CitiBank Whistleblower Richard Bowen: The Ethics Merry Go Round

The McCuistion program, which airs in Dallas/Fort Worth on PBS station KERA, recently re-aired its program, Ethics and Transparency as Antidotes to Financial Fraud. Host Dennis McCuistion asked the guests what ethics and the lack of transparency may have done to contribute to the 2008 financial crisis?

One of his guests, Marianne Jennings, J.D.: Professor Emeritus Arizona State University Ethical and Legal Studies, author of The Seven Signs of Ethical Collapse; commended as a top 100 thought leader on ethics and one of the most influential people in ethics by Ethics Magazine, responded, ”I’m getting tired of doing this because it’s the same story over and over again. What happens is there are regulations and people find little loopholes.”

I was hooked- such a true statement. There is no question that the lack of ethics and transparency greatly contributed to our financial meltdown in 2008 and we aren’t learning anything new as the egregious lack of ethics still continues in the financial industry. Ms. Jennings commented that everything that is now regulated was at one time an ethics issue- and used a graph to firmly illustrate her point regarding social, regulatory and litigation cycles.

According to Ms. Jennings, people look for loopholes to get around rules and regulations, which while they maybe legal are not necessarily ethical. If you act fairly ethically and stay within the “wriggle room” parameters you’re fine. Step outside that and you enter the Awareness stage, and perhaps a major newspaper such as the Wall Street Journal catches it and reports on it. In the Activism stage, the pitchfork stage,  USA Today, reports on it, people are outraged, storm the castle and demand action be taken. In turn this leads to the Regulation stage and government sets regulations and more rules, with new loopholes, and the cycle starts all over again.

According to Ms. Jennings, as long as ethical issues are made within wriggle room parameters, proper disclosures made and transparency followed, all is fairly well. As she states, not all ethical issues are the same, there are layers of influence. If we treat all ethical issues equally, then one may erroneously think fixing the rogue players who exhibited unethical behavior will solve the problem.

However an individual may make an unethical decision because he or she was influenced by an organization’s culture, its expectations and what is rewarded. Ethical decisions are also driven by peer pressure within the industry which forces those organizations who want to continue to stay in business to go along to get along. What is really not acceptable then becomes an industry standard.

In the financial services industry this played a major role.  For example, the industry started widely accepting a borrower’s word as to his or her income and employment (a.k.a. “stated” or “no doc” loans) so these products became an integral part of doing business in the financial services industry. Those organizations that had misgivings but wanted to stay in business thus conformed to the new norm and embraced the new loan products.

After a while society goes along with the new norm, after all everyone else is doing it- why can’t we? Speeding, cheating on exams and taxes, the teenager’s “all my friend’s Moms let them do it” whine!!!!

Richard Ebeling, PhD: Distinguished Professor of Ethics and Free Enterprise Leadership at the Citadel, former President of the Foundation for Economic Education and V. P. Future of Freedom Foundation, the program’s second guest, says the financial industry has always been heavily regulated. When the Fed loosened its policies to keep interest rates low, there was no longer transparency and market forces were then not allowed to dictate interest rates and the Fed’s artificially low interest rates fueled the 2008 bubble.

Fannie Mae and Freddie Mac compounded the problem as they responded to Congressional pressure to loosen credit standards. By ensuring banks they could relax their underwriting standards and Fannie and Freddie would still buy the loans, market dictated risk parameters no longer applied and the banks were off to the races.

Dr. Ebeling believes it was our government agencies, like Fannie and Freddie, that helped undermine the financial market and threw sound ethical decisions out the window. His explanation fits Ms. Jennings layers of ethical issues. Eventually society starts accepting what is going on as everyone else is doing it too.

My soap box all over again. Ethics makes for good business. Yet even though it is talked about at length, codes of conduct are written, classes are taught, accountability-or-else mandates are made, there is still in the financial industry and in other business arenas as well a glaring lack of ethics and egregious lapses of conduct.

If we don’t solve the underlying problems, then ethics don’t matter because there is a payoff, with no consequences, for breaking them. Solutions become almost impossible. I’m with Ms. Jennings- ”I’m getting tired of doing this because it’s the same story over and over again.”

CitiBank Whisteblower Richard Bowen: They’re Back! Fannie and Freddie Ride Again

By Richard Bowen

It looks as if Fannie Mae and Freddie Mac have not learned from their previous enabling of banks leading to the financial crisis. In fact, it looks as if the two are still using the same business model; they are lowering even further their underwriting standards to allow loans to be underwritten, ignoring student, credit card and auto loans supposedly “paid by others.” Didn’t this kind of tactic fail before? 

Their creativity now extends to former college students who are so heavily burdened with student and other debt, so why not excuse the debt? Why not change the rules and allow mortgage lenders to ignore the debt that would prevent many students out of school to not be able to buy homes, cars, etc? Why not put them into more debt, not less and oh, by the way, maybe cripple the economy as they helped do before?!

Fannie Mae has just released new rules allowing millennial borrowers to exclude student loans, credit cards and auto loans that are “paid by someone else” when they are applying for a new mortgage. To further incent, taxpayer subsidized mortgage loans can also now be used to repay student debt.

According to Jonathan Lawless, Vice President of Customer Solutions, Fannie Mae, ”We understand the significant role that a monthly student loan payment plays in a potential home buyer’s consideration to take on a mortgage, and we want to be a part of the solution, …. These new policies provide three flexible payment solutions to future and current homeowners and, in turn, allow lenders to serve more borrowers.”

And, ironically, the person in charge of cleaning up these Wall Street rules is Craig S. Phillips, a former top executive on Morgan Stanley’s trading desk, who is now in charge to head up the effort to reform the Government-Sponsored Entities, Fannie Mae and Freddie Mac. At Morgan Stanley, Mr. Phillips headed a division that sold billions of dollars of toxic mortgages and mortgage-backed securities to Fannie, Freddie, and others.

Just this last April, Gretchen Morgenson of the New York Times wrote in an article that Mr. Phillips, then  leader of Morgan Stanley’s mortgage desk during the peak mortgage-mania years of 2004 and 2005, ran the operation that bundled loans and sold them to the two government-sponsored enterprises and many others. The loans blew up, the government sued Morgan Stanley and Mr. Phillips was a named defendant in the initial case — a case that resulted in the firm paying a $1.25 billion settlement. 

Discussing the financial crisis in December 2008 at the National Press Club, Phillips said he felt terrible about the level of government support of the financial system at that time, but government actions such as injecting capital were “critical because we can’t have systematic failure and a breakdown in all markets.” 

As I commented in a recent article, before the 2008 debacle the push was on to make housing affordable for everyone, and Congress gave directives to loosen the underwriting standards. And, although this was certainly one of the reasons Fannie and Freddie had such catastrophic losses, I strongly believe that the primary reason Fannie and Freddie had the huge losses was that they purchased many, many mortgages which did not even meet that lowered bar of creditworthiness. That is, they did not review the individual mortgages purchased but relied almost solely upon false certifications by the large bank sellers that the mortgages sold met the published standards. 

It was a perfect storm: a lack of controls, the implicit guarantee the government would stand by the loan, and the assumption that the institutions doing the lending wouldn’t go under and were providing true certifications. No one was checking. It was a circus! And still continues to be one!

The more mortgages were purchased, the more incentives went straight to Fannie and Freddie and their executives, until their collapse, when they were bailed out and placed into conservatorshipThen, in a move some have described as nationalizing the entities, the US Treasury started taking all of their profits, thus ensuring they would never be able to rebuild a capital base.

Our country is now faced with the dilemma of what to do with Fannie and Freddie. Should they be recapitalized and returned to private ownership, or should another path more favorable to the large banks be followed?

What to do with Fannie and Freddie is a huge decision now facing President Trump’s administration. Bad enough we’re encouraging – read enabling, those who may not be able to afford more debt to do so. Yet to appoint someone with Mr. Phillips’ less than clean hands to make this decision is a travesty.

Richard Bowen: Is the Fed Really Interested In Protecting Consumers or Is It just Lip Service?

By Richard Bowen, CitiBank Whistleblower

Eric Ben Artzi … is a former risk officer at Deutsche Bank. Mr. Ben-Artzi was one of three former Deutsche Bank employees turned whistleblowers who in 2010-2011 notified regulators of improper accounting at Deutsche. What was discovered resulted in a five-year investigation and a $55 million settlement between Deutsche Bank and the SEC. While Mr. Ben-Artzi was entitled to 15 percent of the award, he publicly rejected the multimillion dollar award. He shines as an example of a whistleblower who truly wants to change the system without any personal monetary or other gratification.

In his most recent post, he reminds us to not let the political upheaval in the U.S. and abroad cloud our judgements and common sense and hide what is still not happening to correct the situation. Government continues to exhibit an abject failure to correct the underlying causes of the “culture that wreaked havoc on the financial system.”

He says, “Fortunately, every now and then a tone-deaf bureaucrat inadvertently reminds us of how far our institutions have strayed from their obligation to serve the public.” His example,  

“William C. Dudley, President and CEO of the Federal Reserve Bank of New York, recently addressed the UK’s Banking Standards Board in London (BSB). Mr. Dudley’s speech capped several years of joint work by the New York Fed and the BSB on the issue of reforming the culture of banking.”

In that speech, Mr. Dudley pointed out a benchmarking survey conducted by the BSB which stated that of the 28,000 or so responders in banking, nearly 30 percent of them were worried about negative consequences if they raised concerns at work. Supposedly this culture of fear is what Mr. Dudley’s Fed and the BSB are attempting to change.

In a previous post, I pointed out how banks retaliate against brokers, employees and others for blowing the whistle, definitely a fixation with me as you might imagine. In that post, we talked about the culture of winks and nods and jobs for the boys, where too many people making bad decisions have gotten where they are for reasons other than excellence.

The culture of fear seems to permeate the financial services industry. Regardless of what steps Mr. Dudley may point out to “fix” the situation, the Fed, the SEC and other regulators and key officials still look the other way. Whom do we, should we believe? The facts frankly say not the Fed and other regulatory agencies.

A prime example of the out of control behavior by our regulatory agencies is the Wells Fargo situation. Comptroller of the Currency Thomas Curry said during a congressional hearing in September, soon after the bank’s $185-million settlement with the OCC and other regulators, that he had ordered a review of the OCC’s supervision of Wells Fargo. Wednesday’s report is the product of that review.

In a recent report, the Office of the Controller of the Currency (OCC) admitted to lax oversight on its part toward Wells Fargo, missing many opportunities to address its wrongdoing. The report goes on to say, “The OCC did not take timely and effective supervisory actions after the bank and the OCC together identified significant issues with complaint management and sales practices.”

This lack of oversight has to date resulted in significant lawsuits and settlements. The report points out that in 2010 the bank examiners met with Carrie Tolstedt,  the former Wells Fargo executive, then in charge of the community banking division which was at the center of the unauthorized accounts scandal.  While the examiners asked about the 700 whistle-blower complaints of workers “gaming” the bank’s sales goal system so they could receive more compensation, after that initial meeting the investigation was dropped. The OCC looked the other way and the fraud continued.

Some lawmakers, including  Rep. Jeb Hensarling (R-Texas), the chairman of the House Financial Services Committee have also asked why the  OCC and the Consumer Financial Protection Bureau had not identified  problems at the bank earlier. A spokesman said Wednesday that it seems clear the agency failed in this case; in just this case!! Really??

“If there was ever a case where consumers needed regulators to protect them, this was it, ”said Jeff Emerson, a spokesperson commenting on the report. “Yet obviously Washington regulators, including the OCC, failed to do their jobs and let the American people down.”

The OCC did confront Carrie Tolstedt, then head of Wells Fargo’s community bank, about the stunning number of whistleblower claims. However, there are no records that show that federal inspectors “investigated the root cause,” or force Wells Fargo to probe it. And the OCC report also says that the Wells Fargo’s board of directors received “regular” reports going back to 2005 indicating that most ethics line complaints and firings were related to sales violations.

Our regulators and that includes the Fed do not have a culture which permits dissent.

In fact, their own retaliation against Fed whistleblower Carmen Segarra, for not going easy on the banks is another example.

The Fed’s actions during and after the financial crisis have raised serious concerns about its leadership’s priorities. It seems that it prefers the financial interests of America’s banking elite over those of the general public. Numerous examples of revolving doors (Mr. Dudley himself is a former Goldman Sachs chief economist) and conflicts of interest have been exposed in the Fed since the financial crisis.

The Fed needs to also be accountable. It has too much of its own dirty laundry; so how can it “fix” others issues?

Whistleblower Richard Bowen: Will Wall Street Soon Be Asking: Where’s Our ROI?

By Richard Bowen

There is no free lunch. Eventually, the chips are called in and someone has to pay. For too long, in the “triangulation war” of citizen versus Wall Street and the government, it’s been the American taxpayer who loses.

Now the debt has increased even further. According to a recent report by Americans for Financial Reform (AFR), during the 2015-16 election cycle, Wall Street banks and financial interests spent more than $2 billion to influence decision making in Washington.  Individuals and entities associated with the financial sector gave $1.2 billion in congressional campaign contributions — more than twice the amount given by any other business sector, according to the study, making the financial sector the largest contributor to federal candidates and parties and the third-largest spender on lobbying.

The findings, which were first reported by Politico’s Ben White, show an average contribution of more than $2.7 million a day, and over $3.7 million per each member of Congress. The report, Wall Street Money in Washington, a 62-page examination of political spending, draws on a special data set compiled by the Center for Responsive Politics for AFR in order to provide a more precise look at financial industry spending than is otherwise possible. As the data cannot include “dark money” that goes unreported, the actual sums of Wall Street spending are surely much higher.

“The entire apparatus of government operates in an environment flooded with millions of dollars in Wall Street cash on a daily basis,” said Lisa Donner, executive director of Americans for Financial Reform. “If you want to understand why finance too often hurts consumers, investors and businesses far from Wall Street, take a look at these numbers.”

The study points out:

“Since 2008, the financial services industry has consistently spent more money on contributions and lobbying than it did before the crisis. According to the report, this election cycle reflects the highest contributions to date. It appears that financial companies spent almost $900 million on lobbying alone.

This all adds up to a lot of Wall Street big time election spending. So shouldn’t we be asking why? Is it possible, AFR asks that “the numbers reflect the industry’s relentless efforts to roll back financial regulations put in place after the crisis, lobby Congress to weaken the rules, and to forestall deeper changes to the financial system?”

Well, what do you think?

The report also breaks out the contributions to members of the Senate Banking Committee and House Financial Services Committee and highlights a set of conspicuously large contributions to members of Congress from a particular financial firm or industry. Individuals and entities associated with
Wells Fargo contributed $14.8 million, with Citigroup spending $13.7 million and Goldman Sachs $12.4 million. 

It’s no secret that Wall Street controlled the last administration and it’s shaping up that it will own this one as well. The increase in lobbying will probably mean even more control over government and regulations – in their favor. Wall Street has already gutted some of the specific parts of Dodd-Frank which directly impacted them, which is just one example of the control they’ve exerted on government. 

Senator Elizabeth Warren (D-MA) has repeatedly warned of the harm Wall Street can inflict and the power many Wall Street institutions have exerted on government. “In virtually every economic policy discussion held in Washington, the point of view of the Wall Street banks is represented – so well represented in fact; it crowds out any other point of view,” said Warren.  

As I said in a previous post, this country is built on the concepts of entrepreneurship, not monopolies who are allowed to have a strategic hold on our government. It’s built on the principles that encourage its citizens to strive to better their circumstances for themselves and their families.

No, there is nothing illegal over Wall Street contributing to this last campaign in record amounts. No, there is nothing illegal in their lobbying. It’s probably not even an ethical issue.

However, it is about accountability. Those who pay feel entitled. They get precedence in the government–Wall Street revolving door. How does one tell the holder of the purse strings:  no, we are not going to do it your way? We are not going to write legislation that so blatantly favors you over other banks and financial organizations. Don’t think so.

Money talks. Paying to play means that it’s possible a financial institution could wield such power over Congress that it can dictate what bills are passed. Such power endangers our economy and the very foundation of democracy on which this country was built.

 Richard Bowen is widely known as the Citigroup whistleblower. As Business Chief Underwriter for Citigroup during the housing bubble financial crisis meltdown, he repeatedly warned Citi executive management and the board about fraudulent behavior within the organization. The company certified poor mortgages as quality mortgages and sold them to Fannie Mae, Freddie Mac and other investors.

Bill Black: A Letter to Warren Buffett and Charlie Munger about Hiring Proven Whistleblowers

Lambert here: One of those sensible measures that just never seems to happen…

By Bill Black, the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. Originally published at New Economic Perspectives.

The Wall Street Journal recently published a summary of a study of “desired director traits.”

A survey of 369 supervisory directors from 12 countries by search and advisory firm Russell Reynolds Associates asked which behaviors they thought are most important to creating a board culture that drives effectiveness and company performance.

The Ideal Director’s Traits

The study found that the five most highly valued traits in a director are, in descending order:

  • Courage
  • Willing to constructively challenge management
  • Sound business judgment
  • Asking the right questions
  • Maintaining an independent perspective and avoiding “group think”

The first two traits are essentially the same – courage. Traits three through five are closely related to each other. The fifth has an element of courage as well, the courage to fend off “group think” and the CEO’s views and maintain an “independent perspective.”

Reality: CEOs Want Directors Who are “Sedated Chihuahuas”

I confess that I do not believe the study about the ideal director. More precisely, I do not believe that CEOs think directors with these traits are ideal. Indeed, I think these are precisely the traits that CEOs most fear. Warren Buffett agrees.

The typical corporation has a compensation committee, and believe me, they don’t ask Dobermans to be on it; rather, they want Chihuahuas who’ve been sedated.

It’s an unequal negotiation [between the board and the CEO]. The CEO really cares, but to the board, it’s play money.

How CEOs Can Prove Me (and Warren Buffett) Wrong

I would love to be proven wrong about the traits that CEOs value in directors. There is a simple, direct manner in which they could prove me wrong. The way that CEOs could prove me wrong would greatly improve the integrity and effectiveness of the firms they run, so this is a win-win-win.

Whistleblowers exemplify each of the five most useful traits. Two of my co-founders of Bank Whistleblowers United (BWU), Richard Bowen and Michael Winston should be among the most heavily recruited people in the world to become board members at Fortune 50 firms if the answers that the directors gave in the survey reflect the true views of CEOs.

Richard Bowen was a Citigroup SVP leading a team of hundreds of loan underwriters. His team found that the lenders selling Citigroup roughly $100 billion in mortgages annually were doing so through fraudulent “reps and warranties.” Citigroup then fraudulently resold the same mortgages, making the same type of reps and warranties about the loans that it knew to be false. Bowen warned Citigroup’s senior managers, including Bob Rubin, of this massive fraud and cautioned that it could create massive liability for Citigroup. Instead of acting to stop the massive fraud on which Bowen blew the whistle, Citi’s management attacked Bowen and ended his career at Citigroup. The fraud incidence grew to 80% because top management refused to heed Bowen’s warnings. Of course, their bonuses also grew because they refused to heed Bowen’s warnings.

Michael Winston was a C-suite level officer at Countrywide who blew the whistle on their loan underwriting fraud to the controlling managers, including the CEO. He warned that the practices would cause catastrophic losses. Countrywide’s (and then Bank of America’s) management destroyed his career at Countrywide and Bank of America.

Recall the top five traits of the ideal director.

  • Courage
  • Willing to constructively challenge management
  • Sound business judgment
  • Asking the right questions
  • Maintaining an independent perspective and avoiding “group think”

Bowen and Winston exemplify courage. They persisted in trying to protect their banks even when they knew that it was leading the bank’s managers to destroy their careers. They “challenged management” “constructively” at the highest level. Their business judgments were correct both in terms of the bank’s safety and soundness and integrity. They blew the whistle because they “asked the right questions” – and acted properly on the answers they got. They were overwhelmed by senior managers who embodied a toxic “group think” that led to harmful and dishonest business practices. Even under immense pressure to conform, including the destruction of their careers, they maintained “an independent perspective.” They spoke truth to power.

Bowen and Winston consistently acted in the best interests of the bank even when they knew that the controlling management was harming the bank in order to benefit the top managers. Lots of managers and directors brag about how tough they are. Bowen and Winston went through the crucible and revealed that their spines were forged out of the strongest and most indestructible of metal alloys formed by that crucible. They do not brag. They simply walk the walk.

CEOs are All Talk About Wanting Courageous Directors

In economics, we are taught to focus on “revealed preferences” – what you actually do, not what you say, reveals your true beliefs. Not a single CEO has asked Bowen and Winston to serve as directors. I am, of course, only using Bowen and Winston as examples of the hundreds of whistleblowers who have proven themselves to be off the charts on these five ideal traits. Like Bowen and Winston, the vast majority of senior financial whistleblowers are unemployable in finance precisely because they exemplify the top five traits directors are supposed to possess.

Will Mr. Buffett and Mr. Munger Reveal Their True Preferences?

In order to recover from their scandals, Wells Fargo and Moody’s desperately need independent directors and senior managers that exemplify these five ideal traits. In both scandals not a single director or top manager displayed the five ideal traits. Warren Buffett’s firm, Berkshire Hathaway, effectively controls both of these firms. Buffett and Charlie Munger, his top colleague who shares Buffett’s disdain for directors who are “sedated Chihuahuas,” can signal (1) that they seriously intend to clean up the scandals at both of the leading firms in the field of finance and (2) will no longer tolerate filling the top managerial and board of directors ranks of both firms with sedated Chihuahuas.

Neither Bowen or Winston will act like a “Doberman.” Both gentlemen have a calm, polite style. Neither seeks to intimidate, much less snarl. But they are people of proven integrity, courage, and skill. They were forced out because they were correct in their warnings and were devoted to the best interests of their firms and their customers. They were forced out because they spoke truth to power.

Mr. Buffett and Mr. Munger, you have enormous accomplishments. It is time to reveal your true preferences and serve as corporate leaders setting a path that is good for firms and whistleblowers. I would be happy to put you in touch with Mr. Bowen and Mr. Winston. You would not be doing them a favor by hiring them for top positions. They have proved their exceptional worth. They are everything you say you want in a senior manager or director. They are your kind of people, and you will be proud, as I am, if you become their colleagues and friends and you will be delighted by the contributions they make. It is a tragic, insane waste to take the people who have demonstrated the ideal traits of managers and directors – and render them unemployable in such roles.

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