How Citi Broke Rules

Ronald Henkoff, EDITOR

The $2 billion trading loss JPMorgan Chase & Co. announced in May focuses new attention on the debate over how closely big banks should be regulated. In this month’s cover story, Bob Ivry shows how eight years of bad behavior at another giant bank, Citigroup Inc., would have gone undetected were it not for one manager’s determination to hold her employer accountable (“BLOWING THE WHISTLE ON CITI,” page 26).

Sherry Hunt supervised a unit at Citi’s vast mortgage-processing office in O’Fallon, Missouri. Her team’s job was to certify the quality of the mortgages the bank bought from brokers. At one point, she says, about 60 percent of the loans that her team reviewed were defective, meaning the borrowers or lenders may have lied or omitted crucial information. When she alerted her bosses, they bought the loans anyhow, and she was demoted.

Hunt sued Citi in federal court and contacted the Securities and Exchange Commission. “I am afraid of what I know,” she told the agency. “I do not want to know what I know.”

The Justice Department joined her suit in January. A month later, Citi admitted to approving loans for government insurance that didn’t meet federal standards. The bank paid $158.3 million to settle the suit, and the U.S. awarded $31 million of that to Hunt. What’s striking about Citi’s misdeeds is how they continued unabated through the first quarter of 2012. Says Neil Barofsky, former inspector general of the Troubled Asset Relief Program, “This case demonstrates that the notion that the bailed-out banks have somehow found God and have reformed their ways in the aftermath of the financial crisis is pure myth.”

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