Tale of Two Citis

It took an obscure magazine to reveal how Sandy Weill built his empire on subprime lending. Why?

A long time ago, before the turn of the century, subprime lending was a marginal business—economically, ethically, every way. The business was basically left to the hustlers. Financial carrion. Birds of prey.

Let’s face it, only the likes of Commercial Credit Corp., of Baltimore, would sell 40 percent loans to barely literate residents of Mississippi’s Noxubee and Lowndes* counties, tacking on credit insurance to bring the rate up to 70 percent. (Never mind what credit insurance is. Just don’t buy it.) Or maybe Primerica, of Atlanta, which Tennessee regulators accused of “seeking to deceive and confuse” customers through “a system of deliberate evasion.” Or maybe the truly rancid Associates First Capital Corp., of Irving, Texas, so corrupt that it employed a “designated forger,” an ex-employee told ABC’s Prime Time Live. I mean, who would go near a bunch like that?

Whoops! My bad. Sanford I. Weill, the former chairman and CEO of Citigroup Inc., Fortune’s third-most admired megabank last year, got his start buying Commercial Credit in 1986, then bought Primerica in 1988 before merging with Citicorp a decade later.

And Associates First Capital? Yup, Citi bought it in 2000. The Citi never sleeps.

But, surely, Citigroup is marginal in the subprime industry, and the subprime industry is marginal to Citi, by some measures the world’s largest bank. Right?


Citigroup has established itself as perhaps the most powerful player in the subprime market by swallowing competitors and employing its vast capital resources and its name-brand respectability. CitiFinancial, its flagship subprime unit, claims 4.3 million customers and 1,600 plus branches in forty-eight states, including nearly 350 offices across the South.

Things don’t stop with CitiFinancial, however. The web of subprime is woven throughout Citigroup. Sandy Weill’s company has refashioned itself into a full-service subprime enterprise—one that makes high-cost loans and sells securities backed by the income streams from all these transactions. In 2000, one study calculated, nearly three of every four mortgages originated within Citigroup’s lending empire were made by one of its higher-interest subprime affiliates—nearly 180,000 loans out of a total of 240,000-plus mortgages for the year.

Yes, you read that right. Nearly three of four Citigroup mortgages in 2000 came from a subprime unit.

What’s the source? Surely, Audit Readers are familiar with Southern Exposure, published by the Institute for Southern Studies, based in Durham, North Carolina.


And therein lies a problem.

The piece, by Michael Hudson, ran in the summer of 2003 under the headline: “Banking on Misery: Citigroup, Wall Street, and the Fleecing of the South.” Yes, I understand, the south exists to be fleeced by northerners. Just ask State Farm. But while Citi may indeed have been stiffing the South, it is not just a regional bank, unfortunately. And this issue goes far beyond predatory lending, as bad as that is.

Wasn’t it only a few weeks ago that global financial markets seized up precisely because of poorly underwritten loans made by lenders like CitiFinancial to people in Noxubee and Lowndes counties who patently couldn’t afford them? The Dow lost 8 percent of its value in a month, Audit Readers will recall, and was bailed out only through an unexpected rate cut of fifty basis points by the Federal Reserve. That drastic move renews inflation fears, hurts the already-weak dollar and bails out bad actors, like CitiFinancial. Even so, the economy still faces a 40 to 45 percent risk of recession due to the cratering housing market, according to the head of Freddie Mac, quoted in last Friday’s Financial Times.

So, somehow, an industry a couple of notches above pawn brokerage is allowed to metastasize into something that it threatens the global economy. And the story is broken by Southern Exposure? What?

I realize Southern Exposure is the alternative press, but does it really occupy an alternative universe from the one covered by the conventional business press? I think it does. Ours.

This troubling Tale of Two Citis shows how the business press, even as it produces oceans of copy, can lose its way. I don’t think the business press is lazy or lacks courage. I know the opposite to be largely true. I do think, though, that it is poorly led. An overemphasis by senior editors on deals and other scoops has forced reporters to give away far too much in the never-easy trade-off between access and arms-length scrutiny. A lack of investigative experience and overall editorial vision at the top has produced coverage that is too narrow, too incremental, and insufficiently confrontational, in my view.

It has also led to what I think is a fatal sense of disconnect between what readers read in the business press and the lives they lead day to day. I’ll have more on that in another post.

Hudson, by the way, spent twenty years at the Roanoke Times and wrote freelance for other publications. Now, he’s a staffer at The Wall Street Journal, which, to its credit, hired him in May 2006. I consider the Journal’s hiring of him—a now forty-five-year-old reporter who covered poverty, prisons, and the like—a minor miracle.

And while Hudson is no doubt a clever fellow, we can see in retrospect that he cheated: he made use of the abundant evidence in the public record.

How many business-press readers—or business reporters, for that matter—remember that the Federal Trade Commission sued CitiFinancial over its abusive credit-insurance sales practices? Citi argued that its problems stemmed from the odious Associates and moved to dismiss the case. Bad move:

The FTC countered with affidavits from two former New York managers who said CitiFinancial was just as bad as Associates. Gail Kubiniec said CitiFiancial packed loans with insurance if a customer ‘appeared uneducated, inarticulate, was a minority, or was particularly young or old…The more gullible the consumer appeared, the more coverages I would try to include in the loan.” Michele Handzel said CitiFinancial created so much pressure to ‘flip’ customers into new loans ‘that some employees did not even bother to obtain customers’ signatures’ on the refinancings.

Citi called the allegations, Hudson writes, “an affront to the thousands of CitiFinancial employees who every day work in the best interests of their clients.” But then it abruptly agreed to a settlement, $240 million in 2002, covering two million customers.

Hudson summarizes press coverage of the time, which indeed was weak:

Media coverage accentuated what the FTC and Citigroup wanted in the headlines: the deal was the largest consumer protection settlement in FTC history—and an effort by Citigroup to straighten out an old mess. ‘These problems basically related to a company before we acquired it,” Weill explained.

And the FTC-Citi case was just one of many available signs that subprime was going mainstream and bringing its crooked habits with it. Subprime leader Household International Inc. paid an even bigger penalty—$484 million—the same year as Citi. Another big subprimer, First Alliance Mortgage Co., also settled predatory lending allegations that year.

Meanwhile, a whole new generation of subprimates emerged, including the likes of New Century and Option One, a unit of H&R Block Inc., to challenge the dinosaurs bought by Citigroup and other subprime stalwarts, like Household International Inc. Ameriquest Mortgage Co., which only a few years before was still called Long Beach Mortgage Co., sponsored the 2005 Super Bowl halftime show, the Rolling Stones 2005 World Tour, and owned two blimps. Its principal owner, Roland Arnall, hit number eighty-five on Forbes’s list of the 400 richest Americans, with a net worth of $3 billion.

By 2006, the subprime business had, under the business-press radar, exploded to $600 billion, ten times the volume of a decade before and fully one fifth of all mortgages. This, Audit Readers, is nuts.

And it was Citi, one of the biggest beats at any financial publication, that led brandname banks and Wall Street into the subprime sector. As Hudson writes:

Citigroup’s push into the subprime market is a dramatic example of how the merger of high and low finance is playing out on Wall Street and on side streets across the South

This story was written, again, in 2003.

And even if you don’t care about poor, dumb, rural and inner-city marks, er, borrowers—I mean, who does?—look what’s happening to something important: Citi earnings. They’re cratering as its subprime operation unravels.

Yesterday, The Financial Times and others play Citi’s financial problems in the most recent quarter as a reflection on the performance of Weill’s successor, Chuck Prince, and calls for his ouster by an analyst. That’s fair, but in the end, Prince didn’t make this subprime machine nor most of those loans now going bad. Weill did.

Given what we know from Hudson, the coverage of Citi’s financial troubles seems out of it.

Thankfully, there is always The Wall Street Journal editorial page to provide comic relief. It applauds Citi and UBS for writing down almost $10 billion in bad mortgage loans combined. That’s $10 billion in a single quarter.

Oh, yes. Bravo!

In fairness, though, to the WSJ editorialists and in seriousness: Given the weak Citigroup coverage, how would they know how Citi got into this mess and exactly what kind of borrowers are taken down in this mudslide?

Listen, I don’t mean to say there hasn’t been fine reporting on Citigroup, or that the subprime story is the only Citi story worth pursuing. Roger Lowenstein wrote a wonderfully intimate 8,000-word profile for The New York Times Magazine in 2000 [1], chronicling Weill’s rise from modest Brooklyn roots, his painful exit from American Express, a stormy relationship with protégé-turned-rival Jamie Dimon, and unlikely triumph in taking over and vastly expanding Citi, making it for a while the world’s most profitable company. Fortune’s Carol Loomis and the Journal’s Monica Langley have done much good work on Weill’s driven personality and why he is not the world’s nicest boss.[2], [3]

Much was written, albeit after the fact, about Weill’s central role in creating and taking advantage of conflicts of interest that led to a fraudulent stock-research scandal, his relationship to fallen star analyst Jack Grubman, as well as on Citigroup’s pivotal role in the crashes of Enron and other scandals.

The Wall Street Journal also did interesting work framing the Weill-Dimon rivalry as a battle over the consumer, as opposed to the commercial, market. [4] But the story merely waves at a serious accusation of predatory practices. That’s here:

The trend has big risks for banks and their customers. The banking behemoths have gained a reputation for ingenuity at generating growth by tinkering with consumer interest rates and tacking on myriad fees.

That “tinkering” with rates and “tacking on myriad fees” packs a lot of bad behavior into a very small space.

That’s not good enough. In that sense, it was typical of reporting on Citigroup as a whole.

Interestingly, there is one Weill story the entire New York financial press corps seems to have jumped on: whether Prince and others would be able to undo what is invariably described—after the fact, of course—the extensive reputational damage Weill caused the bank. [5], [6], [7], [8].

I’m not saying Hudson’s Citigroup piece was the perfect story. It was the just right one. That it took Southern Exposure to run it is troubling.

P.S. Last year, Ameriquest agreed to a $325 million settlement of a multi-state investigation into allegations that it gave borrowers inaccurate information about interest rates, discount points, and other mortgage loan terms, inflated property appraisals, and persuaded borrowers to refinance, even when refinancing didn’t offer any real advantage to the borrowers. Some borrowers also complained that Ameriquest pressured them to close loans on terms that were different from those originally proposed. The “Proud Sponsor of the American Dream” closed up shop last month and sold its assets and operations.

The buyer? Citigroup.

P.P.S. Ameriquest founder Arnall? He’s U.S. ambassador to the Netherlands, what else?

*The Audit corrects: Speaking of barely literate, an earlier version managed to misspell the names of both counties, Noxubee and Lowndes.

Coming soon: The Audit explores the even bigger debt story the business press has missed.

1. Alone At the Top

27 August 2000

2.Whatever It Takes ; Sandy Weill has always rolled with the punches. Now he wants Citigroup to be not only the richest financial company but also the purest in soul.
25 November 2002

3. Wall Street’s Toughest Boss
The Wall Street Journal
18 February 2003

4. People Power: Two Financiers’ Careers Trace A Bank Strategy That’s Now Hot —- Weill and Dimon Built a Titan By Focusing on Consumers; Today They’re Arch-Rivals —- A Risk: Higher Interest Rates
The Wall Street
16 January 2004

5. Course Correction — Behind Citigroup Departures: A Culture Shift by CEO Prince —- His New Focus on Controls, More-Bureaucratic Style Spur Exits at Top Level —- Adding Lawyers in High Places
24 August 2005
The Wall Street Journal

When Mr. Prince took over in 2003, the world’s largest financial-services company was embroiled in a series of scrapes that hurt its reputation. It was penalized for blurring the line between analysts and investment banking. It lost its private-banking license in Japan and faced probes of an aggressive bond-trading strategy in London that participants dubbed “Dr. Evil.” The Federal Trade Commission accused a Citigroup consumer-lending unit of misleading customers. And Citigroup drew flak over its role in financing fraud-ridden companies including Enron Corp., WorldCom Inc., Adelphia Communications and Parmalat. In all, the firm faced billions of dollars in fines and settlements.

6. Rewiring Chuck Prince; Citi’s chief hasn’t just stepped out of Sandy Weill’s shadow — he’s stepped out of his own as he strives to make himself into a leader with vision
20 February 2006

7. CITI’S NEW ACT Chuck Prince, Sandy Weill’s top troubleshooter, is the unlikely choice for CEO. Does he have the right stuff?
28 July 2003

8. Can Sallie Save Citi, Restore Sandy’s Reputation, and Earn ; Her $30 Million Paycheck?
9 June 2003

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Dean Starkman Dean Starkman runs The Audit, CJR's business section, and is the author of The Watchdog That Didn't Bark: The Financial Crisis and the Disappearance of Investigative Journalism (Columbia University Press, January 2014). Follow Dean on Twitter: @deanstarkman.