Citigroup Mortgage Trader Sent a $7 Billion E-Mail

I feel like I know less about the financial crisis now than I did before reading the Citi settlement.
Each of these people is as mad at Citi as each of the other people.

Back before everything was thrown into confusion by the capture of the alleged mastermind of the Benghazi attack, Citigroup and the Justice Department argued over how much money Citi should pay for having securitized a bunch of terrible mortgages. The bid-ask spread was wide; it was also strangely specific:

Citigroup's $7 billion agreement comes after a long negotiation. The bank in May had opened with an offer to pay $363 million in cash, plus more for "consumer relief," or money the bank will set aside to help customers in financial trouble. The Justice Department came back with a far higher number: $12 billion, including consumer relief.

I admire the gumption of the Citigroup lawyer who was like "yeah, $363 million sounds about right," 1 but the Justice Department made some good points too:

Citigroup’s lawyers argued that the lender should face a far smaller penalty than JPMorgan because Citigroup sold fewer mortgage bonds, the person with knowledge of the deal said yesterday. The government rejected that position, citing what it considered Citigroup’s level of culpability based on e-mails, internal bank documents and the rates at which loans backing its bonds soured, the person said.

How do you resolve such a huge disagreement on how much Citi should pay? Well, I guess if you wanted to choose the dumbest and most mechanical approach possible, you could just to take the arithmetic mean of the two proposals and round up to the nearest billion dollars. And that ... happened? 2

There are other approaches, in principle. Citi's and the Justice Department's approaches both leave something to be desired. Citi's approach seems to be premised on the idea that the misconduct was securitizing mortgages: The more mortgages you did, the more you gotta pay, regardless of how they performed. The DOJ's approach, on the other hand, seems to be premised on the idea that the misconduct was sending bad e-mails about mortgages: The more "culpable" you look, the more it should cost you, regardless of how much damage you did.

I would have thought that the misconduct was knowingly securitizing bad mortgages, and that the penalties ought to scale with the aggregate badness of Citi's mortgages. So, for instance, you'd want to measure how often Citi's mortgages didn't match up to its stated quality-control standards, and then compare the actual financial performance of the loans that didn't meet the standards to the performance of the loans that did. Then you could say, well, if Citi had lived up to its promises, investors would have lost $X billion less than they actually did. And then you could fine Citi that amount, or some percentage of that amount. And you could do a similar exercise for the other big banks -- JPMorgan, say, which already settled, or Bank of America, which is negotiating its settlement -- and get comparable amounts that appropriately balance market share (how many bad mortgages did you sell?) and culpability (how bad were they?).

But the actual Statement of Facts that Citi stipulted to does nothing at all like that. 3 It is a very strange document, seemingly designed to allow Eric Holder to say that "the bank has admitted to its misdeeds in great detail" without that statement being especially true or interesting. The gist of the Statement of Facts is:

  • Citi had a due diligence vendor review the loans it securitized, and assign them one of three grades: "EV1" (good), "EV2" (meh), or "EV3" (bad).
  • Citi wasn't supposed to securitize EV3 loans.
  • It securitized a lot of EV3 loans.

This is pretty bloodless stuff, and it does not get more compelling when you stretch it out to nine pages. It comes from nowhere, and it goes nowhere: The Statement of Facts provides no insight into why so many bad loans were securitized (intentional fraud? bad incentives? excessive haste? dumb optimism? principled disagreement with due diligence vendors?), and more importantly it provides no insight into what the results were. I mean, there was a global financial crisis, sure. But you'd never know it from this Statement of Facts: 4 It goes up to "significant percentages of the loans reviewed did not conform to the representations provided to investors about the pools of loans to be securitized," but it never takes the next step, to "... and those loans suffered greater losses than the ones whose representations were true."

The only hint in the Statement of Facts that the EV3 loans were actually dangerous comes from, what else, one embarrassing e-mail:

In addition, early in the due diligence process, a trader at Citigroup wrote an internal email that indicated that he had reviewed a due diligence report summarizing loans that the due diligence vendor had graded as EV3s and had noted that “a lot” of these rejected loans had unreasonable income and values below the original appraisal, which resulted in combined loan- to-value in excess of 100 percent. The trader stated that he “went thru the Diligence Reports and think that we should start praying… I would not be surprised if half of these loans went down. There are a lot of loans that have unreasonable incomes, values below the original appraisals (CLTV would be >100), etc. It’s amazing that some of these loans were closed at all.”

Despite this trader’s observations, Citigroup securitized loans from this pool in the two RMBS.

Was he right? Did half of those loans go down? Are you not at all curious? The Justice Department apparently was not. The existence of that e-mail -- "Look, even people at Citi knew that Citi was doing bad stuff!" -- is of interest; the actual connection between Citi's underwriting, the losses to investors, and the global financial crisis is not. You get the sense that, without that e-mail, Citi might have gotten away with $363 million. 5

Of course, e-mails like that are not totally irrelevant. A bank that causes $X billion of losses by accident should perhaps be fined less than a bank that knew it was causing $X billion of losses and did it anyway. But you can't take that too seriously. Banks can't know things. Banks are collections of lots of humans. The best indication that a bank was behaving culpably is that it did lots of bad stuff. Troves of e-mails saying "hoo boy we know we're doing bad stuff" tend to be more indicative of dumb e-mail etiquette than of degrees of badness.

The Statement of Facts begins, "In 2006 and 2007, Citigroup ..." It is now 2014. You would think that one of the main purposes of these settlements -- besides, you know, getting money, which matters of course, but still -- would be to clarify the causes and processes of the financial crisis. What you'd want Citi to explain -- what you'd want the DOJ to require CIti to explain -- would be something like:

  1. These are the failures that occurred in our underwriting process.
  2. This is how they came about.
  3. This is the damage they caused.

We get almost none of that here. We learn that some stuff that some people thought was EV3 was sold as though it was EV2. I don't even know what "EV" stands for. Seven years on, this settlement makes the causes of the financial crisis less clear. The lesson of this settlement is that Citi will pay $7 billion. Why remains mostly a mystery.

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  1. I hope it was really, like, 326,984,773.16, just to sound well thought-out.

  2. I mean, CEILING(AVERAGE(12000,363),1000) = 7000. It's even closer than that when you figure that Citi was offering something in consumer relief, so that $363 million is a little understated.

  3. You can find the DOJ press release and related settlement documents here. The Settlement Agreement has the terms of the settlement but not much for facts; there's an Appendix and an Annex listing covered deals. The $7 billion number includes $4 billion of penalties to the DOJ, $500 million of other penalties, and $2.5 billion of consumer relief, again apparently unconnected to Citi's mortgage misrepresentations.

  4. You'd know it from the speeches, though! Eric Holder:

    The bank’s activities shattered lives and livelihoods throughout the country and around the world. They contributed mightily to the financial crisis that devastated our economy in 2008. While Citigroup was not alone in its willingness to ignore internal warnings and disregard the law in order to defraud consumers and investors, as a result of their assurances that toxic financial products were sound, Citigroup was able to expand its market share and increase profits. They did so at the expense of millions of ordinary Americans and investors of all types – including other financial institutions, universities and pension funds, cities and towns, and even hospitals and religious charities. Ultimately, these investors suffered billions of dollars in losses when Citi’s false and fraudulent claims came crashing down.

    Loretta Lynch:

    After nearly 50 subpoenas to Citigroup, Trustees, Servicers, Due Diligence providers and their employees, and after collecting nearly 25 million documents relating to every residential mortgage backed security issued or underwritten by Citigroup in 2006 and 2007, our teams found that the misconduct in Citigroup’s deals devastated the nation and the world’s economies, touching everyone.

    All of this is based on facts not in the record, as it were.

  5. I exaggerate: That Bloomberg News story cites "internal bank documents and the rates at which loans backing its bonds soured" as sources of culpability, not just dumb e-mails. And the rate of default would seem to be relevant under my theory of things.

To contact the author on this story:
Matthew S Levine at

To contact the editor on this story:
Toby Harshaw at

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