* Former Citi underwriter warned of "defective" mortgages
* Testifies to U.S. panel about 2007 email to Rubin
(Adds Bushnell testimony, detail of Bowen's warnings)
By Maria Aspan and Dan Wilchins
NEW YORK, April 7 A former Citigroup Inc (C.N)
senior underwriter warned senior managers including Robert
Rubin that the bank was selling problem loans to investors as
the mortgage market peaked and deflated, the executive
Richard Bowen, a former business chief underwriter for
Citigroup, said on Wednesday that he warned the bank's senior
executives of problems with most of the prime mortgages it sold to
Fannie Mae FNM.N, Freddie Mac FRE.N and other investors
beginning in 2006.
Bowen's testimony before the Financial Crisis Inquiry
Commission painted a picture of a bank that cared little for
underwriting standards even as a massive credit crisis was
While other Citigroup executives blamed unexpected economic
events for the more than $100 billion of credit losses and
writedowns the bank took during the credit crunch, Bowen
pointed out problems internal to the bank that contributed to its
"I continued to warn management, through 2007, of ... risks
to the shareholders posed by the increasing defective rate of
mortgages ... and (Bowen's group) continued to purchase and sell
increasing volumes of defective mortgage product," Bowen said.
Bowen was a small cog in a big mortgage machine. He oversaw
220 underwriters in a group that bought mortgages made by other
lenders. Those loans were in turn sold to other investors.
Bowen's job was to make sure the loans met Citi's credit
Often, they did not. In mid-2006 Bowen discovered that over 60
percent of the home loans his group bought and sold were
defective, meaning they were not underwritten to Citigroup's
stadards, or did not have all the required documents. By 2007,
that number swelled to more than 80 percent.
"During 2006 and 2007 I witnessed many changes to the way the
credit risk was being evaluated," Bowen said.
"These changes included the Wall Street Chief Risk
Officer's reversing of large numbers of underwriting decisions
on mortgage loans from 'turn down' to 'approved,'" Bowen added.
WARNINGS TO RUBIN, OTHERS
Bowen warned a number of managers at Citigroup. On Nov. 3,
2007, Bowen sent an email to Robert Rubin and senior finance and
risk management executives at Citigroup with the subject line
"URGENT -- READ IMMEDIATELY -- FINANCIAL ISSUES."
"The reason for this urgent email concerns breakdowns of
internal controls and resulting significant but possibly
unrecognized financial losses existing within our
organization," Bowen wrote.
Rubin, the former chairman of the executive committee of
Citigroup's board of directors, is scheduled to testify before
the U.S. panel on Thursday. The crisis commission is examining
the causes of the credit crunch that began in 2007.
Bowen requested an investigation "conducted by officers of
the company outside of the Consumer Lending Group." He
addressed his email to Rubin, Chief Financial Officer Gary
Crittenden, Senior Risk Officer David Bushnell, and Chief Auditor
Citigroup spokeswoman Shannon Bell wrote in a statement:
"The issues raised by Mr. Bowen were promptly and carefully
reviewed when he raised them and corrective actions were
Bowen's manager agreed with some of his objections. But by
early 2007, he testified, all of his manager's responsibilities
Bowen continued to issue his warnings, but Citi "continued
to purchase and sell increasing volumes of defective mortgage
product," he said. "The overall defective rate increased to
over 80 percentage in 2007."
In separate testimony before the commission, Bushnell cited
widespread industry ignorance about the looming housing danger in
2006 and 2007.
Citigroup's "risk models, like those of most major
financial institutions, tested for what were believed to be
extreme loss scenarios for residential real estate," Bushnell said
in prepared testimony.
"Clearly, Citi and virtually all other market participants
failed to anticipate the dramatic and unprecedented decline in
the housing market that occurred in 2007 and 2008."
Bowen, who said during his testimony that he left the bank
in January 2009, sent his 2007 email to Rubin and Bushnell a
day before an emergency meeting of the Citigroup board of
directors. At that meeting, which had been called in October,
Chief Executive Charles Prince resigned.
Prince is also due to testify before the committee on
(Reporting by Maria Aspan and Dan Wilchins; Additional
reporting by Corbett B. Daly; Editing by Richard Chang, Phil