Why does the SEC protect banks' dirty secrets?

Nov 4, 2012 @ 12:01 am

By William D. Cohan

Richard Bowen
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Richard Bowen (Kevin Lamarque/Reuters/Landov)

Remember Richard Bowen?

He is the former senior executive at Citigroup Inc. who in November 2007 issued a clarion call to his colleagues and Citi's board that a major credit quality problem loomed for the bank.

Mr. Bowen was the chief underwriter in the business unit that bought from third parties $50 billion annually in home mortgages that were then bundled up and sold as securities to investors the world over. On Nov. 3, 2007, he sent an “urgent” e-mail to executives including Robert Rubin, the former U.S. Treasury secretary who was then chairman of the bank's executive committee, and Gary Crittenden, the chief financial officer, raising concerns about “breakdowns in internal controls and resulting significant but possibly unrecognized financial losses existing within our organization.”


Mr. Bowen wrote that he had been “agonizing for some time” about the problem, especially since his direct superiors at the bank, whom he had warned repeatedly since he first discovered the problem in mid-2006, had done little or nothing to remedy it. What he had discovered was that 60% of the home mortgages that Citigroup had bought from third parties, or $30 billion, were “defective,” meaning that they didn't meet Citigroup's underwriting criteria. Nevertheless, they were still packaged up — defects and all — and sold as securities.

You know where this is going. The Citigroup executives did next to nothing. Mr. Rubin, who left the company in January 2009, told the federal Financial Crisis Inquiry Commission on April 8, 2010, that “either I or somebody else sent it to the appropriate people, and I do know factually that that was acted on promptly and actions taken in response to it.” Chairman Phil Angelides asked Mr. Rubin to follow up with his commission and explain precisely what actions Citigroup took in response to Mr. Bowen's e-mail. A few months later, Mr. Rubin's attorneys sent a letter stating that the “e-mail was subsequently passed on to the appropriate personnel at Citigroup” and that “Citigroup should be able to provide a description of its response to Mr. Bowen's concerns.” A Nixonian response if ever there was one.

Citigroup's attorneys, in turn, wrote to the commission in November 2010 that the bank had responded to Mr. Bowen's e-mail by firing “the head of the group” responsible for evaluating the credit quality of the purchased mortgages — actually, Mr. Bowen had done that already — and by putting in place a bunch of new “processes.” Yet according to a July 2012 article in Bloomberg Markets magazine by Bob Ivry about Sherry Hunt, who worked for Mr. Bowen, “there were no noticeable changes in the mortgage machinery as a result of Mr. Bowen's warning.”

By the time of Mr. Rubin's FCIC testimony, of course, Citigroup had been bailed out with $45 billion in cash from the American people, along with another $306 billion in guarantees from the federal government for a pot of the very same toxic home mortgages that Mr. Bowen had warned about. Mr. Rubin pocketed $126 million in his 10 or so years at the company. Mr. Bowen, who was stripped of his responsibilities at Citigroup soon after writing the infamous e-mail, left the company two weeks after Mr. Rubin. He now teaches accounting at the University of Texas at Dallas.

As horrific as it was for Mr. Rubin, Mr. Crittenden and others to ignore Mr. Bowen's explicit warning, that's not the end of the story. As part of blowing the whistle on Citigroup's bad behavior, Mr. Bowen also alerted the Securities and Exchange Commission, the bank's main regulator, hoping it would thoroughly investigate the “breakdowns of internal controls” and take legal action against those responsible. Before the bailout of Citigroup, he gave the SEC two long depositions and 1,000 or so pages of documents, detailing the extent of Citigroup's problems and Mr. Bowen's attempts to rectify them. He said he also gave his permission for the SEC to release to the public his depositions and the revealing documents.

Naturally, the SEC did nothing to pursue Mr. Bowen's claims before billions of taxpayer dollars were used to rescue Citigroup. But it must abide by the Freedom of Information Act, which allows the public to gain access to documents such as those Mr. Bowen provided. It has a horrendous track record of fulfilling FOIA requests in anything like a timely manner. My experience has been that the agency begrudgingly gives out the bare minimum long after I really needed it.


Bloomberg's Mr. Ivry filed an FOIA request this year with the SEC to get copies of Mr. Bowen's two depositions and the 1,000 pages of documents. Initially, the SEC stonewalled, claiming the Bowen cache amounted to Citigroup “trade secrets.”

When Mr. Ivry finally got the documents, he was underwhelmed. “It was a discussion about nothing and it was heavily redacted, including Mr. Bowen's name,” Mr. Ivry told me.

When I told Mr. Bowen recently that the SEC had failed to release his documents and his testimony about Citigroup to Mr. Ivry, he was flabbergasted. For legal reasons, Mr. Bowen said, he can't share the information directly, but he fully expected the SEC to make it available to journalists and the public. He also expected the SEC to investigate the wrongdoing.

“I'm outraged, quite frankly,” Mr. Bowen told me.

William D. Cohan, the author of “Money and Power: How Goldman Sachs Came to Rule the World” (Doubleday, 2011), is a Bloomberg columnist.


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