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The Real Reason Citigroup Is a Mess

Citigroup CEO Vikram Pandit is blaming his company’s considerable troubles on moves by previous management to dive into real estate. In a particularly generous gesture, he also told PBS’ Charlie Rose that he understands how people might be upset by the company’s massive government rescue, Reuters reports.

From Reuters:

Pandit said in the interview that short-sellers, as well as investors worried about Citigroup’s asset quality, were among those who drove the bank’s shares down in recent sessions, and that it was important “that we got control of the situation.”

“I can completely understand how people on Main Street, people who are not close to this industry, would be furious at what’s happened,” he said.

Well, thanks for that, at least. Pandit’s observations follow recent comments by financial analysts pointing to causes like “excessive risk taking” to explain Citi’s problems. It also sounds so…. reasonable. Citigroup, like others, simply got caught up in the complicated market of derivatives and credit default swaps. It could have happened to anybody on Wall Street, and it did. That’s basically the spin, anyway.

And none of it is true.

Citigroup got into its mess all by itself. It’s hardly a victim of circumstance. Over the past decade, it steadily and aggressively built an empire of unsavory subprime companies that targeted and took advantage of vulnerable customers. Even beyond that, Citi proudly led the way for the rest of Wall Street to also look for profits in hidden fees, high interest rates, misleading terms, unnecessary and expensive products like credit insurance, and the rest of the muck that characterized the subprime market at its height. And all the while, Wall Street and the business press applauded its moves.

How do we know this? Just take a glance at “Banking on Misery: Citigroup, Wall Street, and the Fleecing of the South.” It’s an investigative report by Southern Exposure magazine – from 2003. Journalist Michael Hudson traced Citigroup’s rise as it gobbled up shady finance firms and figured out how to make a killing on Wall Street off people with marginal credit and little financial sophistication.

From the story:

In Southern hometowns such as Selma, Ala., Ashland, Ky.,

and Knoxville, Tenn., people complain Citigroup has taken advantage of them in an unglamorous part of its financial empire—personal loans and

mortgages aimed at borrowers with bad credit, bills piling up or, in many instances, simply a trusting nature. Unhappy customers claim the

company manipulated them into paying excessive rates and hidden fees, refinancing at unfavorable terms, signing deals that trapped them into

bankruptcy and foreclosure.

These borrowers are part of the growing “subprime” market for financial services. They are mostly low-income, blue-collar and minority

consumers snubbed by banks and credit card companies. Still others are middle-class consumers who have hit hard times because of layoffs or credit card-fueled overspending. Whatever their circumstances, they pay dearly. Citi’s subprime customers frequently pay double or triple the prices paid by borrowers with Citi credit cards and market-rate mortgages—annual percentage rates (APRs) generally between 19.0 and 40.0 on personal

loans and 8.5 and 21.9 on mortgages. And beyond exorbitant APRs, critics and lawsuits claim, Citi has fleeced customers with slippery salesmanship and falsified paperwork.

As CJR’s Dean Starkman noted in 2007, when the subprime was just beginning to crumble, it took an obscure magazine to uncover what had been right in front of everyone on Wall Street. Starkman explains that Hudson laid out in detail how Citigroup grew into the subprime king, while no one was looking:

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

By 2000, nearly three of every four Citigroup mortgages came from a subprime subsidiary, Hudson found

Saying that Citigroup’s problems came from excessive risk taking is like saying a terrible car accident was caused by a poorly engineered bend in the road. That way you can pretend the driver didn’t exist and ignore the damage left behind. There’s plenty of damage here from what Citigroup did. Borrowers with modest incomes have been dealing with it for years, while Citigroup prospered and its top executives raked in hefty bonuses. Somehow, I doubt Henry Paulson is driving around their neighborhoods these days, writing checks to rescue them.

Don’t buy the story lines from Citigroup and financial experts that the bank simply got caught up in the real estate frenzy, just like your neighbor down the street or your eccentric uncle Harry. That’s not how it happened. Citigroup went full force into lending that bordered on amoral, and set an example for others to follow down the same sleazy but incredibly profitable path.

We deserve nothing less than the truth here. Because we all know how this has turned out, regardless of whatever spin comes from Citigroup. We’re the ones paying for it.

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