By Pam Martens and Russ Martens: September 16, 2013
An institutionalized wealth transfer system is playing out at New York University, a nonprofit organization subsidized by the U.S. taxpayer. Forgivable mortgage loans for multi-million dollar luxury homes have been doled out by NYU to an inner circle of administrators and elite faculty. The University’s President, John Sexton, has received an interest rate of less than one-quarter of one percent from NYU to finance a multi-million dollar beach residence on Fire Island. All this while NYU students carry the greatest burden of debt of any nonprofit university in the country – a figure placed at $659 million in 2010 by the Department of Education and now estimated to be well over $1 billion due to a poorly understood debt compounding trick called “capitalized interest.”
While the unconscionable mortgage loans at NYU have received significant press attention and a Congressional probe by Senator Chuck Grassley, the unseemly details of just how NYU students amassed all this debt and the conflicts of interest between the university’s preferred lender, Citibank, and the Chairman of NYU’s Board, Martin Lipton (who has inexplicably held that post for the past 15 years), have failed to make it to the front pages of mainstream media.
On April 2, 2007, with much press and fanfare, then Attorney General of New York State, Andrew Cuomo (now Governor of the state), announced a settlement with NYU and Citibank (the insured deposit bank owned by the Wall Street poster child of bailouts) Citigroup. According to the settlement documents, NYU had decided in 2001 to put Citibank’s Student Loan Corporation (SLC) on a list it recommended to students as a preferred source for student loans. But unbeknownst to many students and their parents, according to the Attorney General, Citibank was kicking back a portion of the loans to NYU – a sum totaling $1,394,563.75 during the period 2002 through 2007. According to the Attorney General’s settlement, this practice is illegal under New York State Executive Law and General Business Law.
There were a number of decidedly problematic aspects to this settlement. First, Citibank was let off the hook with a tiny commitment to contribute $2 million to a national fund administered by the Attorney General’s office to educate college-bound students about the student loan industry. The settlement came just a few months into the investigation and before the Attorney General’s office had all the facts – as evidenced by the requirement in the settlement that the parties agree to continue cooperating with the investigation. There was also a statement in the settlement which would not hold up to future revelations – that Citibank’s SLC lending division was selected because it was going to offer “private loans to the University’s students and their families at the favorable interest rate of one percent below the prime rate (currently 7.25 percent)[in 2007], with no fees, on terms under which more than 80 percent of the University’s students and their co-signers qualify.”
Another component of the settlement raising serious red flags was the statement Cuomo made in his press release at the time, seemingly saluting Citigroup, a serial law violator that had over a decade clearly demonstrated it had no remorse or intent to reform its practices. In 2011, U.S. District Judge Jed Rakoff in Manhattan rejected a $285 million settlement between Citigroup and the SEC, calling the company a “recidivist” or repeat offender. (To underscore the wholesale failure of Citigroup to reform its egregious practices that have stripped billions in wealth from unsuspecting Americans, we have included a chronology at the end of this article of just some of the milestones in the company’s past decade of abuses.)
Referring to a voluntary new code of conduct that Citigroup, NYU and other schools had agreed to, Cuomo gushed in his press release: “These schools and Citibank have made the responsible choice and are showing themselves to be industry leaders by being the first to take a major step in cleaning up a system laden with conflicts of interest,” Cuomo said. “We are beginning the process of restoring trust between universities and students…”
Cuomo knew, or should have known, the nature of the company with whom he was dealing. Citigroup’s name had been in the press for a solid decade in connection with a multitude of alleged malfeasances. From 2002 through 2012, Citigroup paid out over $8.35 billion to settle charges of securities fraud or bilking customers or investors.
The same year that NYU was approving Citibank as a preferred student loan lender, the Federal Trade Commission was taking testimony from Gail Kubiniec, a former assistant manager at another Citigroup affiliate, CitiFinancial, on how the company paid employees incentives to bury consumer loan borrowers under abusive add-ons. The FTC settled the case the following year for $215 million.
Kubiniec testified to the FTC on July 20, 2001 that at CitiFinancial, “Employees would receive quarterly incentives, called ‘Rocopoly Money,’ based on how many present borrowers they ‘renewed’ (refinanced) into new loans…Typically, employees would only state the total monthly payment amount in selling a proposed loan. Additional information, such as the interest rate, and the financed points and fees, closing costs, and ‘add-ons’ like credit insurance, were only disclosed when demanded by the borrower…When quoting the monthly payment, I frequently quoted the payment with coverages already included, telling the consumer only that it was ‘fully protected.’ This was a common practice used by employees at CitiFinancial…The pressure to sell coverages came from CitiFinancial’s Regional and District Managers. Each branch had monthly credit insurance sales goals to meet…If these goals were not met, the District Manager would call and put pressure on the Branch Manager to get the branch up to par.”
Even more disturbing in evaluating the fitness of a Citigroup company to be offering loans to young, inexperienced students at a nonprofit institution of higher education, Kubiniec testified that CitiFinancial intentionally targeted the young, gullible and minorities: “I and other employees would often determine how much insurance could be sold to a borrower based on the borrower’s occupation, race, age, and education level. If someone appeared uneducated, inarticulate, was a minority, or was particularly old or young, I would try to include all the coverages CitiFinancial offered. The more gullible the consumer appeared, the more coverages I would try to include in the loan…” Kubiniec told the FTC investigators.
How could a company with this history, given any kind of serious due diligence by the Board of Directors of NYU, be given the imprimatur of a New York University preferred student loan lender?
One serious conflict of interest with the naming of a Citigroup company for this lucrative inside track to grab the lion’s share of student loans at NYU is the fact that Martin Lipton, who has chaired the NYU Board of Directors since 1998, had legally represented Sanford (Sandy) Weill, Chairman and CEO of Citigroup when Citibank was named a preferred lender, since the mid 1980s according to Weill’s autobiography, The Real Deal. In the book, Weill calls Lipton a close friend.
Lipton is a co-founder of the Wall Street powerhouse law firm, Wachtell, Lipton, Rosen & Katz. Weill is the man who forced the government’s hand to repeal the Glass-Steagall Act, the Depression era investor protection legislation that made it illegal for banks holding insured deposits to merge with Wall Street firms that engaged in risky stock trading and underwriting – a combination that led to the 1929 to 1933 collapse on Wall Street. (It took only nine years from the Glass-Steagall repeal in 1999 for Wall Street to collapse again in 2008.) According to the Government Accountability Office, during the 2008 to 2010 financial crisis, the insolvent Citigroup obtained taxpayer support of over $2 trillion in low cost loans from the Federal Reserve, as well as over $345 billion in government equity infusions and asset guarantees.
According to Weill’s book, Wachtell is the very firm that counseled him on how he could maneuver around the Glass-Steagall Act and merge his Wall Street brokerage firm, Smith Barney, and insurance operations, Travelers Group, with a bank holding insured deposits. Weill writes: “Around this time, we had been discussing strategic options with Marty Lipton and his team of banking lawyers at Wachtell Lipton. The firm’s lawyers captured my attention by claiming they could help us circumvent the legal issues involved with merging with a bank. Two powerful federal laws, the Bank Holding Company Act of the 1950s and the Depression-era Glass-Steagall Act, stood in our way…”
In 2002, Weill writes that Lipton and Wachtell were asked to “oversee” the litigation at Citigroup. “In short,” says Weill, “Marty Lipton would be our uberlawyer who’d make sure we’d learn from mistakes and remain in the forefront of industry reforms.” (That was 2002, check the list and dates of charges of malfeasance below to fully appreciate how Citigroup never learned from its “mistakes.”)
According to Cuomo’s settlement, Citibank was not only chosen as a preferred student loan lender in 2001 by NYU, it was chosen again in 2004. That was one year after one of the largest and well-publicized scandals in Wall Street history – the rigging of stock research provided to the public so firms like Citigroup could pump and dump hot issues and obtain stock underwriting business. Citigroup had to pay $400 million to settle charges with multiple regulators. Its star telecommunications analyst, Jack Grubman, was barred from the industry for life.
Grubman’s taint extended to Weill once it became public knowledge that Grubman had bragged in an email that Weill had gotten Grubman’s twin daughters into the prestigious 92nd Street Y nursery school in exchange for his recommendation that investors buy AT&T stock. Weill, who also served on the Board of AT&T, admitted to asking Grubman to “take a fresh look” at AT&T. Citigroup admitted that its foundation had pledged $1 million to the nursery school. Eliot Spitzer, then the New York State Attorney General, began an investigation of Weill. Lipton was tapped once again to represent Weill. In his autobiography, Weill writes: “…Marty Lipton moved two of his top attorneys, Larry Pedowitz and John Savarese, to work exclusively on my personal situation until we satisfied the regulators that I bore no culpability.”
By late August 2002, Lipton was actually making personnel recommendations to Citigroup. Weill writes: “…I received an urgent call from Marty Lipton…I went to Marty’s apartment where he and our outside public relations expert, Gershon Kekst, waited for me…Marty came straight out with his message: If we were serious about leading industry change and getting out from under this regulatory storm, I needed to understand that we’d never get there with Mike Carpenter continuing to run things downtown…” Carpenter was replaced as head of the Global Corporate Investment Bank within a month’s time.
By 2004, when Citibank’s Student Loan Corporation was named a preferred lender at NYU for the second time, no one had more clarity or greater understanding of Citigroup’s problems than the Chairman of NYU’s Board, Martin Lipton. Perhaps he recused himself. Perhaps the matter did not even come before the Board of Directors. The reality is, someone or some entity at NYU made this decision and the amount of due diligence that went into the process appears highly questionable. The Board owes its debt-strapped students and the 400 faculty members, who have asked Martin Lipton to resign over his intransigence on a multitude of issues, an explanation of just how Citibank was vetted.
In February of this year, the Consumer Financial Protection Bureau (CFPB) solicited comments from students on their experiences with private student loans — offered predominantly by banks. Students who had taken out loans from Citibank to attend NYU were among the respondents.
Sarah V. wrote: “In 2004 I took out both private loans from Citibank and government loans to attend NYU to study for my MA in Art Therapy. I received a letter from NYU stating that Citibank was the preferred lender of their students and they highly recommended their services. I was offered no financial aid, but NYU ‘offered’ me $26,000 per year in loans from Citibank. They were practically pre approved…My first full time Art Therapy position in a city hospital offered monthly take home pay of about $1800 a month. My student loan payments were $800 a month approximately. Rent with three roommates was $750. Public Transportation was about $90 a month then. I went without heat for the winter, sleeping in my coats and hats with a heating pad. I wrote to Citibank and called them. I told them I wanted to pay, but asked for a reduced payment plan. They wrote back telling me that it would be ‘illegal’ to take more than 10 years to pay. They refused all of my requests.”
At a Senate Banking Committee hearing on June 6, 2007, Citibank’s regulators testified that there is no regulation prohibiting banks from modifying student loans as long as it does not impact the safety and soundness of the institution.
Another NYU student and Citibank borrower, Gina K., wrote to the CFPB early this year telling them that “I was misinformed, manipulated and the lenders were not honest with me. They estimated that my student loans would be about $200 – 300 a month. A far cry from $1,000 a month. When the economy gets better, my variable interest rate goes up, and my payments can be as high as $1,300 or $1400 a month.” Gina told the CFPB that she has a Masters Degree from NYU but because student loan payments are consuming half of her monthly income, she is forced to live from paycheck to paycheck with no hope of getting out of debt.
One of the hidden dangers to students is rampant confusion between Federal student loans and private student loans obtained from banks or other private financial institutions. Subsidized Federal loans (Stafford loans) defer the payment on the debt until after the student graduates. The Federal government charges zero interest while the student is in school. Private banks like Citibank, however, compound that interest over the four years, adding it to the original principal (capitalized interest), leading to an unanticipated explosion in the amount owed by the time the student graduates. Students, of course, have the option of paying just the interest while they are in school but few have the ability to do so until they graduate and secure a job.
If two additional years of graduate school are added to the compounding of interest, students are stunned to find they are paying back twice or even three times the amount they borrowed in original principal, depending on the interest rate.
Under the 2005 bankruptcy reforms, it is next to impossible to discharge student loan debt in bankruptcy. If students ask private lenders for a forbearance for hardship, the interest continues to compound, adding to an even more unmanageable problem in the future. When students default on private loans, their wages can be garnished and their credit rating is ruined. This can impair job prospects.
The Federal government, rather than helping, seems to be asking young struggling students to help pay down the national debt – a significant portion of which grew out of the Wall Street implosion. The government currently issues 10-year Treasury notes at a rate of less than 3 percent but it is charging rates far in excess of that to students and for student loans taken out by parents.
Senator Elizabeth Warren reported in a Senate floor speech on June 6 that the government is currently making $51 billion in profits on student loans. The Senator added: “Our college students already see that the system is rigged against them. They watched Wall Street bankers get bailed out while their parents lost jobs and struggled to hang on to their homes. They see special subsidies for companies that ship jobs overseas and exploit tax loopholes, while the investments in their future – in jobs at home – disappear…That’s not who we are. This does not reflect our values. We see students drowning in debt, and we should be there to help.”
Warren introduced legislation this year, the Bank on Students Loan Fairness Act, which would allow students to borrow at the same interest rate on their student loans from the government as Wall Street banks pay when they borrow from the Federal Reserve’s discount window – a rate currently set at .75 percent. The rate would last for one year to allow Congress to enact a long term solution. Congressman John Tierney introduced a corresponding bill in the House of Representatives.
NYU, as a taxpayer subsidized nonprofit, enjoys a multitude of benefits. It has received hundreds of millions of dollars in Federal grants for research. It’s sitting on an endowment of over $2 billion on which it pays no income tax, ostensibly to be used to help educate worthy students.
A high school valedictorian applied this year to the NYU financial aid office for his sophomore year at NYU. The tab for tuition and housing was $68,501 for the year. The university offered a $9,000 scholarship and a $3,000 Federal work/study program. The balance was structured as loans. The student was forced to withdraw from NYU and enroll elsewhere. When a university forces out high school valedictorians over ability to pay, the system is screaming for help.
According to congressional testimony from regulators, when banks make student loans they consider the credit history and income of the co-signer of the loan, typically the student’s parents. Since poor families typically have much lower credit scores, the young student who has never had credit nor a chance to show how worthy a borrower he will be, is being punished for his station in life, rather than being rewarded for his grades or how hard he worked in high school.
With the likelihood that the student’s capitalized interest will double the original amount he borrowed, he will have a higher risk profile when he attempts to borrow to buy a car or take out a home mortgage loan in the future. The higher risk profile could mean he will be paying a higher rate of interest for decades, stripping or severely impairing his ability to save for his own kids’ education, thus forcing the next generation into the arms of the next predatory lender.
Instead of education being the great equalizer, the NYU education model has become the fast track to ensuring that the generational chains of poverty are never broken. A four year education at NYU, including campus housing, is now over $280,000.
According to a September 2012 report by the Organization for Economic Cooperation and Development (OECD), the U.S. ranks 14th among 37 OECD and G20 countries in the percentage of 25 to 34 year olds achieving higher education. That puts the U.S. 20 percentage points behind the leader, Korea, at 65 percent. The report also found that American students struggle more than their foreign peers to top their parents. The report said that the odds of a young person in the U.S. attaining higher education if his or her parents did not do so are 29 percent, ranking as one of the lowest levels among OECD countries.
America as the land of opportunity is tragically becoming a quaint fairy tale to millions of our young people.
Citigroup’s Rap Sheet:
September 19, 2002: FTC Announcement — “In the largest consumer protection settlement in FTC history, Citigroup Inc. will pay $215 million to resolve Federal Trade Commission charges that Associates First Capital Corporation and Associates Corporation of North America (The Associates) engaged in systematic and widespread deceptive and abusive lending practices.” The firms were owned by Citigroup.
October 31, 2003: U.S. District Court Judge William Pauley signs a settlement order agreed to by multiple regulators for Citigroup to pay $400 million over issuance of fraudulent stock research.
May 28, 2004: The Federal Reserve announces a $70-million penalty against Citigroup Inc. and CitiFinancial Credit Co. over their handling of high-interest-rate “subprime” mortgages and personal loans.
May 31, 2005: SEC announces a $208 million settlement with Citigroup over improper transactions by its proprietary mutual funds.
June 28, 2005: Citigroup agrees to pay the UK regulator, the FSA, $25 million over its “Dr. Evil” trade, alleged to have manipulated the European bond market.
March 26, 2008: Citigroup settles a suit with Enron creditors for $1.66 billion over claims it aided and abetted Enron in hiding its debt.
August 26, 2008: California Attorney General Edmund Brown Jr. announces a settlement with Citigroup to return all monies improperly taken from customers through an illegal account sweeping program. According to the Attorney General: “Nationally, the company took more than $14 million from its customers, including $1.6 million from California residents, through the use of a computer program that wrongfully swept positive account balances from credit-card customer accounts into Citibank’s general fund…The company knowingly stole from its customers, mostly poor people and the recently deceased, when it designed and implemented the sweeps,” Attorney General Brown said. “When a whistleblower uncovered the scam and brought it to his superiors, they buried the information and continued the illegal practice.”
December 11, 2008: SEC forces Citigroup and UBS to buy back $30 billion in auction rate securities that were improperly sold to investors through misleading information.
July 29, 2010: SEC settles with Citigroup for $75 million over its misleading statements to investors that it had reduced its exposure to subprime mortgages to $13 billion when in fact the exposure was over $50 billion.
October 19, 2011: SEC agrees to settle with Citigroup for $285 million over claims it misled investors in a $1 billion financial product. Citigroup had selected approximately half the assets and was betting they would decline in value. Judge Jed Rakoff refused to approve that settlement and the matter is now on appeal.
February 9, 2012: Citigroup agrees to pay $2.2 billion as its portion of the nationwide settlement of bank foreclosure fraud.
August 29, 2012: Citigroup agrees to settle a class action lawsuit for $590 million over claims it withheld from shareholders knowledge that it had far greater exposure to subprime debt than it was reporting.