By Pam Martens: October 5, 2009
A federal agency tasked with expanding the American dream of home ownership and affordable housing free from discrimination to people of modest means has been quietly moving a chunk of that role to Wall Street since 2002. In a stealth partial privatization, the U.S. Department of Housing and Urban Development (HUD) farmed out its mandate of working with single family homeowners in trouble on their mortgages to the industry most responsible for separating people from their savings and creating an unprecedented wealth gap that renders millions unable to pay those mortgages.
This industry also ranks as one of the most storied industries in terms of race discrimination. Rounding out its dubious housing credentials, Wall Street is now on life support courtesy of the public purse known as TARP as a result of issuing trillions of dollars in miss-rated housing bonds and housing-related derivatives, many of which were nothing more than algorithmic concepts wrapped in a high priced legal opinion. It’s difficult to imagine a more problematic resume for the new housing czars.
To what degree this surreptitious program has contributed to putting children and families out on the street during one of the worst economic slumps since the 1930s should be on a Congressional short list for investigation. HUD’s demand for confidentiality from all bidders and announcement of winning bids to parties known only as “the winning bidder” deserves its own investigation in terms of obfuscating the public’s right to know and the ability of the press to properly fulfill its function in a free society.
Despite three days of emails and phone calls to HUD officials, they have refused to provide the names of the winning bidders or the firms that teamed as co-bidders with the winning party. Obtaining this information independently has been akin to extracting a painful splinter wearing a blindfold and oven mitts.
That a taxpayer-supported Federal agency conducts a competitive bid program of over $2 billion and then refuses to announce the names of the winning bidders is beyond contempt for the American people. If the Obama administration does not quickly purge this Bush mindset from these Federal agencies, he is inviting a massive backlash in the midterm elections.
The HUD program was benignly called Accelerated Claims Disposition (ACD) and was said to be a pilot program. A pilot program might suggest to those uninformed in the ways of the new Wall Street occupation of America a modest spending outlay; a go slow approach. In this case, from 2002 to 2005, HUD transferred in excess of $2.4 billion of defaulted mortgages insured by its sibling, the FHA, into the hands of Citigroup, Lehman Brothers and Bear Stearns while providing the firms with wide latitude to foreclose, restructure or sell off mortgages in bundles to investors. HUD retained a minority interest of 30 to 40 percent in each joint venture. Citigroup was awarded the 2002 and 2004 joint ventures; Lehman Brothers the 2003; Bear Stearns the 2005. I obtained this information by reconciling the aliases used by these firms in foreclosures of HUD properties to the addresses of the corporate parents. I further confirmed the information by checking the official records at multiple Secretaries of State offices where the firms must register their subsidiaries to do business within the state.
What the program effectively did was allow the biggest retail banks in the country to get accelerated payment on their defaulted, FHA-insured, single family mortgage loans while allowing another set of the biggest investment banks to make huge profits in fees for bundling and selling off the loans as securitizations. Once the loans were securitized (sold off to investors) they were no longer the problem of HUD or the Wall Street bankers. The loans conveniently disappeared from the radar screen and the balance sheet. The family’s fate had been sold off by HUD to Wall Street in exchange for a small piece of the action. Wall Street then sold off the family’s fate to thousands of investors around the world for a large piece of the action.
HUD has attempted to spin this program as a win-win for everyone with the suggestion that families would have more options under this program. In a HUD February 17, 2006 report titled “Evaluation of 601 Accelerated Claims Disposition Demonstration,” a few kernels of truth emerged. It was noted on page 4 that the private partners “determine how best to maximize the return on the loan…Loans liquidated through note sales generally earn a higher return than property sales, so the JV [joint venture] has an incentive to maximize the share of note sales relative to property sales.” Rather than evaluating the success of the program based on how many families were able to get a loan modification and remain in their homes, the report notes that “The benchmark for progress is the share of loans that have reached resolution.”
From its 2002 joint venture, Citigroup dumped en masse 2,599 loans in one securitization alone in August 2004. It sold another 1,177 at other unknown times. From its 2004 joint venture, it dumped 1,814 in one fell swoop. The 2006 HUD report notes that following securitization “there is no information available on the [home] retention after the sale.”
According to HUD’s web site, another major award of $400 million to $800 million in defaulted mortgages was slated for October 23 of last year in the midst of a foreclosure and eviction crisis. Lemar Wooley, in HUD’s Office of Public Affairs, advises that the deal never happened as a result of “no acceptable bids being received.” Given that we have been promised change we can believe in, I would have much preferred to hear: “We’ve sacked this program as an abhorrent example of privatizing profits and socializing losses while turning our backs on the neediest of our society.”
While this was clearly not a win-win for families in financial distress, two other red flags come to mind. The 2006 HUD report notes that to be eligible for this program, loans had to be four full payments past due (five full payments past due for the 2005 Bear Stearns deal). But to securitize the loans, the Wall Street firms had to bring the loans into performing status, that is, up to date in their payments. The question arises as to whether the investors in the securitizations were advised that these were heretofore defaulted HUD loans. One might be forgiven for pondering that as a material fact required in a prospectus since there is much data available showing that loans once in default tend to re-default. Some of these investors might unknowingly be you and your family members. The loans could be sitting right now in public employee pension funds, mutual funds held in 401(k)s, etc.
The second concern is that many of the homes in the deals were foreclosed on in 2006, 2007 and 2008. By HUD not keeping these loans and insisting on its legal mandate for lenders to attempt loan modifications, special forbearance or partial claims to bring the loans current, there may have been an increased impact on the foreclosure glut and overall property value declines.
It is worth noting what happened to the firms that HUD deemed qualified for this program: Lehman Brothers collapsed on September 15, 2008. Bear Stearns required a weekend rescue by JPMorgan Chase and the Fed on March 16/17, 2008. Citigroup, which got the lion’s share of the HUD deals, exists today only because of a $45 billion direct infusion from unwilling taxpayers (overruled by their Congress) and hundreds of billions of dollars more in various other government backstop operations – some still undisclosed despite Freedom of Information Act requests and litigation.
Future articles in this series will look at how these deals started under the Clinton administration with awards to Goldman Sachs, GE Capital, Blackrock and others, with the dubious protection of Merrill Lynch as the overseer for HUD. This program also went virtually unnoticed until charges of rigged computers and bid rigging erupted in headlines. We will also look at the human suffering resulting from this macabre rewriting of the social contract in America. The series begins today with the most unlikely candidate of all for helping people in need: Citigroup.
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In the early evening of June 26, 2009 I was cleaning up emails I had saved for more careful reading at a later date when I bolted in my chair. A message from a reader whom I have permission to call Melissa X advised that she had documentation that Citigroup was engaging in dubious real estate transactions out west under an alias. I immediately answered with a request for specifics and received the following response:
“…a friend asked me to pull the real property records on a house a few doors down from him that he had heard sold at a very low price in a foreclosure sale. After pulling the property records I just couldn’t believe the price this particular house sold for in the ‘foreclosure sale’ and started looking into the foreclosure purchaser, Liquidation Properties, Inc. (LPI). I have been a litigation paralegal for 14 years, thus I have a good amount of investigation experience and also in real estate law as we have a considerable practice in real estate litigation. Needless to say, my instinct told me something wasn’t right about this and I Googled the Directors of LPI, who happened to be high level executives at Citigroup Global Markets. At first I thought that LPI wasn’t a subsidiary of Citigroup because when I was reviewing court records they have filings that say they are a privately owned company with no connection to a publicly traded company. So, initially, I thought these high level Citigroup execs had formed this company that was purchasing these Citi foreclosures super cheap…one of the Directors of LPI is Jeffrey Perlowitz, who according to his online bio ran the trading desk at [Citigroup’s] Smith Barney during the housing ‘boom’ and is credited for ‘purchase, sales and trading of single family residential mortgages and asset backed securities…’ Then I ran LPI through Edgar [an SEC search engine] to see if I could find anything in SEC filings about this entity and that is how I ended up discovering LPI is actually a Citi subsidiary. I know from reading your articles that you are well aware of how shady Citi is with their subsidiaries. I particularly liked an article you wrote about the oil markets and how we can’t expect the sleuths at Congress to figure out why the prices went out of control, and then you linked it to a little talked about Citi subsidiary.”
It took but a few minutes to confirm that Liquidation Properties, Inc. was indeed a subsidiary of Citigroup. Exhibit 21.01 of Citigroup’s December 31, 2008 SEC filing lists Liquidation Properties Holding Company Inc. and Liquidation Properties Inc. as subsidiaries chartered in Delaware. (But how many people are going to notice that when Citigroup has over 2,000 subsidiaries.)
A quick click at the Secretary of State web site for Massachusetts, one of the many states in which Liquidation Partners, Inc. conducts business, revealed the following officers as of March 14, 2007: Randall Costa, President; Scott Freidenrich, Treasurer; Robyn Gomez, Secretary; Jeffrey Perlowitz, Director; Mark Tsesarsky, Director. But just as Melissa X had noticed, there was nothing on this filing to connect this firm with Citigroup or any publicly traded company.
In fact, the form indicated that there were only 200 shares of common stock outstanding. Citigroup, on the other hand, has an unprecedented and unfathomable 22.9 billion (yes, billion) common shares outstanding, now withering in value alongside the faded dreams of financial security for its shareholders and customers.
I reviewed two other documents Melissa X had sent along: two foreclosure filings by Liquidation Properties, Inc. in the U.S. District Court for the Northern District of Ohio stating that it was not a “party, a parent, a subsidiary or other affiliate of a publicly owned corporation.”
One other item stood out in this filing: the address of this firm was listed as 388 Greenwich Street in the trendy neighborhood of Tribeca, New York City. That is where the raucous trading of exotic derivatives, commodities and mortgage securities by Citigroup’s subsidiaries has traditionally been handled. The legacy of the swashbuckling culture of the notorious Salomon Brothers, a predecessor firm whose traders rigged the two-year note auction of U.S. Treasurys in 1991, remains alive in these trading rooms. Indeed, Jeffrey Perlowitz was a Salomon protégé. The seminal book on the Salomon culture, Michael Lewis’ “Liar’s Poker,” assigns mortgage traders a philosophy of “ready, fire, aim.”
In other words, this is the address of the investment bank of Citigroup with whom these individuals are involved, not the calm bean counters at the retail bank, Citibank. The investment bank specializes in mergers and acquisitions, lending and trading, with a sophisticated customer base of corporations, governments and institutions. An investment bank is an unfit place for conducting or even overseeing the hand holding and financial counseling of frightened families who need urgent and sincere help to avoid losing the roof over their heads.
Call it divine intervention or call it happenstance, but Melissa X had chosen to electronically communicate with a stranger on the other side of the country who just happened to have an indelibly forged mental picture of 388 Greenwich Street in Tribeca.
At 1 pm on May 20, 1997 an eclectic group of protesters filled the sidewalk in front of 388 Greenwich Street. I was one of them. My group, which included Gloria Steinem, came to name the firm (then known as Smith Barney) a Merchant of Shame for its privatized justice system which barred employees, as a condition of employment, from suing the firm in a public court setting. Tribeca residents spontaneously joined us as they walked by to raise hell about the company’s bizarre selection of signage.
Cemented into the middle of the sidewalk in front of the firm was a 16 foot, 5300 pound, red steel umbrella representing the company’s logo at the time and, I imagined, the physical equivalent of Sandy Weill’s ego, then CEO of the firm. A Business Week article once quoted a former employee stating that Weill would steal pennies off a dead man’s eyes. Mr. Weill’s pennies, plucked from the dying firm’s eyes, eventually added up to $1 billion and he retired not long before the tens of billions of losses squirreled away in Structured Investment Vehicles (SIVs) in the Cayman Islands came home to roost.
In what I now recognize as the electronic manifestation of the whoring of Wall Street, a four-story red neon lighted umbrella was mounted near the top of this 39-floor building. Both the sidewalk and building umbrellas were later removed but I did note in a recent visit to Manhattan that giant and bizarre electronic signs flash messages to pedestrians from the formerly sedate wealth management offices of major Wall Street firms in midtown.
Having verified Melissa X’s information that Liquidation Properties, Inc. was indeed a subsidiary of Citigroup with officers employed by the firm, endowed with the uncanny knack of capturing an inordinate amount of winning bids at foreclosure auctions in depressed neighborhoods, I sat about unraveling the multitude of Byzantine transactions in which it was involved.
The trail led to four more entities: Reo Management 2002, Reo Management 2004, SFJV-2002, and SFJV-2004. (Reo is an acronym for real estate owned by a bank, typically after an unsuccessful foreclosure auction.) SFJV, I would later learn, was the name of the HUD joint ventures, an acronym for Single Family Joint Venture. SFJV-2002 and SFJV-2004 were, indeed, subsidiaries of Citigroup and being used to facilitate the transfer of foreclosed homes around the country.
The Reo Management firms were listed as subsidiaries of Residential Capital Corp. (ResCap) on its July 15, 2005 filing with the SEC but filings with the Secretary of State in Massachusetts showed the same Citigroup officials at 388 and 390 Greenwich Street in Tribeca as officers and directors: Costa, Freidenrich, Perlowitz, Tsesarsky. Filings with other Secretaries of State showed these same four individuals along with numerous other officials at Citigroup. Reo Management 2002 showed 200 shares of stock issued to unnamed parties while Reo Management 2004 said stock details were not available online.
Why would Citigroup managers be officers of a competitor? I called people in the know on Wall Street. No one had ever heard about it or could offer an explanation. I called Jeffrey Perlowitz’ secretary and sent her an email requesting an explanation from Mr. Perlowitz. Mr. Perlowitz took the same position as HUD: silence.
ResCap’s operations include GMAC Mortgage and GMAC-RFC. Until 2006, GMAC was a wholly owned subsidiary of General Motors, a company that had been around since 1919 to provide car financing to GM dealers and customers. In 2006, a majority stake was sold to Cerberus Capital Management, a private equity/hedge fund whose investors are a tightly held secret. The firm is now known as GMAC Financial Services. In 2008 the Federal Reserve waived its magic wand and GMAC became a bank holding company (now called Ally Bank) and TARP gave $5 billion of taxpayer funds to the entity. Another $7.5 billion was provided in 2009. As of June 30th of this year, you and I involuntarily own 35.4 per cent of the firm with Cerberus and its secret investors owning 22 percent.
Since all of us hold the largest block of stock, I felt I might get some answers. I emailed GMAC and asked what all of this was about. A spokeswoman responded that “the loans which we acquired from the [HUD] auction happened to be those in which we co-bid with Citi. The Reo Management 2002 and 2004 entities were set up as subs of those joint ventures to hold the resulting Reo properties until they were resolved.” I countered with: “Why were officials of Citigroup serving as principals and directors of subsidiaries of ResCap?” The spokesperson replied that both Reo Management 2002 and Reo Management 2004 had been dissolved and she had no further information.
After scrutinizing every scrap of paper available through HUD on these deals for endless weeks, I was, as a taxpayer, more than a little nonplussed that I had seen nary a word about co-bidders. Citigroup operating under an alias in consumer real estate transactions was scary enough, but allowed to team up with another giant player also operating under an alias, all under the imprimatur of a Federal agency, that was beyond rational comprehension.
It’s not like the Federal government didn’t know Citigroup was a serial rogue. Our tax dollars have been used since this Frankenbank was created to investigate serious crimes, while letting the company off with a fine so it could live on to create even bigger problems the next time around.
In 2001, Citigroup settled with the Federal Trade Commission for $215 million for predatory lending at one of its divisions. In 2003, Citigroup paid $400 million to U.S. regulators for fraudulent research reports and improper handling of new stock offerings. In 2004, Citigroup paid $2.65 billion to WorldCom stock and bond holders over its role in the demise of the firm. Also in 2004 its private bank was kicked out of Japan for money laundering. In 2005 Citigroup was fined $26 million by Europe’s Financial Services Authority for conducting a trade it internally named “Dr. Evil” that roiled the European bond market. In that same year, it settled with the SEC for $101 million for helping Enron inflate cash flows and under report debt. Also in 2005, it settled a private litigation over its role in the bankruptcy of Enron for $2 billion.
HUD’s own Regional Inspector General wrote in a 45-page report issued on November 13, 2008 that CitiMortgage, a unit of Citigroup, placed the FHA insurance fund at an increased risk of loss on one-third of the loans HUD audited at CitiMortgage as result of improper underwriting practices.
Melissa X took her concerns not just to me but to the U.S. Attorney’s office. In one passage of an email to this U.S. Attorney she wrote: “It is such a disappointment to me that our Government has failed us so, and only continues to do so…One must wonder how much the American people will take of this before a total revolution occurs…”
While I was researching this story, a friend forwarded a video clip of Laura Flanders of Grit-TV interviewing the filmmakers of “American Casino,” Andrew and Leslie Cockburn. At one point Flanders asks: “So you think it was all really a scam to transfer money from the vulnerable and the poor to the wealthy? There was no positive interest in home ownership distribution involved?”
The answers from the Cockburns go to the heart of this crisis. Both this clip and the movie “American Casino,” playing now in theatres across the U.S., provide a critical foundation for understanding that while our government and mighty military chased down men in caves in Afghanistan, the ivy league educated enemy within Wall Street sacked our nation. The film premiered in the U.S. in April, ironically, in Tribeca, just moments away from the real, live American Casino, Citigroup. Watch the interview and clips from the film here.
This article originally appeared at www.CounterPunch.org.