Sherry Hunt never expected to be a senior manager at a Wall Street bank. She was a country girl, raised in rural Michigan by a dad who taught her to fish and a mom who showed her how to find wild mushrooms. She listened to Marty Robbins and Buck Owens on the radio and came to believe that God has a bigger plan, that everything happens for a reason.
She got married at 16 and didn’t go to college. After she had her first child at 17, she needed a job. A friend helped her find one in 1975, processing home loans at a small bank in Alaska. Over the next 30 years, Hunt moved up the ladder to mortgage-banking positions in Indiana, Minnesota and Missouri, Bloomberg Markets magazine reports in its July issue.
On her days off, when she wasn’t fishing with her husband, Jonathan, she rode her horse, Cody, in Wild West shows. She sometimes dressed up as the legendary cowgirl Annie Oakley, firing blanks from a vintage rifle to entertain an audience. She liked the mortgage business, liked that she was helping people buy houses.
In November 2004, Hunt, now 55, joined Citigroup (C) Inc. as a vice president in the mortgage unit. It looked like a great career move. The housing market was booming, and the New York- based bank, the sixth-largest lender in the U.S. at the time, was responsible for 3.5 percent of all home loans. Hunt supervised 65 mortgage underwriters at CitiMortgage Inc.’s sprawling headquarters in O’Fallon, Missouri, 45 minutes west of St. Louis.
Hunt’s team was responsible for protecting Citigroup from fraud and bad investments. She and her colleagues inspected loans Citi wanted to buy from outside brokers and lenders to see whether they met the bank’s standards. The mortgages had to have properly signed paperwork, verifiable borrower income and realistic appraisals.
Citi would vouch for the quality of these loans when it sold them to investors or approved them for government mortgage insurance.
Investor demand was so strong for mortgages packaged into securities that Citigroup couldn’t process them fast enough. The Citi stamp of approval told investors that the bank would stand behind the mortgages if borrowers quit paying.
At the mortgage-processing factory in O’Fallon, Hunt was working on an assembly line that helped inflate a housing bubble whose implosion would shake the world. The O’Fallon mortgage machinery was moving too fast to check every loan, Hunt says.
By 2006, the bank was buying mortgages from outside lenders with doctored tax forms, phony appraisals and missing signatures, she says. It was Hunt’s job to identify these defects, and she did, in regular reports to her bosses.
Executives buried her findings, Hunt says, before, during and after the financial crisis, and even into 2012.
In March 2011, more than two years after Citigroup took $45 billion in bailouts from the U.S. government and billions more from the Federal Reserve -- more in total than any other U.S. bank -- Jeffery Polkinghorne, an O’Fallon executive in charge of loan quality, asked Hunt and a colleague to stay in a conference room after a meeting.
The encounter with Polkinghorne was brief and tense, Hunt says. The number of loans classified as defective would have to fall, he told them, or it would be “your asses on the line.”
Hunt says it was clear what Polkinghorne was asking -- and she wanted no part of it.
‘I Wouldn’t Play Along’
“All a dishonest person had to do was change the reports to make things look better than they were,” Hunt says. “I wouldn’t play along.”
Instead, she took her employer to court -- and won. In August 2011, five months after the meeting with Polkinghorne, Hunt sued Citigroup in Manhattan federal court, accusing its home-loan division of systematically violating U.S. mortgage regulations.
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The U.S. Justice Department decided to join her suit in January. Citigroup didn’t dispute any of Hunt’s facts; it didn’t mount a defense in public or in court. On Feb. 15, 2012, the bank agreed to pay $158.3 million to the U.S. government to settle the case.
Citigroup admitted approving loans for government insurance that didn’t qualify under Federal Housing Administration rules. Prosecutors kept open the possibility of bringing criminal charges, without specifying targets.
Citigroup behaving badly as late as 2012 shows how a big bank hasn’t yet absorbed the lessons of the credit crisis despite billions of dollars in bailouts, says Neil Barofsky, former special inspector general of the Troubled Asset Relief Program.
“This case demonstrates that the notion that the bailed-out banks have somehow found God and have reformed their ways in the aftermath of the financial crisis is pure myth,” he says.
As a reward for blowing the whistle on her employer, Hunt, the country girl turned banker, got $31 million out of the settlement paid by Citigroup.
Hunt still remembers her first impressions of CitiMortgage’s O’Fallon headquarters, a complex of three concrete-and-glass buildings surrounded by manicured lawns and vast parking lots. Inside are endless rows of cubicles where 3,800 employees trade e-mails and conduct conference calls. Hunt says at first she felt like a mouse in a maze.
“You only see people’s faces when someone brings in doughnuts and the smell gets them peeking over the tops of their cubicles,” she says.
Over time, she came to appreciate the camaraderie. Every month, workers conducted the so-called Jean Charities. Employees contributed $20 for the privilege of wearing jeans every day, with the money going to local nonprofit organizations. With so many workers, it added up to $25,000 a month.
“Citi is full of wonderful people, conscientious people,” Hunt says.
Those people worked on different teams to process mortgages, all of them focused on keeping home loans moving through the system. One team bought loans from brokers and other lenders. Another team, called underwriters, made sure loan paperwork was complete and the mortgages met the bank’s and the government’s guidelines.
Yet another group did spot-checks on loans already purchased. It was such a high-volume business that one group’s assignment was simply to keep loans moving on the assembly line.
Still another unit sold loans to Fannie Mae, Freddie Mac and Ginnie Mae, the government-controlled companies that bundled them into securities for sale to investors. Those were the types of securities that blew up in 2007, igniting a global financial crisis.
Workers had a powerful incentive to push mortgages through the process even if flaws were found: compensation. The pay of CitiMortgage employees all the way up to the division’s chief executive officer depended on a high percentage of approved loans, the government’s complaint says.
By 2006, Hunt’s team was processing $50 billion in loans that Citi-Mortgage bought from hundreds of mortgage companies. Because her unit couldn’t possibly review them all, they checked a sample.
When a mortgage wasn’t up to federal standards -- which could be any error ranging from an unsigned document to a false income statement or a hyped-up appraisal -- her team labeled the loan as defective.
In late 2007, Hunt’s group estimated that about 60 percent of the mortgages Citigroup was buying and selling were missing some form of documentation. Hunt says she took her concerns to her boss, Richard Bowen III.
Bowen, 64, is a religious man, a former Air Force Reserve Officer Training Corps cadet at Texas Tech University in Lubbock with an attention to detail that befits his background as a certified public accountant. When he saw the magnitude of the mortgage defects, Bowen says he prayed for guidance.
In a Nov. 3, 2007, e-mail, he alerted Citigroup executives, including Robert Rubin, then chairman of Citigroup’s executive committee and a former Treasury secretary; Chief Financial Officer Gary Crittenden; the bank’s senior risk officer; and its chief auditor.
Bowen put the words “URGENT -- READ IMMEDIATELY -- FINANCIAL ISSUES” in the subject line.
“The reason for this urgent e-mail concerns breakdowns of internal controls and resulting significant but possibly unrecognized financial losses existing within our organization,” Bowen wrote. “We continue to be significantly out of compliance.”