Tuesday, January 13, 2009

No Longer Too Big to Fail

"Too big to fail" has been the reason for bailout after bailout. As Americans we cannot live without some companies, so it is our responsibility as taxpayers to pay for their mistakes. Whether it's Bear Sterns' debt or saving automakers from bankruptcy, we the taxpayer are here to keep failing companies afloat. One of the companies that the government chose to spend our hard earned money to assist is Citigroup.

About a year ago I left a 16 year career with Countrywide to take a job as a Regional Manager for Citi's mortgage company. Four months later I was let go as the entire division was dismantled. I hold no hard feelings toward Citi. When I signed my severance agreement (which was generous considering I had only been there for four months) I agreed not to say anything negative about Citi in a public forum. So let me be clear, any negative comments concern the government, not Citi.

Now that I have that disclosure out of the way I can move on. Citigroup is the financial goliath created by Sandy Weil in 1998 when Citicorp and Travelers merged. The idea was to create a diversified financial supermarket that crontained various cross-sell and synergistic opportunities. Well, it didn't really perform like it was drawn up. There have now been five quarters of very large losses and questions about whether Citi would survive.

But Citi is the largest diversified financial organization in the universe. The federal government was fearful of what would happen if Citi filed for bankruptcy. I agree it would probably be very bad, and the stock market would tank like it did when Lehman went down. So far the feds have injected $45 billion in cash into Citi as well as guaranteed $260 billion in debt. That total exposure is 44% of the entire $700 billion TARP funds. Of course even in a worst case scenario you still wouldn't lose that amount, but it demonstrates how much support our federal government is providing to this private (albeit publicly traded) company.

But now Citi is doing what they need to in order to survive. They are getting smaller. Does that mean they will no longer be too big to fail? They are shedding businesses including Smith Barney which will be a part of a joint venture with Morgan Stanley. It appears as though Citi will be more of a wholesale bank with large corporate clients and retail banking operations in only select markets around the globe. Would the fed actually bail out a firm that is what Citi will look like when the shedding is complete? I would hope not. But it's too late, the bailing out has been done.

Citi will shrink itself by roughly a third. Is that still too big to fail? I am not alone in my opinion that the government has done a lousy job so far with the TARP. It has been widely criticized. But the critisism must continue if things are going to change.

Monday, January 5, 2009

Mi Casa es Su Casa

I have a couple of housekeeping topics before I go into my article for this week.  First of all, I apologize to any Spanish-speaking readers for my title.  I don't know how to add the proper accents over the appropriate vowels when typing in Spanish on my keyboard.  My high school Spanish classes occurred when homework was still done with pen and paper.  Secondly, I removed my photo.  My father informed me I looked like a skinhead in that photo.  While I do have a shaved scalp, my views of the world and life in general would not come close to that of a neo-Nazi skinhead.  Even if I wanted to join one of their deranged groups, my marriage to a Jewish woman would probably preclude me from membership.  A new photo will be uploaded this week.

Now that we have that out of the way, I can address the topic at hand.  An article titled "Housing Push for Hispanics Spawns Wave of Foreclosures" by Susan Schmidt and Maurice Tamman captured my attention as I read the Wall Street Journal this morning.  Throughout my entire 17 year career, and especially in the past five years, I was very involved in promoting mortgage loan products that were designed to get more people into homes, especially new immigrants in the Hispanic community.  

The article discusses the great push by legislators, specifically the Congressional Hispanic Caucus, and mortgage lenders to ease lending standards and get more Hispanics to become homeowners.  It further discusses subprime lenders' involvement with policy-makers and industry associations such as the National Association of Hispanic Real Estate Professionals.  In 2005 at the height of the subprime boom, companies that were involved in subprime lending contributed $2.3 to the campaigns of  Congressional Hispanic Caucus members.  That wasn't even an election year.  The point is that all of the players were working together for what should have been a righteous cause, and it probably started out that way.

I started in the business in the early nineties when the movement to increase lending to minorities and low income Americans was gaining momentum.  Working for Countrywide, I recall us introducing our effort in the form of a program called House America.  This was not a subprime program.  It was a fixed rate loan with competitive market rates.  The key was the fact that it allowed the borrower to purchase the home with a minimal down payment (3% if I remember correctly) with minimal credit history.  We also took extra care to try to approve every possible loan in this program.  Many of these loans were for properties in California, where Countrywide had its strongest share of the market.  Unfortunately too many were approved that shouldn't have been, and when property values began to fall through the mid-nineties many of the loans went into foreclosure.  The company was able to remain profitable because these loans were a small share of overall production and because management handled the downturn well by cutting expenses.  It took several years for the memory of those events to fade.  

Fast-forward to 2003 and once again the entire industry is interested in capitalizing on the fasted growing segment of potential homeowners, Hispanic Americans.  At Countrywide we dusted off the old House America program with the best intentions.  Helping more Americans achieve the dream of homeownership was the right thing to do.  In Arizona and New Mexico I conducted countless seminars for mortgage brokers in English and Spanish.  We flew in a bilingual speaker from corporate to present.  The number of Spanish speaking mortgage brokers in the Phoenix area was growing.  I would visit offices of these mortgage brokers with one of my bilingual account executives and I would have no clue what anyone was saying.  Loan officers and processors were immigrants themselves and spoke no English at all.  But all of the loan documents were still only in English.  While these Spanish speaking mortgage brokers opened the door to a new segment of homeowners, I found many of them to be less than ethical.  Not all, but a significant portion charged exorbitant fees.  Loan files were often poorly packaged, and we terminated relationships with several after discovering fraudulent activity.  Before discovering the poor quality of one of these companies, I was astonished by the volume of loans they were originating.  I asked my account executive that managed that account why we were not getting more business.  His answer was that they were lazy.  This broker preferred to send their loans to a certain subprime lender because they asked for less documentation even though many of the borrowers would qualify for our more affordable House America or a Fannie Mae My Community loan.  All of the companies that I know conducted business in such a manner have since been shut down by the Arizona Department of Financial Institutions, but much of the damage was already done.  

Money was being made by the lenders (mainly subprime) and Wall Street, new homeowners were happy, and the policy-makers were receive fat campaign contributions.  This quote from the Chairman of the Federal Housing Finance Board Ronald Rosenfeld wraps it up nicely, "It's very hard to get in front of a train loaded with highly profitable activities and stop it."  In fact that pretty much sums up the inability to stop the entire financial meltdown.

I doubt that memories will fade as quickly this time around.  I support efforts to get more minorities and new immigrants to become homeowners.  I still believe that homeownership is a key component of Americana.  Let's just make sure we don't lose sight of sound underwriting principles as we strive to fulfill the American Dream.