becomes decoupled from the reward for Brokers; they can push their Realtors to pursue risky prospects because they get a cut every time. Furthermore, when Realtors collude with their Brokers, they have collective incentive to both negotiate prices upward and take as large of a cut as possible of that inflated amount. Missing from the equation is a system of checks and balances.
CitiMortgage mortgage brokers' compensation being tied to volume means that turnover in the housing market is something they aim(ed) for. There is something seriously wrong with this model.
The fact that nobody in the NAR or mortgage industry is being held accountable is puzzling.
[+] [-] glesica|13 years ago|reply
I'm reading Liars and Outliers, by Bruce Schneier, and this is one of the big points he makes in his discussion of how trust and security balance to allow society to function.
There is a huge difference between personal morality and organizational morality, for instance. Even if every person working for Citigroup had been basically moral (in the sense that they wouldn't have committed fraud alone) this still could have happened, and probably would have.
The argument that gets repeated ad nauseum, that things like this are the fault of "a few bad apples", is just plain false. The bad apples certainly exist (especially given that our society and economy reward anti-social behaviors), but the incentive structure is the real problem. It's systemic, there's no getting around that fact.
[+] [-] UnfalseDesign|13 years ago|reply
Almost all CitiMortgage employees get merit based bonuses. My department, on the other hand, gets shafted. Seven years working there and two years programming for them and running Oracle reports and I didn't even get a raise last year. (And now I see why since we lost so much money.)
Business has really slowed down and most people work in Lost Mitigation now.
I need out!
</rant> =) Sorry, just had to get that off my chest. Working at the O'Fallon headquarters of CitiMortgage is not where I want to spend my career. It's not even where I want to spend my Friday.
[+] [-] patrickgzill|13 years ago|reply
The key take-away is: no one at Citi went to jail for fraud.
[+] [-] mindcrime|13 years ago|reply
This shit is what gives capitalism a bad name... I'm as much a proud anarcho-capitalist, Ayn Rand reading, Ludwig von Mises quoting, Gary Johnson supporting libertarian as the next guy, and it pains me to get beat up for believing in capitalism because of these crooks at Citi and BoA, when nobody is being punished for their fraud. Capitalism does not inherently entail accepting fraud like this, but every time these asshats get away with this kind of behavior, it reinforces all the negative images that people have about capitalism.
If we're going to accept the idea that government (or something like government) is to protect property rights and enforce a "rule of law" that protects against this kind of fraud, then our government needs to step the %$!# up and prosecute some of these assholes.
[+] [-] chernevik|13 years ago|reply
I don't know the answer and there might be a good one.
But I can't help noticing that these institutions were "too big too fail", that substantial sums were advanced and pledged to keep them afloat, and that their preservation has been an important consideration of Fed policy for going on five years.
It isn't too hard to imagine a decision to accept additional losses among the GSEs and federal housing agencies for the higher purpose of keeping the US financial system afloat. Please note that Fannie and Freddie are something like $100 billion in the hole to the Federal government, financial catastrophes that dwarf any bailout extended and yet have somehow escaped the public attention proportionate to their amazing losses. (Indeed we have politicians advocating still greater losses for them as part of efforts to settle the housing market.)
These banks are big beyond the wisdom or fortitude of public officials to conduct prudent and and equitable policy. If banks that big exist, they'll earn rents based on their regulatory position, and their executives' compensation be essentially free from any market discipline. And those banks and executives will provide political contributions and favors and soft landings to politicians and regulators whose views will matter so much to their profitability. It's an "iron triangle" secured by the governments' regulatory monopoly and the flow of capital through the system.
The expansion of the government into housing finance through the GSEs and various guarantors only makes the situation worse.
There is no doubt that smaller banks lead to higher capital costs and accepting lower slower economic growth. There are real economies of scale in these businesses. But realizing that potential contribution requires an intelligence and integrity of regulation, over sustained periods of time, that is simply beyond the institutional capacities of public institutions. They thus accumulate excess risks, which translate to costs, which ultimately consume their promised potential and leave us with net losses. And political distortions to boot.
There are few on this board more conservative than I. But US banking policy must be put into a place where no one can fail to know that the failure of any US financial institution will result in losses for its capital providers, equity and debt, with no possibility of public intervention on any basis. The freedom of our economy and polity must be distorted to the extent of our deviation from that state.
[+] [-] JackFr|13 years ago|reply
Citi passed fraudulent mortgages on to investors. That is, either homeowners or third party mortgage brokers fraudulently obtained loans to which they otherwise would not have been able to get. The victim of this fraud is not the homeowner, but the lender.
Citi became culpable only when they bought loans that a prudent man would have recognized as obtained through fraud and packaged and sold them as securities.
Now if you're willing to send officers of Citi to jail for complicity in a fraud perpetrated by and large by home owners and small time mortgage brokers, who also were the primary beneficiaries, you've got to be willing to send them to jail as well.
[+] [-] bgilroy26|13 years ago|reply
Is it the idea that folks always have about how "if you go up against company x's legal department you'll get destroyed no matter what"?
One lady winning doesn't really change the odds in general.
[+] [-] yashchandra|13 years ago|reply
[+] [-] DigitalSea|13 years ago|reply
They didn't deny the allegations, why didn't someone go to jail over this? They breached mortgage regulations and by the sounds of it most of their purchased loans were fraudelent. Disgusting.
Even after the housing bubble popped it surprises me that banks are still doing these kinds of things. The saying history repeats itself couldn't be more true even if it tried.
[+] [-] unknown|13 years ago|reply
[deleted]
[+] [-] unknown|13 years ago|reply
[deleted]
[+] [-] sparknlaunch|13 years ago|reply
Saying this, Hunt seems much more deserving than the former banker in this article:
http://gawker.com/5553737/
[+] [-] planetguy|13 years ago|reply
This is clearly a "fits the narrative" type headline, hardy individual versus big bad bank; and I don't trust stories when they fit popular narratives.
Tell me the facts of the case, Bloomberg, I'll make up my own mind how I want to feel about it.
[+] [-] JabavuAdams|13 years ago|reply
Just read the article. The headline is one sentence. You have to evaluate the whole thing anyway.
[+] [-] intended|13 years ago|reply
It's also a tortured story - complex, with one narrator actively trying to cover his tracks. And This article is more for adding a human angle to what is extremely tortured and boring reading.
For you to get the facts at this stage is not going to happen from an article like this. You would need to google gumshoe a bit to read up for that.
[+] [-] horsehead|13 years ago|reply
[+] [-] mcphilip|13 years ago|reply