Mortgage Servicing Fraud
occurs post loan origination when mortgage servicers use false statements and book-keeping entries, fabricated assignments, forged signatures and utter counterfeit intangible Notes to take a homeowner's property and equity.
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Citigroup Loss Raises Anxiety Over Economy

Published: January 16, 2008
New York Times

Citigroup, the nation’s largest bank, reported a staggering fourth-quarter loss of $9.83 billion on Tuesday and issued a sobering forecast that the housing market and the broader economy still had not bottomed out.

To shore up their financial condition, Citigroup and Merrill Lynch, which has also been rocked by the subprime mortgage debacle, both were forced again to go hat in hand for cash infusions from investors in the United States, Asia and the Middle East, for a combined total of nearly $19.1 billion.

Citigroup’s gloomy news will most likely add to the anxiety of consumers and workers already concerned that the mortgage crisis could plunge the economy into a recession. Adding to worries, the government reported that retail sales in December declined for the first time since 2002.

Growing pessimism led to another sharp sell-off in stocks, which fell about 2 percent for the day and are now down about 6 percent since the beginning of 2008, the third worst start for a year since 1926.

More bad news is coming, with Merrill Lynch expected to report sizable losses this week and major financial institutions like Bank of America retreating from their investment banking business. These moves add to concerns that financial institutions will be forced to pull back on lending at a time the economy most needs access to credit to help cushion against a downturn.

“It looks like the financial sector as a whole will see a big decline in profits, and the only time this happened in the last 100 years — financial firms’ going from making good profits to negative profits — was the Depression in the 1930s,” said Richard Sylla, a professor of financial history at New York University. “I don’t think it will be as bad this time; the Federal Reserve is fighting the problem as hard as it can.”

Just last week, the Federal Reserve chairman, Ben S. Bernanke, said the economy was worsening, bringing widespread hope that the Fed would move swiftly to lower interest rates. Wall Street’s worsening results combined with Mr. Bernanke’s comments will certainly add fuel to the economic stimulus package being debated by the White House, Congress and the central bank.

Citigroup’s record loss was caused by write-downs from soured mortgage-related securities and reserves for current and future bad loans totaling $23.2 billion. Responding to a string of dismal quarters, the bank said it would also lay off another 4,000 workers, on top of announced reductions of 17,000 employees, and cut its dividend to conserve $4.4 billion cash annually.

Citigroup, which earlier raised $7.5 billion from the Abu Dhabi Investment Authority to improve its capital, said it had raised an additional $12.5 billion from a number of investors, including the Government of Singapore Investment Corporation and Citigroup’s former chairman and chief executive, Sanford I. Weill. Citigroup will also offer public investors about $2 billion of newly issued debt securities, a portion of which will be convertible into stock.

At the same time, Merrill Lynch announced it had issued $6.6 billion in preferred stock to the Kuwait Investment Authority, the Korean Investment Corporation, Mizhuo Financial Group, a Japanese bank and other investors, including the New Jersey pension fund and a Saudi investment fund. That is in addition to the $4.4 billion it raised in December from Temasek Holdings of Singapore.

While the banks were able to raise record amounts of cash, they had to circle the globe to get it, and they had to raise it in two separate rounds. There is “a tremendous amount of liquidity in the world,” Mr. Weill said in an interview. “That is witnessed in the amounts of money Citigroup was able to raise in a very short period of time.”

Citigroup, which has a large consumer lending business, sounded some warning bells on Tuesday that the American economy was turning. The bank reported sharp upticks in losses stemming from souring auto, home and credit card loans, with problems coming form the same areas being hit by real estate.

Two-thirds of the credit card losses, for example, occurred in just five states — California, Florida, Illinois, Arizona and Michigan — that have been among those hit hardest by the housing downturn. Gary L. Crittenden, the company’s chief financial officer, acknowledged the bank’s losses appeared to be accelerating month after month.

The banks’ need for additional financing suggests that housing-related problem will persist. Citigroup executives expect house prices around the country will fall, on average, another 6.5 percent to 7 percent.

The news sent the company’s stock tumbling 7.3 percent, to $26.94. It has now fallen about 50 percent in the past year.

The write-downs did not assuage fears in the market that more bad news was coming. “I think the financials will continue to need to raise more money,” said Barry L. Ritholtz, chief executive of Fusion IQ, a quantitative research and asset management firm.

The fear is that financial institutions will continue to take large write-downs as bad loans mount, while consumers, facing higher energy costs, falling house prices and a bleak outlook for job growth, will rein in spending even more than they already have.

Citigroup set aside $4.1 billion for future bad loans, and Mr. Crittenden said the bank is tightening lending standards as credit card defaults increase, a move that could make it harder for consumers to continue the spending that has helped fuel growth in recent years.

Bank of America said on Tuesday that it would lay off 650 people on top of the previously announced 500 and retrench in a number of significant businesses, including certain trading operations and prime brokerage, or servicing hedge funds. Kenneth D. Lewis, its chairman and chief executive, sounded a somber note about the markets.

“I am not sure there are any quick fixes,” he said in a meeting with reporters. “Only time and a little more pain will be the answer.”

Adding concern to the outlook is the significant role that financial service companies have come to play on the back of robust growth. From 1995 through 2006, financial service companies represented 17.8 percent of the Standard & Poor’s 500 index and contributed a whopping 25.1 percent of total earnings. No longer.

Including Citibank’s large fourth-quarter write-down, financial service companies constituted roughly 7 percent of total fourth-quarter earnings, according to Howard Silverblatt, senior index analyst at Standard & Poor’s.

For a sense of how steep the fall has been, Mr. Silverblatt pointed out that for the fourth quarter, earnings for all companies in the index fell 11.2 percent. But taking out financials, the index was up almost 11 percent.

Mr. Ritholtz from Fusion IQ is watching carefully to determine if weakness in consumer spending is psychological and temporary or more severe, stemming from a lack of available capital.

“Lending is a function of trust — trust that people will pay back what they borrow,” he said. “The problem with the banks is that they don’t trust their clients or each other.”

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More Losses To Come

One of the more telling things about CitiCorp's reported $18 billion mortgage writedown is the fact that it seems to refelct an INABILITY by CitiCorp to locate sufficient new capital to cover the capital impairment that would have arisen if it had FULLY written down its subprime MBS exposure to date.

When a depository financial institution suffers such a significant capital impairment, it faces two choises.  It can obtain new capital or it can SHRINK its assets and liabilities.  Without NEW CAPITAL, the institution must conduct a fire sale of assets, while giving depositors and other holders of its liabilities back their money.  Selling assets in distress usually both fuels new losses (due to the distress prices) and the realization / recognition of unrealized losses as assets carried on the books at cost or some inflated basis are disposed of at new lower market prices.  

CitiCorp was apparently scrambling to to find capital to cover a $24 billion writedown of subprime mortgage exposure.  But when it couldn't FIND enough capital, it seems to have ELECTED to write down a smaller amount.

That, of course, means that NEXT QUARTER, they still have at least another $6 billion to write off, BEFORE the realization of additional mortgage losses.  Of course, what started as a subprime problem is contributing to a generally downward spiral in houseing prices.  This in turn means that prime mortgage MBS issues are going to start to sour.  Moreover, as primary mortgage insurers and bond pool insurers begin to FAIL, the sea of red ink in prime mortgages will quick ECLIPSE the losses to date associated with the sbprime crisis.

Look for CitiCorp to write off at least $6 to $10 billion MORE THIS QUARTER with additional even HEAVIER LOSSES later in the year.  The recognition and realization of those larger losses seems likely to be a bridge to far, even for a global concern like CitiCorp!  
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