December 1, 2011
Mr. James H. Jacoby
Producer, 60 Minutes
524 West 57th Street
New York, NY 10019
Dear Mr. Jacoby:
On behalf of Citi, I write in response to your letter of November 18, 2011, in which you raise several issues and pose certain questions in connection with an upcoming 60 Minutes story. We appreciate the opportunity to address those issues and to answer each of your questions, while correcting the factual inaccuracies and incorrect assumptions that underlie many of those questions. At the outset, we believe it is important to provide some important context.
As you undoubtedly know, like virtually every other major financial institution, Citi's business operations and financial condition were dramatically and adversely affected by the financial crisis that began to unfold in late 2007 with the collapse of the U.S. real estate market. Like most of its competitors and other major market participants, Citi did not anticipate these sudden and catastrophic disruptions. Although there were signs of weakness in the subprime market in the spring and summer of 2007, the issues were widely believed to be contained, including by leading market regulators. For example:
- In March 2007, Federal Reserve Chairman Ben Bernanke stated that "the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained."
- In July 2007, Treasury Secretary Henry Paulson stated that he believed that the housing market correction was "at or near the bottom there. I don't deny there's a problem with subprime mortgages but I really do believe it's quite containable."
- Also in July 2007, Chairman Bernanke stated that "the U.S. economy appears likely to expand at a moderate pace over the second half of 2007, with growth then strengthening a bit in 2008 to a rate close to the economy's underlying trend."
It has been well chronicled that most of the losses suffered by Citi in the wake of the financial crisis resulted from mortgage-backed securities, specifically, exposure to the super-senior positions of collateralized debt obligations (CDOs). These positions consisted of tranches ranking above (i.e., less risky than) tranches rated AAA by the independent rating agencies. Citi's risk management and senior business executives--like those of most other financial institutions, regulatory authorities and rating agencies--viewed these positions (which represented less than 2% of Citi's total balance sheet) as posing virtually no risk.
However, during the fall of 2007, tightening credit markets significantly restricted financial institutions' access to liquidity, exerting acute pressure on virtually every financial sector participant. As the crisis deepened in October, even the highest-rated structured credit products began to suffer. Then, on October 18, 2007, Standard & Poor's (S&P) announced unprecedented and unanticipated ratings downgrades on over $23 billion of securities, including downgrades on 14% of AAA-rated securities. Through mid- to late-October 2007, Moody's and S&P downgraded approximately $165 billion in subprime and mortgage-related securities.
The severity and speed of this collapse--and, in particular, its effect on high-rated CDO tranches--caught market participants and financial commentators by surprise:
- "The fall in the super senior tranches has been so extreme that 'no stress model in the world would ever have had it'" (quoting Morgan Stanley's former CFO), as the drop "implies defaults in the range of 40-50% on mortgages written in 2005 and 2006, levels never seen before." David Wighton, "Morgan Stanley Peers Through Looking Glass," Financial Times, Nov. 8, 2007.
- "[U]ntil recently, the super-senior pieces were thought to be shielded from the volatility that shook riskier CDOs." Valerie Bauerlein & Carrick Mollenkamp, "Wachovia Write-downs Deepen--Value of Securities Falls By $1.1 Billion; Feeling Burned," Wall Street Journal, Nov. 10, 2007.
- "Th[ere] has never in financial history been a AAA rated bond that fell so far, so fast." UBS Business Update Call (Dec. 11, 2007).
With this important context, we turn to the specific questions raised in your letter. Your letter repeats, directly or implicitly, a collection of allegations dating back several years to which we have responded previously. Nevertheless, we respond here to each of your questions.
To assess Mr. Bowen's allegations, it is important to understand exactly where he worked and the matters of which he would have had direct knowledge. As you know, Citi has both consumer and institutional or "investment" banking businesses. As the chief underwriter for the correspondent channel, one of the three origination channels in CitiMortgage, Mr. Bowen worked in Citi's consumer bank and not in Citi's investment bank. The investment bank, where most of the activities you reference occurred, is an entirely separate business. Simply put, it is mixing apples and oranges to conflate activities in the investment bank with those in the consumer bank and assert that allegations about one impacted the other.
Next, the issues raised by Mr. Bowen had no impact on the integrity or propriety of Citi's financial statements or the accuracy of the certifications signed in connection with Citi's year-end and quarterly public filings. Mr. Bowen had no involvement in, or knowledge of, Citi's accounting or reserving process. At all times, Citi properly accounted for its mortgage-lending activities in the consumer business, including by taking appropriate reserves. There has never been a suggestion to the contrary. Even so, as pointed out above, the issues raised by Mr. Bowen all occurred in the consumer bank, which did not contribute to the $31 billion in losses caused by Citi's exposure to mortgage-backed securities in its investment bank.
Regarding Mr. Bowen's November 3, 2007 email, Citi took prompt action to address the issues, contrary to the suggestion in your letter. In fact, the issues referenced in your letter were first raised by Mr. Bowen in mid-2006. In response, CitiMortgage, in addition to other measures, undertook an investigation of the issues, terminated the head of the group responsible for those issues, assembled a working group to review and assess the issues, and, in accordance with the plan developed by the working group, revised existing policies and procedures and dedicated additional personnel and technological resources to address the issues. After Mr. Bowen's November 3, 2007 email was received, a further review of these issues was undertaken, which included a review of the status of the steps already taken over the prior year and a half.
Citi did not retaliate against Mr. Bowen in any way, shape or form. In fact, Mr. Bowen was commended in 2006 and 2007 for raising, and taking steps to address, the issues he later included in his November 3, 2007 email. In 2007 and 2008, changes in the mortgage markets and other factors resulted in several reorganizations at CitiMortgage. The change in Mr. Bowen's job in early 2008 resulted from those reorganizations, and, though the new position involved a different set of responsibilities for Mr. Bowen, his seniority and his compensation did not change. Furthermore, the individuals at CitiMortgage responsible for Mr. Bowen's job change were not aware of his November 3 email. Mr. Bowen separated from the company by agreement, and Citi handled the situation entirely appropriately.
Your letter raises questions concerning a February 14, 2008 report issued by the Office of the Comptroller of the Currency (OCC), which identified two principal "Matters Requiring Attention": "Corporate Governance and Risk Management" and "CDO Valuation and Risk Management in the Capital Markets & Banking Group." Specifically, you ask first, why Citi did not disclose the OCC's findings in its annual report, filed on February 22, 2008; and second, why, in light of the details contained in the OCC report, did Citi's senior management execute Sarbanes-Oxley certifications in connection with the company's 2007 annual report?
With respect to the first question, as a regulated bank entity, Citi is prohibited by federal law from disclosing the substance of its communications with its bank regulators. The OCC, like Citi's other regulators, is onsite at Citi and provides ongoing commentary regarding Citi's business practices and operations. Moreover, in its 2007 annual report, Citi did disclose significant detail regarding the valuation methodology it used to value its CDO positions, contrary to the suggestion in your letter. In addition, Citi has publicly disclosed on numerous occasions the substantial enhancements it has undertaken with respect to its corporate governance and risk management processes, all in furtherance of the company's efforts to address the unique challenges presented by the financial crisis.
With respect to your second question, the issues identified in the OCC letter did not affect the integrity or propriety of Citi's Sarbanes-Oxley certifications executed in connection with its 2007 annual report. Sarbanes-Oxley requires management to disclose either material weaknesses in internal controls over financial reporting or a material change in internal controls that has materially affected the firm's internal controls over financial reporting. The OCC letter did not conclude that there were material weaknesses, hence no disclosure was required. To the contrary, the OCC report expressly concludes that the valuation method used by Citi was "broadly within the range of current market practice." As a result, the certification of the 2007 annual report was entirely appropriate.
Next, you assert that a series of "DEFCON calls" was held during late 2007 and early 2008 "during which the bank's massive risks were discussed as was the possibility that the bank's valuations of its subprime-related assets were inaccurate." That is not accurate. The so-called "DEFCON calls" among senior management actually took place during late August through October 2007. Contrary to your characterization, these calls were convened to address--in real time--the implications for Citi of the significant and unprecedented market events that began in August of that year with the freezing of the credit markets. As market conditions continued to deteriorate in unprecedented and unexpected ways, Citi's senior management met frequently to assess and respond to these events. You suggest that Citi's hands-on and responsible approach to dealing with these unprecedented and rapidly changing market conditions somehow implies that Citi's reporting and certifications during this period were misleading.
This is simply not the case. The assets in question were marked-to-market each quarter based on a valuation methodology that took into account current market conditions and, as the OCC concluded, Citi's methodology was "broadly within the range of current market practice." The accounting rules require a company to mark its assets in good faith using the best information then available; the accounting rules do not require a crystal ball. There was no "breakdown in the company's accounting" as your letter suggests; like virtually every other financial institution, government regulator, and market participant, Citi failed to appreciate the unprecedented scale and consequence of the impending housing market collapse.
Your letter also asks why Gary Crittenden, Citi's former CFO, certified that Citi's financial reporting internal controls were effective between July and mid-October 2007, when he agreed to pay a fine to settle charges by the Securities and Exchange Commission relating to alleged statements he made during earnings calls regarding Citi's exposure to subprime-related assets. Importantly, as the SEC settlement documents make clear, the SEC's allegations did not concern the accuracy of Citi's annual or quarterly financial statements. Nor did the SEC charge Mr. Crittenden (or Citi) with intentional or reckless misconduct. From July to mid-October 2007, Mr. Crittenden--and the dozens of highly qualified professionals with whom he worked--employed a robust process designed to disclose accurate information to investors. Mr. Crittenden believed that each certification he executed regarding Citi's internal controls and financial condition was accurate at the time in all respects, as does Citi. In addition, the SEC has never suggested that Citi or Mr. Crittenden believed the certification to be inaccurate.
Finally, your letter asks whether, since late 2007, any federal government official has suggested that Citigroup executives would not be charged with violations of the Sarbanes-Oxley Act of 2002. Citi is not aware of any such discussions.
We appreciate the opportunity to address your questions and to set the record straight. Much of what you assert or reference in your letter is incorrect, one-sided or incomplete. Consequently, many of the inferences you draw lack any factual basis. We hope that the information we have provided allows you to portray accurately the events of several years ago.
We also hope that your broadcast makes note of the significant changes that have been implemented at Citi since Vikram Pandit became CEO in December of 2007. Citi today is a fundamentally different institution than it was at the time of the events addressed in your letter. In the wake of the subprime and global credit crisis, and under its new senior executive management team, Citi has built unquestionable financial strength and is one of the best capitalized financial institutions in the world. Citi has overhauled its risk management function, significantly reduced the risk and assets on its balance sheet, and returned to the basics of banking. Having now sold over 60 non-core businesses that aren't consistent with its strategy, Citi is focused on banking with the goals of contributing to the economic recovery and growing responsibly.
Mr. Steve Kroft, 60 Minutes Correspondent