Opposition to Citigroup Banamex
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Click here for more general Citigroup Watch; for or with more information, contact us.
ICP has published a (double) book on the topic of predatory lending. The Pittsburgh City Paper of Dec. 11, 2003, says that the "novel Predatory Bender: A Story of Subprime Finance may, in fact, be the first great American lending malfeasance novel," and mentions CitiFinancial. Click here for that review; click here for sample chapters, an interactive map, and ordering information.]
May 27, 2004 update: vindicating many of ICP's assertions, on May 27, 2004, the Federal Reserve announced a cease-and-desist order against CitiFinancial, for predatory lending and for what the Fed refers to as "misleading examiners" -- basically, as documented by ICP in real time throughout the Web site, Citigroup told employees to lie, threatened to sue whistleblowing employees, and tried to hide and shred documents. Click here for the Fed's 5/27/04 press release, click here for a PDF of the Fed's 14 page order; click here for ICP's current CitiWatch report (the May 27, 2004 Update describes how the world's biggest bank is still run by predatory lenders, document shredders, silencers of whistleblowers....For or with more information, contact us.
...On May 17, 2001, the chief executive of the largest bank in the United States, Citigroup, appeared at a press conference in Mexico City, to announced Citigroup's $12.5 billion proposed acquisition of Banacci / Banamex, the second largest bank in Mexico. Combined with Citigroup's Confia operation, Citigroup would control 26.4% of the Mexican banking market, and over 21% of all Mexican bank accounts. On June 1, Citigroup stated that it had already submitted its required application to the U.S. Federal Reserve Board, and would soon be applying to other agencies.
On June 4, 2001, Inner City Press / Community on the Move and its affiliates (ICP) filed comments opposing Citigroup's applications, with the Federal Reserve Board, the California Commissioner of Financial Institutions, the Mexican National Banking and Securities Commission, and regulators in Argentina, the Cayman Islands, Bahamas and the United Kingdom. ICP's comment to the Federal Reserve is summarized below. See also, "Consumer Group Challenges Citigroup's Banacci Deal," Reuters, June 4, 2001; "Ex-Citigroup Worker Alleges Illegal Lending Norms," Reuters U.S., June 15, 2001 (click here for Reuters Mexico version, in Spanish).
As recounted below, on July 16, after several last-minute amendments of the application by Citigroup, the Federal Reserve Board approved the application, ignoring sworn allegations of predatory lending by an ex-CitiFinancial employee, that were timely submitted to the Fed on July 9, 2001. See, e.g., "Fed Clears Citigroup Buy of Banacci," by Andrew Clark, Reuters, July 16, 2001. We call it a "shameful capitulation" - and explain why, below. For or with more information, contact us.
Update of August 20, 2001: On August 17, the Federal Reserve Board denied ICP's July 29 request that the Fed reconsider its approval of Citigroup - Banamex. The denial came in the form of a seven-page letter from the Board's Deputy Secretary Robert deV Frierson. Mr. Frierson writes that
The members of the Board have carefully considered your request... You assert that your request raises several matters that were not presented to the Board during the comment period. These matters include the following:
--You claim that, since the Citigroup/Banacci Order was issued, various media sources have reported that (i) Citigroup has partially corroborated certain consumer-compliance-related allegations made by Vincent Toomey, a former loan officer of Citigroup's subprime lending subsidiary, CitiFinancial Credit Company ("CitiFinancial"); and (ii) Citigroup's outside counsel has met with some present and former CitiFinancial employees regarding nondisparagement clauses in agreements between CitiFinancial and the employees to prevent disclosure of adverse information about CitiFinancial. [FRB footnote: You assert that the Board should have required Citigroup to discuss on the record of the proposal the substance of the allegations by Mr. Toomey and its use of nondisparagement clauses and that the Citigroup/Banacci Order should have included a more detailed discussion of these two matters]. [ICP footnote -- it's STEVEN Toomey, not "Vincent" Toomey, as the affidavit ICP submitted clearly reflects. So much for "careful consideration"...].
--You believe that Citigroup's July 12, 2001, amendment to the structure of its proposed acquisition of Banacci should have been subject to the notice and comment provisions of the Bank Holding Company Act ("BHC Act").
--You argue that the Board should not have acted on this proposal until it had conducted the examination of CitiFinancial's subprime lending activities that was announced in the Board's approval of Citigroup's acquisition of European American Bank ("EAB"). You also criticize the Board's decision to consider the case before the initial 60-day processing period expired.
--You claim that, since the close of the comment period for this proposal, ICP has received material indicating that Board or Federal Reserve System ("System") staff did not comply fully with the Board's ex parte policy during the processing of Citigroup's proposal.
With regard to the first matter, the Board carefully considered the substance of Mr. Toomey's allegations before it acted on Citigroup's proposal. [FRB footnote: ICP made Mr. Toomey's statement a part of the record on July 9, 2001. Mr. Toomey's statement was considered in the convenience and needs analysis in the Citigroup/Banacci Order. See Citigroup/Banacci Order, footnote 45]. [ICP footnote: the only reference therein is to "concerns about...matters raised in affidavits or statements by former or current employees of these subsidiaries," then a reference to "the affidavit of a former CitiFinancial employee filed in the FTC litigation." Apparently Mr. Frierson is saying that the use of the plural ("affidavits") and then the singular ("affidavit") means that the second affidavit, Mr. Toomey's, was "carefully considered"...].
Mr. Frierson's letter goes on to state that the Fed's "examination will include an interview of Mr. Toomey if he is available." Great -- more than six weeks after the affidavit was submitted, and after Citigroup has conducted interviews and more... Mr. Frierson continues:
You also request reconsideration in light of press reports that Citigroup's outside counsel recently met with some present and former CitiFinancial employees to discuss adherence by the employees to the nondisparagement clauses in their agreements. According to these press reports, the nondisparagement clauses prohibit employees from making derogatory statements about CitiFinancial. Citigroup reportedly had denied allegations made in press articles and by ICP that the purpose of the meetings between its outside counsel and the present and former CitiFinancial employees was to intimidate or frighten the employees into silence, noting that the nondisparagement clauses are standard industry practice and that the clauses do not prevent employees from reporting concerns about allegedly unethical or illegal activities. The impending examination of CitiFinancial discussed above will include a review of these alleged contractual agreements.
First, the lifelong "nondisparagement clauses" have no exemption for reporting concerns of unethical or illegal activities. The agreement simply provide that they extends as far as permitted by law -- meaning, presumably, that if an individual was subpoenaed to provide evidence, it would not violate the agreement. But a person would and could not be subpoenaed until they voluntarily "reported" their concern -- which would violate the terms of CitiFinancial's gag orders. Second, the gag orders that ICP quoted to the Fed are by no means "standard industry practice," as ICP has been informed by others in the subprime lending industry. The Fed could easily have asked: did ex-Citigroup employees John Reed or Bob Lipp sign anything like this? We doubt it... Third, the time for the Fed to have "review[ed] these alleged contractual agreements" was before giving Citigroup an approval to acquire the second-largest bank in Mexico, and to expand CitiFinancial there. Given the Fed's past and recent practice, it is difficult to have much confidence in this "impending examination" -- adverse findings would remain confidential, any positive findings would be trumpeted by the Fed in future Citigroup approval orders.
The largest bank in the United States (and now, in the world) is acquiring one problematic business after another. The Fed rubberstamps the acquisitions, but stands ready, if the past is any guide, to cover up or bail out any ensuing problems. Where's it all headed? Time will tell. ICP's weekly updated continue, on the ongoing Citigroup Watch page...
Update of August 13, 2001: In Mexico City on August 6, Banamex' Manuel Medina set out a timetable: "In early 2002 we want to be able to offer our clients services and products as a combined group, bringing together the best of both organizations and a totally integrated branch network and client attention." On August 8 (Zapata's birthday), bombs went off at five branches of Banamex. The Financial Times (8/10) quotes a Mexico City analyst that "there is a sense that Mexico has sold off its financial system and this is causing a great deal of resentment"....
The U.S. Federal Reserve Board last week mailed Inner City Press a memo, dated July 28, reciting a telephone conversation that Board staff had with Citigroup's lawyers on July 16 (the day the Board approved Citigroup - Banamex). According to the late-provided memo, Board staff "asked how Citigroup proposed to structure its indirect investment in Avantel, in light of the announcement... that Banamex must divest its controlling interest in Avantel within 90 days if Citigroup acquires control of Banacci." These memos must be provided to commenters, under the Board's ex parte rules. But here, the Fed "memorialized" its conversation with Citigroup twelve days after it happened, and mailed the memo out noticeably later than that -- after the underlying deal had been consummated....ICP's weekly updated continue, on the ongoing Citigroup Watch page..
Update of August 6, 2001: On August 3, Citigroup "consummated" its acquisition of Banamex. The fast time-table was attributable to the U.S. Federal Reserve Board's "shameless capitulation" to Citigroup -- disregarding timely comments and evidence submitted in opposition to the deal, approving Citigroup's application in a mere 45 days (compared to 60 days and more in other cases, including smaller deals with fewer issues raised in opposition). When the Fed approved Citigroup's application on July 16, it informed ICP and other commenters that they could request reconsideration of the approval, within 15 days. ICP submitted such a request, summarized below, on July 30, 2001. The request for reconsideration noted to the Fed that Citigroup had, since the Fed's approval, "corroborated" at least two allegations in an affidavit by ex-CitiFinancial employee Steve Toomey, which described systemic predatory lending and consumer compliance violations at CitiFinancial. But ICP has not heard anything back from the Fed; Citigroup went ahead and consummated the deal on the first day it could. There will be other battles -- ICP's weekly updated continue, on the ongoing Citigroup Watch page... For or with more information, contact us.
Update of July 30, 2001: When the Federal Reserve Board approved Citi - Banamex on July 16, it informed ICP and other commenters that requests could be made, for the next fifteen days, that the FRB "reconsider" its approval. The Fed's standard for such requests is "relevant facts that, for good cause shown, were not previously presented to the Board." In this case, several relevant facts have emerged since July 16. Citigroup has had to acknowledge that it has "corroborated" at least two of the allegations in the July 8 affidavit of ex-CitiFinancial employee Steven Toomey. As noted below, a CitiFinancial supervisor named in Mr. Toomey's affidavit as encouraging -- no, requiring -- predatory lending "resigned" on July 25. And new facts have emerged about the gag orders that Citigroup has required ex-CitiFinancial employees to sign, and about Citigroup's investigation / intimidation mission to South Carolina. So, on July 30, ICP filed a request for reconsideration, summarized below:
[ICP's July 29 request for reconsideration filed with the Federal Reserve Board:]
July
29, 2001
Board of Governors of the Federal Reserve System
Attn: Ms. Jennifer J. Johnson, Secretary and Governors
20th Street and Constitution Avenue, N.W.
Washington, DC 20551
Dear Secretary Johnson, Governors:
On behalf of Inner City Press/Community on the Move and its members and affiliates, including the Inner City Public Interest Law Center (collectively hereinbelow, "ICP"), this letter is a timely request for reconsideration of the Federal Reserve Board’s (the "FRB’s") July 16, 2001, Order approving the Applications and notices of Citigroup, Inc. (along with its affiliates, "Citigroup") to acquire Grupo Financiero Banamex Accival, S.A. de C.V., and its affiliates, including California Commerce Bank ("CCB;" collectively, "Banamex").
ICP will begin by directly addressing the standard that the FRB applies to such requests: "present relevant facts that, for good cause shown, were not previously presented to the Board." 12 C.F.R. §262.3(k).
In a timely July 9 submission, ICP submitted a sworn affidavit from an individual who worked at CitiFinancial until May 24, 2001: Steven Toomey. Whereas the FRB had, in the Citi-EAB proceeding, asked Citigroup questions about its inquiry into the affidavit of Gail Kubiniec, which ICP submitted into the Citi-EAB record on June 15, 2001, the FRB never asked Citigroup ANY questions about the Toomey affidavit, which inter alia alleged under oath routine violations of RESPA, pervasive forgery of borrowers' signatures and falsification of borrowers files, directives from management not to disclose interest rates or fees to borrowers, and which directly contradicted Citigroup's June 20, 2001, submission to the FRB regarding its purported safeguards (auditors, Ethics Hotline, Maestro computer system, etc.). As discussed below, ICP infers that the FRB never asked Citigroup about these timely, sworn allegations because the FRB had already committed to Citigroup to give it an unprecedently fast approval on its Banamex proposal, 15 days before the expiration of Citigroup's tender offer on August 2, 2001.
ICP made the FRB aware of "gag orders" that Citigroup had sought and obtained from ex-CitiFinancial employees. This issue is not mentioned in the FRB's Banamex Order, and ICP is not aware of the FRB taking any action on this troubling issue.
As "relevant facts that, for good cause shown, were not previously presented to the Board," consider (and incorporate into the record on this request) the following:
The American Banker of July 30, 2001, at 4 ("Citi Corroborates Two Allegations," by Rob Garver), reports:
Citigroup Inc. has acknowledged that at least some of a former employee's claims of unfair lending practices at its subprime unit, CitiFinancial Mortgage, have been confirmed.
The allegations, in an affidavit signed by former loan officer Steven Toomey, are that at least one Charleston, S.C., CitiFinancial office had a policy of not giving borrowers legally required disclosures in a timely manner, that employees there regularly forged borrowers' signatures on legal documents, and that loan officers were instructed to avoid telling potential borrowers about points and fees on loans.
In response to repeated phone and e-mail requests for comment, Citigroup spokeswoman Leah Johnson issued a statement Thursday that reads in part: "We interviewed Mr. Toomey, and among the many allegations he described, we were able to corroborate only two isolated incidents and have taken appropriate corrective action."
She would not answer questions about what specific activities had been corroborated or what corrective action had been taken. However, Ms. Johnson confirmed that Citigroup had accepted the resignation of a manager mentioned in the Toomey affidavit, Tim Delapaz, on July 25.
Clearly, Citigroup's acknowledgement that at least two of Mr. Toomey's allegations are true is a "relevant fact;" it could not have been previously presented, because Citigroup only acknowledged this fact on July 26. As an aside, ICP believes it is shameful that the FRB did not ask Citigroup any questions regarding the Toomey affidavit, which ICP timely submitted in opposition to Citigroup's Banamex application.
It is imperative that the FRB suspend its July 16 approval order, and not allow Citigroup to move forward thereon, until this relevant, timely raised issue is resolved. The FRB should direct Citigroup to respond to questions on this issues, at a minimum:
--WHICH TWO of Mr. Toomey's sworn allegations did Citigroup corroborate?
--Why was Mr. Delapaz fired, or asked to resign?
--Was Mr. Delapaz asked to sign a gag order?
--Has Citigroup's review exonerated Mr. Delapaz's supervisor (also named in the timely submitted Toomey affidavit) Steve Diubaldo?
--Why was no action taken on employees' "Ethics Hotline" complaints in April and May? (Questions should also be asked about the troubling and unresolved gag order issue, see infra).
The FRB's questions, and Citigroup's responses, should be provided to ICP, other commenters, and the public.
Also, facts around the "gag order" issue have developed since July 16. Reuters of July 27 (reprinted in Newsday and the Houston Chronicle of July 28) reported:
Ettinger last week met with at least 15 current and former CitiFinancial employees to remind them of agreements to keep quiet about their employer, leaving many of them frightened, according to... one of the people interviewed by Ettinger's legal team....
Ettinger, who did not return phone calls to his office, impressed on former workers that Citigroup will enforce so-called non-disparagement clauses, which keep employees from making derogatory statements about the company, according to the person who was questioned by Ettinger's legal team...
Citigroup's actions are designed to prevent potentially damaging statements like the affidavit filed by a former part-time CitiFinancial branch manager, Gail Kubiniec, Lee said. Kubiniec's affidavit, which surfaced in June, is part of the FTC's case against Citigroup and alleged that CitiFinancial preyed on poor people and minorities.
Citigroup, which has objected vehemently to Kubiniec's allegations, denied its outside counsel did anything improper. The company also said the non-disparagement clauses are standard and don't prevent employees from reporting illegal activities.
``Our outside counsel conducted a proper and thorough review. No one was threatened with criminal action,'' said Citigroup spokeswoman Leah Johnson.
``Our severance agreements, like those of most companies, include a standard non-disparagement clause,'' she added. ``Because of our desire to assure that our stringent standards of conduct are upheld, such clauses at CitiFinancial never apply to employees bringing any concerns about illegal or unethical activity they believe they have witnessed to the appropriate authorities inside and outside the company.''
Ettinger has a ``very folksy'' manner but played up his impressive resume to those he interviewed when he visited Charleston and Columbia, South Carolina, said one of the people Ettinger's team interviewed. Ettinger encouraged them to search the Internet to find out about him, the source said.
``He wanted everybody to know that he was the lawyer on the Paula Jones case and invited everybody to check him out so they would know who they were dealing with, trying to intimidate them,'' the source said. ``It's like David and Goliath. He let (people) know that if you do stray from any agreements that you're going to be up against the full resources of a trillion dollar company.''
See http://biz.yahoo.com/rf/010727/n2534263.html, emphasis added.
Again, ICP asserts that it was shameful that the FRB did not immediately ask Citigroup questions regarding these gag orders, once the issue was raised to the FRB in the week beginning July 16, 2001. The gag orders prohibit ex-CitiFinancial employees from making
any statement to any person regarding the Company and its agents of a derogatory nature or which disparage the reputation, business or integrity of the Company or any of the executives or employees of the Company.
ICP raised the issue to Citigroup's "Global Community Relations" division in letters dated July 15 and July 22, and has yet to receive a direct response. In light of Citigroup's spokeswoman above-quoted response, the FRB must now (in connection with this request, and with suspending the approval order) ask Citigroup a number of questions, including without limitation:
--are all Citigroup employees required, as a part of "severance," to sign a similarly-worded, life-long non-disparagement agreement? Did John Reed sign such an agreement? Did Robert Lipp? Did Richard Goldman, who just left Citigroup Asset Management to take over the Guardian Park Avenue Fund?
--How, as Citigroup now publicly claims, are ex-CitiFinancial employees informed of Citigroup's position that "such clauses at CitiFinancial never apply to employees bringing any concerns about illegal or unethical activity they believe they have witnessed to the appropriate authorities inside and outside the company"?
-- In conducting its South Carolina "investigation," did a Citigroup's "investigator" pointed ask ex-CitiFinancial employees where they work now, and about their personal social lives? If so, why?
--In conducting its South Carolina "investigation," did Citigroup's counsel threaten to sue ex-employees under the above-quoted life-long non-disparagement clause? Etc..
The above-recounted gag order (and intimidation) issue is clearly relevant, and the facts surrounding Citigroup's investigation / intimidation mission to South Carolina following the timely submission of the Toomey affidavit have only developed since July 16, 2001. The FRB should suspend its Banamex approval order, and conduct an appropriate inquiry.
The Governors, or the FRB staff members who drafted and presented the Banamex Order to the Governor, appear to have believed that the statement in the July 2 Citi-EAB order that the FRB would be conducting an examination of CitiFinancial was somehow "enough," regardless of what information came in during the Banamex comment period. That the FRB asked Citigroup no questions after July 6 (when the comment period remained open until, and material adverse information was submitted on, July 9) -- makes mockery of the purpose of the FRB's comment periods, and calls into question the FRB's compliance with its statutory duties.
The gag order issue, and the FRB's failure to take action thereon, raises serious doubts about the examination of CitiFinancial that the FRB announced in its July 2 EAB Order. If recent CitiFinancial employees with personal knowledge of illegal practices are gagged by Citigroup (and threatened with expensive litigation under the gag orders), the FRB is deprived of material information, and the results of its exam are called into question.
As ICP raised to Board staff on July 13, that day ICP received on an inexplicably delayed basis a copy of a June 11 memorandum summarizing a June 5 ex parte meeting between FRB staff and Citigroup. Furthermore, ICP has since received documentation of another meeting, held June 8 at the office of the FRBNY (involving Robert O'Sullivan, Prasana Haran and Roland Gerrard of FRS staff, and Banamex representatives including Guillermo Jiminez Sepulveda). ICP was never notified of, or provided with any summary of, this meeting. And the FRB's accepting of Citigroup's July 12 radical amendment of the proposal, without notifying or allowing comment from ICP and other timely commenters, made a mockery of the review process...
For the record, ICP immediately opposed Citigroup's late-proposed amendments to its applications, and objected to the lack of notice: we received copies of Citigroup's amendments on July 13, after the Board had, on July 12, scheduled action on the suddenly amended proposal on July 16...
ICP notes that the FRB withheld notes taken at the FRB's meeting(s) with Citigroup, and claimed that it could identify no communications between Mr. Small and Citigroup. On the ongoing predatory lending front, ICP is annexing hereto the HUD-1 and Disclosure Statement from a CitiFinancial loan made in June 2001, in which the Finance Charge, to obtain $77,000, is over $92,000. There's a purported "Loan Discount" fee of 400 basis points, of nearly $3,000. These June 2001 CitiFinancial practices should be inquired into in light of the timely-submitted Toomey affidavit, and otherwise.
ICP disagrees with many of the Board's other "conclusions" in its Banamex Order. But ICP is focusing this request on the above-recounted relevant issues that, for the good cause shown, were not previously presented to the Board. On the grounds stated, the Board should forthwith suspend its July 16 Citi-Banamex order, and conduct an appropriate inquiry into the above-recounted matters. If you have any questions, please telephone me at (718) 716-3540. Thank you for your attention.
Respectfully submitted,
Matthew Lee, Esq.
Executive Director
Update of July 23, 2001: ICP's inquiry into the CitiFinancial gag orders reported below, and other issues, continues, on ICP's CitiWatch page. In connection with its Banamex proposal, Citigroup is now using a technique it fine-tuned in the United States: getting regulatory agencies to waive provisions of law, for long enough for Citigroup to lobby (that is, pay) to have the law changed. It happened in the U.S., with the Federal Reserve Board's 1998 approval of the Citicorp - Travelers merger (the Fed gave Citi 2 years to have the Glass-Steagall Act repealed, which was accomplished, after millions in campaign contributions, in 1999). Among Citi's problems in Mexico is how to hold on to the telecommunications company Avantel, which is 45% owned by U.S.-based WorldCom, and 55% owned by Banamex, which Citigroup is buying. Mexican law prohibits foreign stakes of over 50% in telecommunications companies - Avantel would be 100% owned by companies based in the U.S.. But on July 17, Banamex president Roberto Hernandez told reporters that Mexican authorities were "allowing Banacci to break the rules for a period while it figured out a scheme that would work." The regulator who's allowing Citigroup to "break the rules" is Jorge Nicolin, president of the Federal Telecommunications Commission (Cofetel), who has said that the Mexican Congress will "have the last word on whether the rules on foreign majority ownership could be modified." Let the campaign contributions begin!
While the Federal Reserve shamelessly dole out a favor to Citigroup in approving its suddenly-amended Banamex application on July 16 (ICP will be petitioning for reconsideration on or before July 30, pursuant to the Fed's rules), sources tell ICP that California legislators are moving to hold a hearing on the proposal. While Citigroup continues to publicly state it anticipates closing the deal "in the fourth quarter," we're expecting it on August 2: the moment Citigroup gets listed on the Mexican stock exchange, and completes its tender offer for Banacci's shares. The Fed's decision to allow Citigroup to "temporarily suspend" many of its Banamex-related requests, until after it closes the deal, was among the many outrages in this proceeding... The CitiWatch continues...For or with more information, contact us.
Update of July 16-17, 2001: At 5 p.m. on July 16, the Federal Reserve Board announced it had approved Citigroup's applications to acquire Banamex. While the Fed takes 60 or more days to rule on most challenged merger applications, including of miniscule banks which operate in a single county, in this case the Fed gave Citigroup approval less than two months after the deal was announced, and less than 45 days after Citigroup submitted its application. The Fed's approval order recites that there were 80 timely commenters on the application: all in opposition. It should be noted that on a merger with fewer protesters -- Wells Fargo / Norwest in 1998 -- the Fed granted a public hearing, and spent several months reviewing the deal. As analyzed in more detail below on this page, the Fed has capitulated to Citigroup; or, the agendas of the two organizations are so similar that they have become collaborators, rather than regulator and regulated.
The Fed's 37-page approval Order defers almost entirely to the Fed's July 2 approval of Citigroup's smaller deal to acquire European American Bank. On issue after issue, the new Fed order states that the matter was previously considered in connection with Citi-EAB. Footnote 45, for example, states that
Commenters have expressed various concerns about the lending practices of Associates and other subsidiaries of Citigroup, including matters related to the sale of insurance, matters raised in affidavits or statements by former or current employees of those subsidiaries, and concerns about the foreclosure practices of these subsidiaries. In connection with the Board's recent review of the proposed acquisition by Citigroup of EAB, the Board carefully and extensively considered these concerns, including information provided by commenters and the affidavit of a former CitiFinancial employee filed in the FTC litigation. Commenters have provided no additional information that warrants a change in the Board's findings on these matters in the Citigroup/EAB Order. As discussed in that Order and below, the Board will conduct an examination of CitiFinancial pursuant to its supervisory authority.
This statement ignores (and we'll explain why) the detailed affidavit of ex-CitiFinancial employee Steven Toomey, which ICP submitted to the Fed on July 9, while the comment period on Citi - Banamex was still open. Mr. Toomey's affidavit -- which even Citigroup apparently acknowledges is material, given that Citigroup has since July 9 sent several $400 an hour lawyers down to South Carolina to investigate (some say, intimidate) -- is quoted below on this page. So: why did the Fed ignore this affidavit, in rushing to approve Citigroup's Banamex application on July 16?
Here's a timeline: the Fed only asked Citigroup one round of "Additional Information" questions, in connection with Citi's Banamex application (this compares to over ten rounds of questions, on Citi-EAB). The Fed's only question-letter to Citigroup was sent on Friday, July 6: while the comment period was still open. The comment period was set to run until the close of business on Monday, July 9. On the evening of Sunday, July 8, ICP faxed Mr. Toomey's affidavit to the Fed, as a timely supplemental comment. ICP inquired to make sure the Fed had received it, and acknowledged it as timely: it had. But the Fed never sent a second Additional Information letter to Citigroup, to require a response to this timely-raised adverse issue. Why?
Well, on the first week of July, Citigroup learned that it had received approvals from Mexican regulators more quickly than it had expected. Citigroup needed approval from a listing on the Mexican stock exchange, the Bolsa, so that it could make a tender offer for Banacci's outstanding shares, and make the deal tax-free. The moment it received these approvals, Citigroup began a formal tender offer, which would expire by its terms on August 2. But Citigroup had not basis to expect U.S. Federal Reserve Board approval before then. In fact, the Fed's letter to Citigroup acknowledging receipt of the application said that a decision would be expected on August 2. Fed approval orders impose a 15 day "waiting period," for antitrust litigation purposes. So Citigroup would need a Fed approval at least 15 days before August 2 -- that is, on or before July 17.
It seems clear that Citigroup and its counsel contacted the Fed, ex parte, and asked what it would take, to obtain an unprecedentedly fast approval, before July 17. On July 12, Citigroup submitted a letter amending its application, "temporarily suspending" portions of it on which the Fed would be unable to rule before July 17. ICP and other commenters only received a copy of this amendment letter on July 13: after the Fed had already placed Citigroup's Banamex application on its agenda for July 16.
It was because of the Fed's rush to accommodate Citigroup that the Fed never asked Citigroup any questions whatsoever about the detailed affidavit of ex-CitiFinancial employee Steve Toomey, timely submitted on July 9. The Fed failure to inquire can be contrasted to its response to the affidavit of another ex-CitiFinancial employee, Gail Kubiniec. ICP obtained a copy of this affidavit from the New York Banking Department in mid-June, and distributed it to the Federal Reserve and others. The American Banker and Reuters ran articles, quoting Citigroup that it had investigated the claims. The Fed immediately -- on the next business day -- asked Citigroup to describe in detail its investigation of the claims in the affidavit.
In this case, ICP timely submitted Mr. Toomey affidivit, which directly contradicts claims Citigroup made in response to the Fed's questions about Citi's investigation of Gail Kubiniec's affidavit. The American Banker ran an article about the affidavit, on July 10, quoting Citigroup maligning Mr. Toomey and/or his motives. The Fed, however, never asked Citigroup a single question about the affidavit, or Citigroup's response. In fact, ICP last week made the Fed aware that Citigroup has been seeking and obtaining "gag agreements" from ex-CitiFinancial employees -- an issue potential more explosive, and troubling, that the contents of Gail Kubiniec's affidavit. But, apparently, it was too late (for the Fed). The Fed had already decided to accommodate Citigroup with a fast approval of its applications to acquire Banamex.
A question has arisen: while the Fed says it will be conducting a "thorough examination" of CitiFinancial, why would current or former employees of CitiFinancial, with personal knowledge of the company's practices, have confidence that the Fed is taking these issues seriously, would act on their testimony, and would ensure that Citigroup does not retaliate against them, for "disparaging" the company? The Fed's dismissal, in its July 16 Order and the process leading up to it, of serious charges timely submitted under oath on July 9, raises questions about the Fed's objectivity and/or seriousness in conducting this examination of CitiFinancial. It is a sad state of affairs, one that portends harm not only to consumers, but to the Fed's credibility -- including on monetary policy, if any of those rate-predictors take a close look at this... There will, of course, be many next steps -- to be updated on ICP's ongoing CitiWatch Report.
Update of July 15, 2001: In the week following ICP's July 9 submission of the sworn affidavit of ex-CitiFinancial employee Steve Toomey, Citigroup sent a team of auditors and lawyers down to South Carolina, purportedly to investigate Mr. Toomey's sworn allegations of predatory lending. To date, Citigroup has cautiously declined to deny Mr. Toomey's statements (see, e.g., American Banker of July 10). ICP is monitoring Citigroup's fast-moving "flying squad," and has made the Federal Reserve Board aware that Citigroup, since acquiring Associates First Capital Corp. on November 30, 2000, has sought and obtained "gag orders" from ex-CitiFinancial employees. Experts consulted by ICP indicate that these gag orders raises issues of "obstruction of the regulatory process," or even obstruction of justice, given the Federal Trade Commission's pending predatory lending lawsuit against Citigroup. But --
On July 12, Citigroup suddenly radically amended its applications to the Federal Reserve Board to acquire Banamex. Citigroup's July 12 letter to the Fed recites that
Citigroup has begun its tender offer for Banacci shares, subject to the receipt of remaining regulatory approvals. That offer will expire on Thursday, August 2, 2001, and, provided that all pending regulatory approvals have been received, Citigroup will promptly close the transaction... In order to expedite the Board's consideration of the Notice, Citigroup has determined to make a change in the post-acquisition reorganization of Banacci for the purpose of streamlining the approvals it is seeking and thereby expediting the prompt consideration of the Notice...
For the time being, following the acquisition of Banacci, Citigroup will continue to own Banacci and will not cause Banamex to be transferred to COIC. Citigroup expects that in the near future it will seek to secure approval to complete the transfer of Banacci and Banamex from Citigroup to COIC. (As discussed with Federal Reserve staff, Citigroup is considering withdrawing its request to transfer Banacci and Banamex to Citibank South Dakota).... COIC hereby temporarily suspends its participation in the Notice. Citigroup continues to request the Federal Reserve to approve the Share Purchase (to be followed by steps 2a and 2b of the Transactions), but temporarily suspends its request for approval of the remaining steps of the Transactions. Citigroup hereby amends the Notice to temporarily suspend all requests for Federal Reserve approval under Regulation K other than for approvals needed to acquire the shares of Banamex and its subsidiaries including Afore B/A, Ban Sud, and Avantel... Avantel will subsequently be "split off" from Banamex and held pursuant to Section 4(k) of the Bank Holding Company Act. Under the authority of Section 4(k), Citicorp, as a financial holding company, may acquire these companies without seeking the Board's prior approval. Citigroup temporarily suspends its request for a waiver of Section 23A of the Federal Reserve Act. Citigroup also withdraws its request for authority to maintain a larger portfolio of Mexican government securities than that allowed by the lending limit rules.
Can you say... the fix is in? It's totally improper: Citigroup has been having ex parte discussions with Fed staffers, on what it would take to convince the Fed, as yet another favor to Citigroup, to approval the heart of the Citigroup - Banacci proposal on an unprecedentedly fast time frame: 45 days after the submission of the application. The Fed took more than four months to review a smaller proposal, Citigroup's application to acquire European American Bank (deal announced February 12, 2001, acted on by the Federal Reserve on July 2, 2001). In the current First Union - Wachovia proceeding, the Fed has granted SunTrust's counsel (the same as Citigroup's: Skadden Arps) extensions of the comment period on First Union's application. But the Fed's willingness to do favors for Citigroup knows no bounds. On July 12 - the same day as Citigroup submitted the above-quoted "amendments" to its Banacci applications -- the Fed put Citi-Banacci on its agenda for action on Monday, July 16. Outrageous....This will be updated.
Citigroup is asking for similar regulatory favors in Mexico. Last week, Citi "approached" Mexico's telecoms regulator Cofetel with a proposal that would allow it to retain ownership of long distance operator Avantel, a joint-venture between Banacci and Worldcom. The Citi-Banacci deal would push foreign ownership of Avantel over 49%, violating Mexico's Federal Telecommunications Law. Banacci's Manuel Medina has disclosed that Citi is seeking to put Avantel in a "neutral trust" while deciding how to "deal with the foreign-ownership problem" -- similar to the way the U.S. Federal Reserve allowed Citicorp and Travelers to merge, and gave them two years to lobby to repeal the Glass-Steagall Act...
So, here is a summary of ICP's comments to the Federal Reserve Board:
[ICP's July 15 comment to the Federal Reserve Board:]
July
15, 2001
Board of Governors of the Federal Reserve System
Attn: Ms. Jennifer J. Johnson, Secretary and Governors
20th Street and Constitution Avenue, N.W.
Washington, DC 20551
Dear Secretary Johnson, Governors:
On behalf of Inner City Press/Community on the Move and its members and affiliates, including the Inner City Public Interest Law Center (collectively, "ICP"), this letter supplements our July 13 letter requesting an extension of the comment period, and making the Board aware of "gag orders" that Citigroup has requested and obtained from ex-CitiFinancial employees, in apparent obstruction of the regulatory process. After transmittal of ICP's July 13 letter, ICP received by mail from Citigroup inter alia copies of its July 12 letters seeking to modify its applications to acquire Grupo Financiero Banamex Accival, S.A. de C.V., and its affiliates, including California Commerce Bank ("CCB;" collectively, "Banamex"), apparently so that the Board would do Citigroup the favor of approving the remaining applications on July 16, well less than sixty days after the applications were filed, and despite the dozens of substantive comments that have been submitted opposing the applications.
For the record, we oppose Citigroup's late-proposed amendments to its applications, and object to the lack of notice: we received copies of Citigroup's amendments on July 13, after the Board had, on July 12, scheduled action on the suddenly amended proposal on July 16. Citigroup's July 12 letter (specifically, that of Citigroup's six July 12 letters that was from counsel James Frazer to FRB Senior Counsel Nardolilli) states, inter alia, that
Citigroup has begun its tender offer for Banacci shares, subject to the receipt of remaining regulatory approvals. That offer will expire on Thursday, August 2, 2001, and, provided that all pending regulatory approvals have been received, Citigroup will promptly close the transaction... In order to expedite the Board's consideration of the Notice, Citigroup has determined to make a change in the post-acquisition reorganization of Banacci for the purpose of streamlining the approvals it is seeking and thereby expediting the prompt consideration of the Notice...
ICP note: When Citigroup announced this proposal on May 17, 2001, it stated that it hoped to consummate the proposal in the fourth quarter. Clearly, that is a time-frame that Citigroup could "live with" then, and could live with now. Because Citigroup received Mexican regulatory approvals faster than anticipated, it now asks the FRB to grant it an unprecedently fast --and unseemly -- approval, despite the many unresolved adverse comments (and sworn affidavit) that have been timely submitted to the FRB, despite, for example, not having submitted any response to the sworn affidavit of ex-CitiFinancial employee Steve Toomey, which ICP submitted on July 9, and despite serious regulatory questions raised by aspect of the proposal, including Citigroup's over 50% stake in the telecommunications company Avantel. Citigroup has shown no legitimate basis for the requested unprecedented expedition of its applications to acquire the second largest bank in Mexico. For the FRB to grant Citigroup this favor, on top of the other favors sketched below, would be shameful... Citigroup's July 12 letter continues:
For the time being, following the acquisition of Banacci, Citigroup will continue to own Banacci and will not cause Banamex to be transferred to COIC. Citigroup expects that in the near future it will seek to secure approval to complete the transfer of Banacci and Banamex from Citigroup to COIC. (As discussed with Federal Reserve staff, Citigroup is considering withdrawing its request to transfer Banacci and Banamex to Citibank South Dakota).
ICP note: Citigroup is proposing to suddenly "segment" its overall proposal into parts, "temporarily suspending" parts of its proposal that it acknowledges it intends to pursue in the near future. This "segmentation" of the overall proposal (a concept from the field of environmental law) is illegitimate. Furthermore, Citigroup's above-quoted parenthetical statement makes clear that other ex parte communications -- beyond those late-summarized to ICP (e.g., the June 13 summary of the June 5 meeting was only provided to ICP on July 13, see ICP's July 13 comment) -- have taken place. No summary has been provided to ICP or other timely commenters. Nor has the FRB even theoretically had time to rule on the propriety of Citigroup's overreaching requests for confidential treatment for portions of its July 12 "proposal," including "the steps of the proposal transaction and structure of the combined organization following this change to the proposal" and "a summary of the authority for each subsidiary and relevant outstanding or withdrawn commitments" (Id. at 2, 3). This type of information is routinely released in (other) applications proceedings. It is illegitimate for the FRB to take final action on Citigroup's radical amendments to its proposal one business day after the proposals were submitted, before timely commenters have been provided with documents that are not legitimately withholdable under FOIA. In fact, timely commenters should be offered an opportunity to comment on the proposal new structure of Citigroup's proposal. For the record, what Citigroup presented last Fall as a "technical" amendment to the structure of its acquisition of Associates First Capital Corp. was in fact, according to the FTC, a device through which Citigroup could later argue that it is not a successor to the Associates, and has no duty or liability regarding Associates' loans before November 30, 2000 (see FTC's response to Citigroup's May 2001 motion to dismiss, in the possession of the FRB and incorporated herein by reference). Especially given the serious (but then-misunderstood) effects of Citigroup's previous amendments to acquisition proposals, the Board should not do Citigroup the unprecedented favor of ruling on a radically amended proposal, a mere business day after the amendments were proposed. Citigroup continues:
COIC hereby temporarily suspends its participation in the Notice. Citigroup continues to request the Federal Reserve to approve the Share Purchase (to be followed by steps 2a and 2b of the Transactions), but temporarily suspends its request for approval of the remaining steps of the Transactions. Citigroup hereby amends the Notice to temporarily suspend all requests for Federal Reserve approval under Regulation K other than for approvals needed to acquire the shares of Banamex and its subsidiaries including Afore B/A, Ban Sud, and Avantel... Avantel will subsequently be "split off" from Banamex and held pursuant to Section 4(k) of the Bank Holding Company Act. Under the authority of Section 4(k), Citicorp, as a financial holding company, may acquire these companies without seeking the Board's prior approval. Citigroup temporarily suspends its request for a waiver of Section 23A of the Federal Reserve Act. Citigroup also withdraws its request for authority to maintain a larger portfolio of Mexican government securities than that allowed by the lending limit rules.
ICP note: the above-quoted simply confirms how material Citigroup's proposed amendments to its initial application are. For the record, current Mexican law prohibits greater than 49% foreign ownership of telecommunications companies like Avantel. It is entirely unclear how Citigroup proposes to address the alluded to "lending limit rules," or Section 23A. Citigroup may wish compliance with law, with anti-tying restrictions, lending limits, etc., to be a game, an intellectual exercise in how to create the largest loopholes on the least amount of notice -- but it would be shameful for the FRB to participate in (much less to coach Citigroup in) this game. Particularly given this history:
The FRB has already provided Citigroup with more than enough favors, for example, bending the Glass-Steagall Act to allow the Citicorp - Travelers merger in 1998, and rewriting, by regulation, the CRA provision of the Gramm-Leach-Bliley Act, in light of Citigroup's ownership of a bank with a Needs to Improve CRA rating. This new proposal -- unprecedently expedited approval for a suddenly-amended application -- is beyond the pale, particularly in light of the sworn allegations of predatory lending at CitiFinancial, including those in the Toomey Affidavit, which we timely submitted on July 9, and to which Citigroup has yet to respond.
A further update for the Board: ICP has become aware that Citigroup and its counsel are now requesting meetings with various current and former CitiFinancial employees in South Carolina. While ICP hopes that this is an inquiry undertaken in good faith, concerns have been expressed to ICP that these "visits" are either misleading, or intended to intimidate, or both. These communications have been inconsistent with Citigroup's previous statements about serious, objective investigation of claims; they are doubly troubling in light of Citigroup's attempt, reflected in a letter Citigroup sent to ICP on July 11, to focus on "specific cases where current or former employees have violated the law." In any event, as Mr. Toomey's declaration makes clear, the direction to violate law, Citigroup's announced commitments, and even the recommendation of CitiFinancial's auditors, came from supervisory personnel, and not from the loan officers themselves.
The FRB has yet to respond to the formal request for an extension of the comment period that ICP submitted on July 13, after late-receiving that day a copy of the FRB's June 13 memo summarizing a June 5 ex parte meeting with Citigroup, after inquiring in this regard with FRB staff, and being directed to submit a request for extension in writing. To the grounds expressed in ICP's July 13 letter, ICP adds the above, and the fact that Citigroup only on July 12 mailed ICP (and presumably other timely commenters) a copy of a June 15 CRA-related Citigroup submission. In the concurrent (but clearly more deliberative) Wachovia proceedings, the FRB has granted counsel to First Union, and counsel to SunTrust (that is, Citigroup's counsel) extensions of the comment period. What is the difference here? Apparently, only the identity of the requester, and, that Citigroup wants (another) favor.
Most substantively, ICP is entirely opposed to the FRB considering any final action on Citigroup's proposal (which, even as amended, is subject to the CRA) before Citigroup has submitted any response to the serious allegations of predatory lending, sworn to by ex-CitiFinancial employee Steven Toomey, which ICP timely submitted on July 9, 2001. The troubling gag order issue (see supra, and ICP's July 13 comment and request) must also be inquired into and acted on. For all of these reasons, for the FRB to take any final action (other than denial) on Citigroup's Banamex proposal on July 16 would be contrary to prior FRB precedent, contrary to any legitimate definition of fair proceedings, inconsistent with the FRB's regulatory duties, and, in short, shameful.
ICP intends to submit further comments and evidence, this week, and urges the Governors, if they meet on July 16, to at that meeting deliberate on how to appropriately investigate the Toomey Affidavit and other adverse material that has been timely submitted, to grant the many timely requests for hearings on this proposal, and to take no final action, other than disapproval. For each of the reasons stated, the comment period should be extended. The record on this application, is not complete, and would not support any legitimate approval of the application. If you have any questions, please telephone me at (718) 716-3540.
Respectfully submitted,
Matthew Lee, Esq.
Executive Director
Inner City Press/Community on the Move
& Inner City Public Interest Law Center
* * *
[Summary of ICP's July 13 comment to the Federal Reserve Board:]
July
13, 2001
Board of Governors of the Federal Reserve System
Attn: Ms. Jennifer J. Johnson, Secretary and Governors
20th Street and Constitution Avenue, N.W.
Washington, DC 20551
Dear Secretary Johnson, Governors:
On behalf of Inner City Press/Community on the Move and its members and affiliates, including the Inner City Public Interest Law Center (collectively, "ICP"), this letter concerns the notice the Board has published that it will consider on July 16 the applications of Citigroup, Inc. (along with its affiliates, "Citigroup") to acquire Grupo Financiero Banamex Accival, S.A. de C.V., and its affiliates, including California Commerce Bank ("CCB;" collectively, "Banamex").
At 4:55 p.m. on July 13, ICP received by fax from the Board a copy of a memorandum describing a June 5 meeting between Board and Reserve Bank staff and representatives of the applicant, Citigroup. The memorandum states that "[a] representative of the Reserve Bank first briefly discussed the ex parte communication rules and how they would apply to the meeting, as a comment on the filings was received by the Reserve Bank prior to the June 5 meeting." This memorandum should have been provided to ICP much earlier, as a timely (June 4) protestant. Instead, the memorandum was provided to ICP for the first time today, after the July 9 expiration of the comment period, and at the close of business on the business day immediately preceding the Board's meeting to take action on the application.
Upon receiving so late in the process this June 13 memorandum of the June 5 meeting, I telephoned Board staff with this procedural inquiry. After 5 p.m., I was informed that the staff member did not agree that the June 5 meeting was covered by the ex parte rules (despite the memorandum's statement that it was, and despite the scope of issues raised in ICP's timely June 3-4 protest). I was advised to submit this in writing, to the Secretary's office, which I am doing less than one hour after the Board staff member's return phone call. On the ground set forth above (and below in this letter), ICP is requesting an extension of the comment period. Beyond the expressed grounds, ICP notes that the customary 60 day period on this application would not expire until August 3 (see Mr. Bernstein's June 5 letter to Citigroup's counsel Mr. Sweet), and that the Board has granted requests for extensions of the comment period made by this same counsel (currently representing First Union in opposition to SunTrust's application to acquire Wachovia), and to SunTrust, in the same proceeding.
There are other serious irregularities and unresolved material adverse issues that militate for an extension of the comment period. ICP yesterday received by mail a copy of Citigroup's July 10 response to the Board's July 6 questions concerning the Application. A number of material issues raised in pre-July 6 comments to the Board, that were not addressed in Citigroup's "Omnibus" Response, were not addressed in the Board's July 6 questions, either. Worse, the Board's comment period on Citigroup's application to acquire Banamex extended until July 9, 2001. On that date, ICP submitted into the record a sworn declaration by an ex-CitiFinancial employee, Steven Toomey, stating inter alia that he witnessed illegal acts in the Charleston, S.C., office of CitiFinancial, and that several of the "reforms" regarding which Citigroup has made representations to the Board were not, in fact, carried out. The record on this application does not reflect that any inquiry was made into these serious and sworn allegation; nor had Citigroup submitted any response to them. Perhaps the Board has published notice of considering Citigroup's Banamex application on July 16 because it intends to consider the many hearing requests made on the application (including a hearing request by the Attorney General of California); or in order to direct Board staff to appropriately investigate the Toomey Affidavit and other adverse material that has been timely submitted. But, for the record: in light inter alia of the material timely submitted by ICP on July 9, the record on this application, is not complete, and would not support any legitimate approval of the application.
To update the Board: Citigroup has sent representatives to the Charleston, S.C.-area to purportedly investigate Mr. Toomey's allegations (which, it must be noted, Citigroup did not deny, in responding thereto in an American Banker article on July 10).
Beyond the sworn statements in Mr. Toomey's July 8 declaration, Citigroup had previously been made aware of a plethora of compliance and other problems at the Charleston CitiFinancial Mortgage office. By, at latest, July 3, Citigroup had been directed to particular loans files... ICP has been told of loans that CitiFinancial Mortgage made in December 2000 (that is, after Citigroup acquired The Associates) that were refinanced, with all the attendant fees (that is, "flipped") less than four months later. While Citigroup headquarters alluded to a document it said should be signed by prospective "flippees" (disclosing, in paraphrased form, that "we are refinancing your loan, there is a chance it will cost you more"), this document was rarely if ever provided to those targeted with refinance loans, much less signed by them. This, too, can be easily verified. ICP has also learned that, while Citigroup's headquarters were e-mailing loan officers to restrict certain business with brokers, management in the Charleston office explicit told employees to continue all broker business, and to disregard the other Citigroup instructions.
Other, even more troubling issues have arisen, including possible obstruction by Citigroup of the regulatory process, and of other legal proceedings. ICP is actively seeking a way around certain outrageous legal impediments Citigroup has erected between individuals with personal knowledge of Citigroup's practices, and Citigroup's regulators and other authorities.
Specifically (or, as specifically as possible, given the improper obstacles Citigroup has erected), ICP has become aware of "gag orders" requested and obtained by Citigroup up to June 2001, barring ex-CitiFinancial employees with knowledge of illegal and otherwise materially adverse practices at CitiFinancial from providing such information, to the FRS (Citigroup's and CitiFinancial's primary supervisor, which has commitment to conduct a thorough examination of CitiFinancial) -- or to the Federal Trade Commission, which on March 6, 2001, filed suit against Citigroup for predatory lending.
These Agreements have sections which prohibit ex-CitiFinancial employees from making
any statement to any person regarding the Company and its agents of a derogatory nature or which disparage the reputation, business or integrity of the Company or any of the executives or employees of the Company.
The first paragraph of these Agreements define "the Company" as CitiFinancial Mortgage Company and its parent, affiliates and subsidiaries: that is, Citigroup as a whole.
Another paragraph of the Agreements is even more specific, prohibiting ex-CitiFinancial employees (and any person they "now or hereafter may control, directly or indirectly") from promoting, instigating, assisting or participating "in any claim, proceeding or litigation charging the Company with any act or omission." Emphasis added. The above-quoted paragraphs attempt to gag ex-CitiFinancial employees who have personal knowledge of CitiFinancial's practices, which in pending litigation the Federal Trade Commission has alleged to be predatory. This agreement is dated June 2001 - long after Citigroup was on notice of the FTC's predatory lending complaint against it, and after Citigroup was aware of the FRB's inquiry into CitiFinancial's practices.
The Board should forthwith demand that Citigroup submit into the record copies of all such gag order agreements it has sought from CitiFinancial employees, or ex-CitiFinancial or Associates employees, since Citigroup acquired The Associates on November 30, 2000. It is imperative that the FRS conduct an appropriate inquiry into these matters, which are related to the matters timely raised in the Toomey Declaration, prior to even considering approving Citigroup's applications to acquire Banamex, and to expand these practices into Mexico.
ICP intends to submit further comments and evidence in this regard, next week, and trusts that the Board has published notice of considering Citigroup's Banamex application on July 16 only because it intends to consider how to appropriately investigate the Toomey Affidavit and other adverse material that has been timely submitted. For each of the reasons stated, the comment period should be extended. The record on this application, is not complete, and would not support any legitimate approval of the application. If you have any questions, please telephone me at (718) 716-3540. Thank you for your attention.
Respectfully submitted,
Matthew Lee, Esq.
Executive Director
Inner City Press/Community on the Move
& Inner City Public Interest Law Center
Update of July 9, 2001: On July 8, another ex-CitiFinancial employee sworn out an affidavit, which ICP has now submitted into the record before the Federal Reserve Board on Citigroup's applications to acquire Banamex. Below is a summary of ICP's July 9 comments to the Fed. The Mexican antitrust regulator appears to have capitulated; ICP has also submitted the affidavit to other regulators still considering the deal. Regarding the numerous confirmed instances of money laundering at Citigroup, including for Raul Salinas, Citigroup has responded that "the seriousness of Citigroup's commitment is reflected in the recent announcement that Richard Small, the Federal Reserve's leading anti-money laundering enforcement officer since 1989, will join Citigroup...". The conflict-of-interest and revolving-door problems this raises have been put to the Fed, including in the comment summarized below:
[ICP's July 9 comment to the Federal Reserve Board:]
July
9, 2001
Board of Governors of the Federal Reserve System
Attn: Ms. Jennifer J. Johnson, Secretary and Governors
20th Street and Constitution Avenue, N.W.
Washington, DC 20551
Dear Secretary Johnson, Governors:
On behalf of Inner City Press/Community on the Move and its members and affiliates, including the Inner City Public Interest Law Center (collectively, "ICP"), this is a fifth timely supplemental comment opposing and requesting hearings on the applications and notices of Citigroup, Inc. (along with its affiliates, "Citigroup") to acquire Grupo Financiero Banamex Accival, S.A. de C.V., and its affiliates, including California Commerce Bank ("CCB;" collectively, "Banamex").
The growing concerns about, and evidence of, Citigroup's involvement in predatory lending must be acted on by the Board, in this proceeding. In addition to the material ICP has previously submitted, annexed hereto is the declaration, sworn to on July 8, 2001, of Steven Toomey, who worked at CitiFinancial's Charleston, South Carolina office until May 24, 2001, stating:
it was routine practice to show borrowers the required Real Estate Settlement Practices Act (RESPA) documents for the first time at loan closings. The RESPA documents were generally not sent out during the required three-day period, but rather were back-dated at the closing.
4. Before closing loans, we loan officers were required to collect the prospective borrowers' "pay-offs" from other lenders. These "pay-offs" can only be obtained with the written authorization of the prospective borrower. I inquired with a senior employee at my office, and watched as the employee forged the prospective borrower's name on the authorization forms. This happened a number of times.
5. After Citigroup acquired The Associates, we loan officers began to be compensated, for the first time, to renew loans to existing borrowers -- i.e., flipping. On many of these refinances, points were assessed and the rate was raised. Also, we loan officers were instructed to only disclose to borrowers their prospective monthly payments, and not the level of points and fees that were being stacked into the loan.
6. After Citigroup acquired The Associates, an announcement was made that we loan officers should cease closing loans at borrowers homes. However, the branch executive in charge of the Charleston office (as well as the Columbia and Greenville offices), Tim Delapaz, stated that his supervisor, Steve Diubaldo, told him that we should continue closing loans at borrowers' homes. I am also aware of instances where management falsified commission information and required employees to falsify information in borrowers' files.
7. After Citigroup acquired The Associates, it imposed some changes on Associates' rate matrix. However, two month in to 2001, when lending volume had dramatically decreased, Citigroup resorted to a rate matrix similar in many ways to the original Associates rate matrix.
8. After Citigroup acquired The Associates, management of the Charleston office began tape recording all communications (not only work- or loan-related communications) of employees, without the employees' knowledge or consent. Two employees were asked to resign. The facts of the unauthorized tape recording (acknowledged to all branch employees by management) were conveyed to Mr. Delapaz and subsequently to Mr. George White, but was never conveyed to the CitiFinancial's Human Resources department, which written policy would have dictated.
9. I also complained about this invasion of privacy, and a promotion that had been agreed upon was revoked. Since then, I have communicated, via CitiFinancial's Ethics Hotline and via certified mail, with CitiFinancial officials Jill Rorschach and Clark Baker. Ms. Rorschach stated that CitiFinancial would not investigate the mere complaint of an employee; Mr. Clark made telephone calls to other employees (presumably generating paperwork and confirmation of many of my statements, above), but no action was taken.
10. I have reviewed Citigroup's June 20, 2001, response to questions from the Federal Reserve Board, concerning the sworn declaration of another CitiFinancial employee, Gail Kubiniec. On personal knowledge, I dispute Citigroup's June 20, 2001, statements.
11. For example, Citigroup's June 20, 2001, submission states that "CitiFinancial has extensive audit procedures that monitor compliance with its policies." From the date of Citigroup's acquisition of The Associates (November 30, 2001) to the date of my departure (May 24, 2001), only one CitiFinancial auditor visited our office. During this visit this auditor, Fred McLean, found that he couldn't get authorization to access the office's computer system. After Mr. McLean left, his two recommendation were conveyed to branch employees by Mr. Delapaz, who said, as to the recommendation that we not close loans at borrowers' homes, that Mr.Diubaldo instructed that this practice should and would (and did) continue. The second recommendation concerned Home Mortgage Disclosure Act (HMDA) inaccuracies. In response to this recommendation, branch management instructed us to continue with past HMDA practice.
12. Citigroup's June 20, 2001, submission states that "CitiFinancial has an extensive training program to ensure that its policies and procedures are effectively communicated to all employees." When Citigroup acquired The Associates, it closed down Associates training facility in Atlanta, Georgia. Employees hired after November 30, 2000, up until at least my departure on May 24, 2001, received no training whatsoever. In fact, we were told that CitiFinancial was looking to hire individuals with no prior experience in the consumer finance industry...
13. Citigroup's June 20, 2001, submission states that "CitiFinancial uses a comprehensive, sate of art computer system, Maestro, which automates the lending process to ensure that no customer is offered a loan or other product for which the customer is not eligible." Between November 30, 2000, and the date of my departure (May 24, 2001), the Maestro computer system was never operational at the branch I worked at.
14. Citigroup's June 20, 2001, submission states that "CitiFinancial encourages all employees to raise any concerns they have about business practices and policies through a variety of means, including employee questionnaires, one-on-one meetings with auditors and managers, and an anonymous 800 number Ethics Hotline that is designed to eliminate the fear of retaliation." As set forth above, between November 30, 2000, and May 24, 2001, there was only one visit to our office by a CitiFinancial auditor, and there were no "one-on-one meetings" with this auditor. I telephoned the Ethics Hotline; a promotion that had previously been agreed upon was rescinded. CitiFinancial's Jill Rorschach told me that CitiFinancial does not initiate any audits or investigations based on a mere complaint by an employee.
15. I can confirm, and participated in, "Loan Blitz Nights." At my office, these were Tuesday and Thursday evenings (for a time, the days were Monday and Wednesday), and including proposing new loans to existing borrowers, under the compensation scheme described above, which promoted "flipping." The individuals we were to target were identified in a computer system called "Lead-Net."
These sworn statements must be inquired into, and acted on in this proceeding, by the Federal Reserve Board, which is CitiFinancial's primary regulator... It is important to note that the affidavits of Gail Kubiniec, previously submitted, and of Steve Toomey, being timely submitted today, detail predatory practices at CitiFinancial itself (and not only at The Associates), and make clear that Citigroup is not even implementing the few reforms it announced last November. The Board's July 2, 2001, Citigroup - European American Bank order states that
the Board will conduct a thorough examination to assess the effectiveness of that implementation at Citigroup's subprime affiliates, CitiFinancial and CitiFinancial Mortgage... The Board also will consider any information gathered in these reports or the examination in reviewing future proposals by Citigroup...
Citigroup proposes to acquire Banamex, and 25% of the banking system in Mexico. A Federal Reserve memo dated June 22, 2001, states that Citigroup's purported reforms of its subprime lending apply "only to real-estate secured loans in the United States." Accordingly, these reforms -- which are contested in the annexed affidavit -- would not even apply in Mexico, into which Citigroup proposes to expand its subprime lending. Citigroup is expanding its troubling practices into other countries, as well. The Financial Times of July 6, 2001 ("Citigroup buys Future Mortgages"), reported:
Citigroup, the US financial conglomerate, has bought Future Mortgages from its venture capital backers. Future, which lends to those rejected by mainstream banks, is the latest in a string of "sub-prime" lenders to be sold to larger groups. No details of the deal were given, but Citigroup is thought to have paid about Pounds 40m. Mr Pitt said Future - which was advised by PwC Corporate Finance - would work closely with the UK arm of Associates, the US finance company Citi bought for Dollars 31bn last September
ICP asks the Federal Reserve Board to inquire into and review this reported Citigroup purchase, to require an application subject to public comment, and to block that proposal, on the current (CitiFinancial) record.
On July 3, Citigroup submitted a purported response to the mounting opposition to its applications to acquire Banamex. On many of the issues raised by ICP and others, the Response is evasive. For example, Citigroup claims that the Federal Trade Commission's lawsuit against it relates only "to practices of Associates prior to the acquisition by Citigroup." That is incorrect -- the affidavit Gail Kubiniec, alleging predatory practices at CitiFinancial (and not Associates) as far back as 1995, is of record in that case, and in this proceeding. With regard to the numerous confirmed instances of money laundering at Citigroup, the Response states that "the seriousness of Citigroup's commitment is reflected in the recent announcement that Richard Small, the Federal Reserve's leading anti-money laundering enforcement officer since 1989, will join Citigroup...". This raises the conflict-of-interest and revolving-door problems regarding which ICP submitted a Freedom of Information Act ("FOIA") request to the Board on May 23, 2001 (for, inter alia, all communications between Citigroup and Mr. Small, during his employment at the Board). Fully a month after ICP's FOIA request, on June 25 the Board extended its time to response until July 9, 2001 - the expiration of the Citi-Banamex comment period. The documents must be provided, and the comment period must be extended.
The Response acknowledges that CCB is being sued for in connection with its money transmittal business, but claims (Resp. at 18) that this is "not relevant" (despite Citigroup's claims, with its it begins its response, that this proposal will be particularly beneficial to Mexico, Mexicans and Mexican-Americans). Likewise, Citigroup argues that the rare "Needs to Improve" CRA rating of one of its banks (which should result in the denial of this application, under the terms of the Gramm-Leach-Bliley Act), and the New York Banking Department's recent enforcement action regarding Citigroup's evasion of its 1998 New York lending commitment, and the inaccurate 2000 HMDA data that Citigroup filed, are not relevant. ICP disagrees. The Board's referral of the HMDA violations to HUD (alluded to in the Board's July 2 EAB Order) is insufficient, given that the Board is Citigroup's and CitiFinancial's primary regulator. For the record, the OCC's July 2 order states, at 6, that "the OCC has not considered Associates National Bank's CRA rating or record of performance in connection with this merger." The OCC also found that "CitiMortgage's percentage of lending to minorities was less than 80% of the percentage experienced by other lenders" in Buffalo, Milwaukee, Memphis, St. Lake City, St. Louis and Phoenix. Id. at 9, n.14.
On June 18, ICP submitted into the record the affidavit of long-time CitiFinancial employee Gail Kubiniec. The Federal Reserve asked Citigroup a series of questions; Citigroup responded that it has procedures in place, including auditing, one-on-one meetings with auditors, an "Ethics Hotline," etc., to ensure that it is not engaged in predatory lending. Now, ICP is timely submitting a sworn declaration from another recent CitiFinancial employee, which directly disputes Citigroup's representations to the Board, and raises other troubling predatory lending (and RESPA, fraud and forgery) issues. The Board must forthwith inquire into these sworn allegations (including but not limited to their contradiction to Citigroup's previous representations); the Board should extend the comment period, to accept further comment on these developing issues (and on the documents the Board has now delayed 46 days in provided to ICP). On the current record, Citigroup's application could not legitimately be approved. If you have any questions, please telephone me at (718) 716-3540. Thank you for your attention.
Respectfully submitted,
Matthew Lee, Esq.
Executive Director
Update of July 2, 2001: There were two Citigroup announcements last week (reviewed, in "real time," on ICP's CitiWatch Report of June 28). Neither announcement -- a new lending pledge in New York State, and a vague commitment to cease offering single premium credit insurance, as some unspecified date in the future -- resolves the problems with Citigroup's applications to acquire Banamex. ICP's July 2 comments to the Federal Reserve Board are summarized below:
[ICP's July 1 comment to the Federal Reserve Board:]
July
1, 2001
Board of Governors of the Federal Reserve System
Attn: Ms. Jennifer J. Johnson, Secretary and Governors
20th Street and Constitution Avenue, N.W.
Washington, DC 20551
Dear Secretary Johnson, Governors:
On behalf of Inner City Press/Community on the Move and its members and affiliates, including the Inner City Public Interest Law Center (collectively, "ICP"), this is a fourth timely supplemental comment opposing and requesting hearings on the applications and notices of Citigroup, Inc. (along with its affiliates, "Citigroup") to acquire Grupo Financiero Banamex Accival, S.A. de C.V., and its affiliates, including California Commerce Bank ("CCB;" collectively, "Banamex") -- and EAB.
For the record, on June 25 Citigroup's chief executive signed a "commitment letter" with the New York Banking Department ("NYBD"), acknowledging inter alia that the 1999 and 2000 HMDA data submitted by Associates Home Equity Services, Inc. and Associates Consumer Discount Corporation is erroneous. The NYBD's jurisdiction is limited to New York State. The FRB, however, has nationwide jurisdiction. These entities are holding company subsidiaries of Citigroup, Inc., FRB-supervised; Citigroup filed Associates' 2000 Loan Application Register ("LAR"), several presumptive errors in which ICP has raised to the FRB, in timely comments on Citigroup's EAB and Banamex applications. ICP is annexing hereto, for the record, the NYBD letter; ICP has previously submitted, and commented on, Citigroup's Associates' 2000 LAR. The FRB must take action on this issue, prior to even considering approving either application. We note that the FRB's "Sunshine line" states that the Board will consider Citigroup's EAB application on July 2. In light inter alia of the NYBD's June 22 formal finding of HMDA inaccuracies in data filed by Citigroup on March 1, 2001, it would be inappropriate for the Board to approve Citigroup's EAB application. Citigroup's Banamex proposal, which would expand and impose CitiFinancial's practices in Mexico could not legitimately be approved.
Beyond the sworn affidavit of long time CitiFinancial employee Gail Kubiniec, already of record, yet another CitiFinancial employee has contacted ICP in the past week, describing how Citi imposed certain changes in Associates' "rate matrix" in January 2001, then, after production volume decreased, allegedly reverted to Associates' practices in March 2001, including transactions where borrowers' monthly payments are nearly, and sometimes exceed, monthly income....
On June 28, Citigroup e-mailed journalists a memorandum from Robert Willumstad, head of Citigroup's consumer division, including CitiFinancial, stating that at some unspecified time in the future, CitiFinancial will cease offering single premium credit life insurance in connection with real estate secured loans. To ICP's knowledge, Citigroup has yet to place this memorandum into the record before the FRB -- if and when it does, ICP will submit further comments. But it should be noted that CitiFinancial engages in questionable subprime lending that is not real estate-secured; and that the systemic predatory practices alleged in the affidavit of long time CitiFinancial employee Gail Kubiniec are not limited to single premium credit life insurance. Citigroup's June 28 announcement does not resolve the adverse issues that are of record.
If it acquires Banamex, Citigroup will expand its consumer finance, including subprime consumer finance, operations in Mexico. ICP has previously cited a recent Business Week article to this effect; below, for the record, is a transcript from CNBC, June 28, 2001:
... First off, Citigroup. Lehman Brothers is talking about Citigroup today. They had a meeting with the head of the consumer banking part of the business. They say, 'We recently met with Robert Willumstad,' CEO of Citigroup's consumer group, 'to discuss the group's strategic priorities.' They come away from the meeting saying that they're on track for above-average growth, particularly through CitiFinanancial and international expansion. You know that the company recently announced that huge acquisition of a bank in Mexico.
'We continue to rate the stock a strong buy,' according to the analyst at Lehman. That's Hank Dixon is the analyst. 'Management of the consumer group'--which is Citibank in North America, the mortgage banking area, North American Cards and CitiFinancial--'can be characterized as decentralized.' They say that the five line managers reporting to the--the executive that they met with have lots of autonomy, and each business line has its own infrastructure. They have a--as I mentioned, a strong buy rating on Citigroup, and they are pushing it today; also mentioning the fact that lower interest rates will be positive for the financials.
--Emphasis added.
The first of the two paragraphs above appears to confirm that CitiFinancial would expand in Mexico. ICP notes that FRB staffer Andrew Miller's June 22, 2001, memorandum into the Citigroup - EAB file recites that he "requested confirmation that the subprime lending initiatives apply only to real estate-secured loans in the United States. Ms. McGinn confirmed this." That is to say: none of the purported (and ICP contends insufficient) safeguards announced by Citigroup would be applied to its operations in Mexico. On this record, including the still-outstanding and unaddressed sworn allegations of ex-CitiFinancial employee Gail Kubiniec, Citigroup's applications to acquire Banamex should not be above.
The second of the two transcript paragraphs describes CitiFinancial as "decentralized," with subprime units being "autonom[ous]" -- which hardly bodes well for the full implementation of CitiFinancial's purported (and insufficient) reforms.
In fact, Citigroup has violated previous commitments to regulators. As both a CRA and a managerial resources issue, it is significant that the NYBD has stated that it was "horrified" by Citigroup's attempts to evade its 1998 lending commitment. See, e.g., Bloomberg of June 26: "State regulators were 'horrified' when they learned that Citigroup had been meeting its projections by mailing out so-called 'live checks' in amounts of $500 to $1,000 before the holidays and counted these as home improvement loans, said... Bethany Blankley, a spokeswoman for the Banking Department." It is clearly a material managerial resources (and integrity) issue, under the BHC Act, when an applicant's activities "horrif[y]" one of its state regulators.
The FRB should also note that the NYBD commitment letter does not address the sworn allegations of ex- CitiFinancial employee Gail Kubiniec, of systemic predatory practices within CitiFinancial. ICP trusts -- and hereby formally requests -- that inquiries are conducted, and that appropriate actions will be taken, before the FRB even considers approving Citigroup's applications.
The reason for the formality of this request is Citigroup's statement, quoted in the N.Y. Daily News of June 27, that "'In connection with resolving this matter and our application to acquire EAB, we have extended our lending projections and are committed to meet or exceed the lending of our peers in targeted communities'" (emphasis added) -- implying that Citigroup views its June 25 commitment as militating for approval of its EAB applications. But ex-CitiFinancial employee Gail Kubiniec's sworn allegations of systemic predatory lending at CitiFinancial have not be addressed or acted upon.
The FRB should also note that Citigroup dismissively characterized its June 25 agreement with the NYBD: the Wall Street Journal of June 27 reported that "Citigroup downplayed the announcement, noting that the commitment letter is the 'lowest level of possible enforcement,' the bank said in a prepared statement." Citigroup appears to believe that it can violate, in spirit (or as ICP contends, in letter) agreements with its regulators, as it violated its 1998 agreement with the NYBD, and then simply re-up the commitment the next time it wants an approval, while being allowed to downplay the significance of the previous violation. This (lack of a) compliance culture at Citigroup is mirrored by Citi's repeated Casablanca-like responses to evidence of its involvements in money laundering, and does not bode well for Citigroup's compliance with the other commitments it has made, including its June 28 announcement regarding single premium credit life insurance (which announcement, for the record, does not address the sworn allegations of systemic predatory lending, in products other than insurance, by long-time NYS CitiFinancial employee Gail Kubiniec).
ICP urges the FRB to pose, and require Citigroup to fully respond to, the full range of questions raised by Ms. Kubiniec's affidavit, and the other material that ICP has entered into the record on these applications. These inquiries should be completed before the FRB even considers approving Citigroup's applications, for Banamex -- or EAB.
As you know, ICP on May 23 submitted a FOIA request for records pertaining to Banamex and Citigroup's application, and for a summary of, and documents related to, the FRB's communications with Citigroup regarding the proposal. Citigroup's CEO Sandy Weill, as previously noted, bragged publicly about these communications (more recently, Reuters of June 28 quoted Citigroup's Robert Rubin prognosticating about the probably timing of approval and consummation of this proposal). On June 25, more than a month after ICP's FOIA request, the FRB's FOIA office wrote to ICP, "extending the period for our response until July 9, 2001" -- which is the expiration of the comment period on Citigroup's Banamex applications. ICP submitted its request as early as possible. The comment period must be extended. ICP is surprised that Citigroup has yet to submit any response to ICP's and others' comments opposing Citigroup's Banamex applications -- three weeks have passed since ICP's first post-application comment. Citigroup's strategy, of delaying its response until after the FRB closes comment periods, should not be countenanced. ICP continues to await the FRB's response to ICP's outstanding FOIA request(s), and will be submitting further comments. On the current record, these applications could not legitimately be approved. If you have any questions, please telephone me at (718) 716-3540. Thank you for your attention.
Respectfully submitted,
Matthew Lee, Esq.
Executive Director
Update of June 25, 2001: On June 23, Inner City Press obtained a copy of Citigroup's response to the Federal Reserve Board's June 18 questions about the Citi's spokeswoman's June 15 statement that "(a)s soon as we learned of [Ms. Kubiniec's] allegations, we commenced a thorough review that has reassured us that these alleged practices are in no way characteristic of how CitiFinancial employees treat their customers or offer and sell products." Gail Kubiniec's affidavit, and the Fed's questions, are set forth in ICP's CitiWatch Report. Here's ICP's June 23 comment to the Fed:
[ICP's June 23 comment to the Federal Reserve Board:]
June
23, 2001
Board of Governors of the Federal Reserve System
Attn: Ms. Jennifer J. Johnson, Secretary and Governors
20th Street and Constitution Avenue, N.W.
Washington, DC 20551
Dear Secretary Johnson, Governors:
On behalf of Inner City Press/Community on the Move and its members and affiliates, including the Inner City Public Interest Law Center (collectively, "ICP"), this is a third timely supplemental comment opposing and requesting hearings on the applications and notices of Citigroup, Inc. (along with its affiliates, "Citigroup") to acquire Grupo Financiero Banamex Accival, S.A. de C.V., and its affiliates, including California Commerce Bank ("CCB;" collectively, "Banamex").
The record on Citigroup's Banamex application now includes the sworn allegations of ex-CitiFinancial employee Gail Kubiniec; ICP notes that Board staff, on June 18, asked Citigroup several questions about Citigroup's spokesperson's public response to the Kubiniec affidavit.
On June 23, ICP received a copy of Citigroup's response, which tersely states that
the Kubiniec declaration prompted the immediate attention of senior management, who initiated a full review of the allegations to determine their merit. Accordingly, counsel from Skadden, Arps, Slate, Meagher & Flom LLP, together with in-house counsel knowledgeable about CitiFinancial's policies and practices, interviewed 10 employees in the three New York branches where Ms. Kubiniec worked over the last four years, as well as relevant supervisory personnel, including 3 branch managers, the relevant district manager, regional manager, human resources manager and 3 insurance sales managers. In addition, counsel reviewed relevant documentation, including training materials, complaint files, audit and compliance reports and a sample of Ms. Kubiniec's loan files.
On the basis of this review, Citigroup was unable to find evidence that the conduct that Ms. Kubiniec ascribes to herself was practices by others, and we have been unable to meet with her to discuss her declaration.
This review reassured CitiFinancial that the practices alleged by Ms. Kubiniec are in no way characteristic of how CitiFinancial employees treat their customers or offer and sell products: CitiFinancial's polices and procedures require that its employees abide by all applicable laws and regulations as well as the Company's stringent internal policies. CitiFinancial has extensive audit procedures that monitor compliance with its policies. The audits of the branches where Ms. Kubiniec worked do not support her allegations.
CitiFinancial has an extensive training program to ensure that its policies and procedures are effectively communicated to all employees. Ms. Kubiniec, as well as all branch employees interviewed, received extensive training on CitiFinancial's policies and procedures, including training that the kind of behavior described by Ms. Kubiniec is prohibited.
CitiFinancial uses a comprehensive, sate of art computer system, Maestro, which automates the lending process to ensure that no customer is offered a loan or other product for which the customer is not eligible. In addition, Maestro automatically calculates payment amounts with and without insurance coverage and it ensures that credit factors drive the loan approval process. Maestro cannot be overriden and provides another means of ensuring that CitiFinancial loans comply with federal and state law as well as CitiFinancial's policies and procedures.
CitiFinancial encourages all employees to raise any concerns they have about business practices and policies through a variety of means, including employee questionnaires, one-on-one meetings with auditors and managers, and an anonymous 800 number Ethics Hotline that is designed to eliminate the fear of retaliation. CitiFinancial also requires all employees to certify periodically whether or not they have knowledge of improper sales practices. There is no record that Ms. Kubiniec reported any violations of the nature alleged in her declaration or that any employee of the branches where Ms. Kubiniec worked did so.
For the record, ICP contends that this response is a white-wash, an evasion, contradictory on its face. If, for example, the "1-800" Ethics Hotline is "anonymous," what's the point of Citigroup's jibe that "there is no record that Ms. Kubiniec reported any violations"? Notably, Citigroup's response does not confirm or deny the existence of the Loan Blitz nights -- a frenzy of flipping -- that Ms. Kubiniec's declaration describes; nor does it confirm or deny the compensation systems, and pressure to impose credit insurance, that Ms. Kubiniec describes.
Another CitiFinancial employee has contacted ICP, describing how CitiFinancial judges each office based on how many "opportunities to sell credit insurance" are missed -- the CitiFinancial forms, this individual states, are called the "Insurance Tracking Reports. The FRB should verify or disprove the existence of such forms, and such inquire into how CitiFinancial employees are compensated, for imposing credit insurance on loans.
The individual describes in detail CitiFinancial offices' attempts, at the end of each month, to drive down the loan delinquencies they have to report. The allegedly systematic mis-reporting of delinquency levels raises troubing managerial, integrity and even securities law issues, including which the FRB should inquire, in this proceeding.
The individual has also told ICP about a CitiFinancial branch office in upstate New York, where such serious irregularities were found that eleven of the twelve employees in the office were removed from their positions (this may be particularly important to inquire into, given Citigroup's description of its upstate New York "thorough review"). The individual states that he called in complaints to the 1-800 "Ethics Hotline," and then called back, when it was clear that no inquiry had ensued (none ever did). This source has, to date, been unwilling to speak for attribution, in light of litigation being prepared for filing. But many of the individual's allegations, complete with names of internal CitiFinancial tracking forms, can be verified or disproved by the FRB, by on-site examination or by directing Citigroup to provide responses and/or documents.
These inquiries should be completed before the Board even considers approving Citigroup's applications, for Banamex or for EAB. ICP is surprised that Citigroup has yet to submit any response to ICP's and others' comments opposing Citigroup's Banamex applications -- three weeks have passed since ICP's first post-application comment. Citigroup's strategy, of delaying its response until after the FRB closes comment periods, should not be countenanced. For the Board's information, the New York Banking Department will not be considering Citigroup's EAB application until, at earliest, July 12, 2001. ICP continues to await the FRB's response to ICP's outstanding FOIA request(s), and will be submitting further comments. On the current record, these applications could not legitimately be approved.
If you have any questions, please telephone me at (718) 716-3540. Thank you for your attention.
Respectfully submitted,
Matthew Lee, Esq.
Executive Director
Update of June 18, 2001: On June 18, ICP submitted comments to the Federal Reserve, the Office of the Comptroller of the Currency, and regulators in Mexico, Argentina, the Bahamas, the Cayman Islands and the United Kingdom, including a just-obtained affidavit by long-time CitiFinancial employee Gail Kubiniec, alleging a multitude of predatory practices at CitiFinancial. The comments (the Federal Reserve version of which is summarized below) also put into evidence recent reports of Citigroup's money laundering for ex-Argentine president Menem, and, apparently, for the Juarez drug cartel:
[ICP's June 18 comment to the Federal Reserve Board:]
June
18, 2001
Board of Governors of the Federal Reserve System
Attn: Ms. Jennifer J. Johnson, Secretary and Governors
20th Street and Constitution Avenue, N.W.
Washington, DC 20551
Dear Secretary Johnson, Governors:
On behalf of Inner City Press/Community on the Move and its members and affiliates, including the Inner City Public Interest Law Center (collectively, "ICP"), this is a second timely supplemental comment opposing and requesting hearings on the applications and notices of Citigroup, Inc. (along with its affiliates, "Citigroup") to acquire Grupo Financiero Banamex Accival, S.A. de C.V., and its affiliates, including California Commerce Bank ("CCB") and Banamex (collectively, "Banamex" or "Banacci").
ICP's June 4, 2001 comment requesting a hearing on this proposal contended that Citigroup's subsidiary CitiFinancial is engaged in predatory lending (and insurance) practices. ICP is annexing hereto, for consideration by the Governors, and to be made part of the record in this proceeding, a sworn affidavit by a long-time CitiFinancial employee, which ICP obtained on June 12, 2001 from the New York Banking Department, alleging in great detail CitiFinancial's recent predatory practices. ICP is also submitting further confirmation (and leads) from another CitiFinancial employee, and recent accounts of Citigroup's continued involvement in money laundering. The FRB must fully inquire into, and act on, these practices, before even consideration approving Citigroup's proposal to acquire Banamex and, with it, control of over 25% of Mexican banking assets.
On June 13, ICP received from the FRBNY a portion of Citigroup's application. The documents provided by the FRBNY, consisting only of Citigroup's application to acquire CCB, reflect Citigroup's cavalier attitude to the Community Reinvestment Act. Citigroup owns a bank with a rare Needs to Improve CRA rating. FRB Question 12(b) directs the applicant to "describe the specific actions... that have been taken to address the deficiencies in the institution's CRA performance record." Citigroup only states that it "is taking appropriate steps" -- hardly a description of "specific actions."
Citigroup's application does not even MENTION that Citigroup is being sued for predatory lending by the Federal Trade Commission. The FRB should not countenance this lack of candor from an applicant. For the record, in the annexed affidavit (which has been filed in the FTC v. Citigroup case), ex-CitiFinancial employee Gail Kubiniec, states under penalty of perjury that:
[Affidivit summarized on ICP's CitiWatch page, Report of June 13-14, 2001]
This affidavit was filed in Federal District Court in Atlanta on May 16, 2001, in Federal Trade Commission v. Citigroup, Inc., et al., Civil No. 010 CV 0606 (U.S. District Court for the Northern District of Georgia, Atlanta Division). See also (and incorporate into the record in this proceeding), "Congress May Investigate Citi Unit's Loan Practices," American Banker, June 15, 2001, Pg. 1; "Ex -Empleada de Citigroup Denuncia Prácticas Crediticias Ilegales," Reuters-Mexico, June 15, 2001. While there is much in the affidavit that the Board must investigate -- and regarding which the FRB should accept testimony, at the requested public hearings -- particularly noteworthy, as fair lending matters, are the sworn allegations about pushing more credit insurance on "minorit[ies]," and targeting mailings to zip codes based on income (and presumably, or statistically-demonstrably) based on race...
Another issue that the FRB must inquire into, address and act on before even considering approving Citigroup's application is Citigroup's continued involvement in money laundering. Beyond the information provided in ICP's timely comments to date, on June 13, 2001, Notimex reported
Menem "lavó" dinero en Citigroup - Carlos Saúl Menem laundered money in Citigroup
..Senator Jesús Ortega Martínez denounced that Carlos Saúl Menem, ex-president of Argentina, laundered money in subsidiaries of Citigroup, the institution that is trying to acquire Banamex.
During today’s session, the legislator said that according to reports received from Argentina Senators and Congress members, Menem obtained large quantities of money from the trafficking arms to countries at war, funds that were deposited in banks that belong to Citigroup with the goal of "washing" them.
[Citigroup is also being] investigated for the recommendation that the parent company, with its seat in New York, made to its Argentina subsidiary to receive deposits from the Mexican narco-trafficker Amado Carrillo Fuentes...
Meanwhile, as proposed by Ortega Martínez, the Joint Congressional Leadership Committee approved unanimously an agreement that the Congress will ask the IPAB fund for the purchasing contracts on the loan deals between FOBAPROA and the banks to verify whether any crime was committed during the bank bailout.
As the FRB should know, the Cayman Islands Monetary Authority last month revoked the license of M.A. Bank, which "had neither a physical presence nor employees in the Cayman Islands, yet it had an account at Citibank in New York it used for suspicious financial transactions... A U.S. Customs probe show[ed] that at least $7.7 million in Mexico's Juarez drug cartel proceeds had been transferred to an account held by M.A. Bank at Citibank in New York. From there, the funds were transferred to Argentina, where they were used to purchase ranches and sports cars for some of Mexico's biggest drug traffickers, the Customs investigation found." Miami Herald, June 12, 2001.
Among the policy issues at stake in this proceeding is the FRB's duty to consider and act on the serious allegations of money laundering and predatory lending at Citigroup, prior to even considering allowing U.S.-based Citigroup to so significantly expand in Mexico (and Argentina and elsewhere). ICP understands that some within the Federal Reserve System believe that it falls to Mexican regulators to decide if they want Citigroup, given its record, to come to control over 25% of Mexican banking assets. However, the FRB is Citigroup's home country supervisor. Under the post-BCCI principles of the Basel Committee on Banking Supervision, and otherwise, it is the FRB's duty to ensure that Citigroup is "clean" (on money laundering, predatory lending and other issues) before granting regulatory approval for expansion, particularly into other countries. CitiFinancial, according to Ms. Kubiniec's above-quoted sworn allegations, would foreseeably harm consumers, in Mexico and elsewhere. Citigroup's oft-alleged involvements in money laundering already adversely affect consumers and banking systems outside of the United States. The FRB must act on these issues, in this proceeding... For the reasons set forth above, the Board should schedule and hold a public hearing on these applications, and, on the current record, the Board must deny the applications. If you have any questions, please immediately telephone the undersigned, at (718) 716-3540.
Respectfully submitted,
Matthew Lee, Esq.
Executive Director
Update of June 11, 2001: In Mexico, opposition to Citigroup's proposed tax-free takeover of Banamex continues to grew. In the Mexican Congress, opponents are preparing to introduce a bill challenging Citigroup's proposal: demanding that Banamex repay the government the $3.8 billion bail-out it received six years ago, and inquiring into the money laundering allegations (and findings) surrounding both institutions. In the United States, community-based groups are commenting to the Federal Reserve Board (e-mail address for comments is below); the Fed has yet to release a "public" copy of Citigroup's application (which will be reviewed in this space, upon receipt). For or with more information, contact us.
[ICP's June 4, 2001 comment to the Federal Reserve Board:]
June 4, 2001
Federal Reserve Bank of New York
Attn: Mr. James Beit, Bank Supervision Officer, et al.
33 Liberty Street
New York, NY 10045-0001
RE: Timely comment in opposition to, and requesting a hearing on, Citigroup's applications under Section 3 of the Bank Holding Company Act, and under the Board's Regulation K, to acquire Grupo Financiero Banamex Accival, S.A. de C.V., Banamex, California Commerce Bank and their affiliates
Dear Mr. Beit, Governors:
On behalf of Inner City Press/Community on the Move and its members and affiliates, including the Inner City Public Interest Law Center (collectively, "ICP"), this is a timely comment opposing and requesting hearings on the applications and notices of Citigroup, Inc. (along with its affiliates, "Citigroup") to acquire Grupo Financiero Banamex Accival, S.A. de C.V., and its affiliates, including California Commerce Bank ("CCB") and Banamex (collectively, "Banamex" or "Banacci").
Citigroup's proposal raises numerous policy and regulatory issues, including under the Bank Holding Company Act (the "BHC Act") and the Community Reinvestment Act (the "CRA"). The Federal Reserve Board's (the "FRB's") duties go beyond reviewing Citigroup's proposed acquisition of Banacci's bank in the U.S., CCB: if it acquires Banacci, Citigroup would control over 25% of banking assets in Mexico. The FRB enforces the cap of 10% of U.S. deposits that any one institution can control. Here, a U.S.-based bank seeks to control over 25% of the banking assets of the U.S.'s neighbor to the south, Mexico.
The FRB should hold hearings -- this is particularly true in light of the U.S. Federal Trade Commission's (the "FTC's") pending lawsuit against Citigroup and CitiFinancial, f/k/a Associates First Capital Corporation, for predatory lending (discussed below), and Citigroup's statements that it would seek to offer, in Mexico and to Latinos in the U.S. through the Banamex brand, the high interest rate consumer finance lending product for which it is being sued. See, e.g., Business Week of June 4, 2001: "In Mexico, says Victor Menezes, Citi's head of emerging markets, the group hopes to build a consumer-finance business -- which typically specializes in high-interest lending to people with poor credit -- with the help of Keith Hughes, the former Associates CEO, who will serve as a consultant."
As set forth below, the FRB has to date been lax in its regulation of Citigroup, on issues including predatory lending and money laundering. In 1998, the U.S. General Accounting Office found that Citibank had violated its own supposed safeguards, in assisting Raul Salinas de Gortari in whisking $90 to $100 million out of Mexico. See, GAO/OSI-99-1, "Private Banking: Raul Salinas, Citibank and Alleged Money Laundering." Citigroup suffered few to no repercussions. In November 2000, a U.S. Senate investigation into money laundering again found that Citigroup has insufficient controls in place to prevent money laundering. See, e.g., New York Times of March 3, 2001, Citibank Admits to Lapses in Dealings With Offshore Shell Banks. Citigroup here proposes to acquire Banamex (subject to a May 1998 FRB cease and desist order on money laundering) and its affiliates in, among others, Bahamas and the Cayman Islands. This is another reason for the requested hearings.
The $12.5 billion that Citigroup proposes to pay for Banacci makes this the largest corporate acquisition proposal in Mexican history. In 1998, Citigroup acquired Confia (which the FRB soon forced to disgorge $12.2 million in money laundering-related funds); Citigroup was granted by FOBOPROA what amounted to a subsidy of $120 million a year, in the form of interest payments on a $2.5 billion high yield promissory note. Citigroup did not obtain a prepayment penalty clause, which it had sought (analogous, ironically, to Citigroup's predatory lending practices in the U.S., analyzed below).
As public outrage grew, FOBOPROA's successor, IPAB, paid off this note in May 2000. Citigroup sued, and also threatened to pull out of Mexico. Ernesto Zedillo, just before leaving office in November 2000, agreed to continue (subsidy) payments to Citigroup. Serious questions are being raised about this arrangement, about the tax treatment of this proposal, about Citigroup's proposed continued ownership interest in the telecommunications firm Avantel, and about certain of the $3.6 billion of troubled loans that Banamex transferred to FOBOPROA / IPAB. These are all issues that must be inquired into and addressed, in proceedings before the FRB and other agencies, before the FRB even considers acting on (other than deny) these Citigroup - Banamex applications.
The FRB in November 2000 allowed Citigroup to acquire Associates, a company which had already been sued for discrimination against Latinos by the U.S. Justice Department, without even allowing public comment on Citigroup's Regulation K applications to acquire Associates' affiliates. Significantly, on March 6, 2001, the FTC sued Citigroup, CitiFinancial, and Associates, alleging systematic predatory practices in Citigroup's subprime lending, including deception of consumers, "packing" of credit insurance, and "flipping" of high-cost loans. See Federal Trade Commission v. Citigroup, Inc., et al., Civil No. 010 CV 0606 (U.S. District Court for the Northern District of Georgia, Atlanta Division, filed March 6, 2001, and incorporated herein by reference). Under its powers as "umbrella regulator," enshrined in the Gramm-Leach-Bliley Act of 1999 ("GLBA"), the FRB is Citigroup's primary supervisor. It is troubling that that it was the FTC, and not the FRB, that took action on Citigroup's questionable subprime lending; it is increasingly troubling that the FRB refuses to conduct any on-site examination of CitiFinancial, even as its practices would be exported to Mexico (see above). Under the principles of the Foreign Bank Supervision Enhancement Act of 1991 ("FBSEA"), and the principles promulgated by the Basel Committee on Banking Supervision (the "BCBS"), the FRB is Citigroup's home country supervisor. ICP contends that the FRB has a duty to fully inquire into and act on Citigroup's subprime lending practices, which are alleged by the FTC to be predatory, before acting on (other than to deny) these Citigroup - Banamex applications. Citigroup's April 16, 2001, response to the FTC predatory lending complaint claims, as its first argument, that "Citigroup Is Not Liable For the Acts of The Associates" (Section I.A), and that "CitiFinancial Is Not a Successor to The Associates and Is Not Liable for Its Acts" (Section I.B). When Citigroup acquired The Associates in November 2000, it argued -- including to the FRB -- that its acquisition would be beneficial to consumers, including Associates' customers. But in 2001, Citigroup has argued that it "is not liable for the acts of The Associates," and even that CitiFinancial, into which The Associates was purportedly merged, "is not a successor to The Associates and is not liable for its acts." This corporate dodge is beyond distasteful: it calls into question representations that Citigroup made to the FRB and others last Fall. It is also another reason that Citigroup should not be granted approvals to acquire Banamex, and to export Associates' practices to Mexico.
When it acquired Associates in November 2000, Citigroup announced certain purported reforms of the practices of CitiFinancial. ICP found, and finds, these to be less than meaningful, often misleading, and full of loopholes. ICP will amplify on that at the requested hearing. In summary, Citigroup currently charges up to nine percent -- nine hundred basis points -- in fees on brokered loans, much higher even than other subprime lenders. Citigroup's "reform"? To reduce it to eight percent.
Citigroup has continued selling single premium credit life insurance, where this cost is rolled into the loan, and never recouped by the borrower. Citigroup continues imposing pre-payment penalties, so that people it traps into high cost loans cannot get out from under them, by refinancing with another lender. Citigroup continues imposing mandatory arbitration clauses on loans, so that those wronged can't even sue, as a class, or seek punitive damages. While a "referral-up" is purportedly being instituted, no explanation has been given why prime loans can't simply be programmed into CitiFinancial's "Maestro" computer system. Citigroup's November 7, 2000, commitment was and is illusory -- and furthermore, Citigroup has yet to implement significant parts of it. ICP has submitted to the FRB (and incorporates herein by reference) a six-page chart, mailed to ICP by the New York Banking Department, dated May 11, 2001, entitled "CitiFinancial Real Estate Lending Initiatives, Status of Implementation," which reveals the following: "Referral-Up Program... Remainder of states['] implementation T[o] B[e] D[etermined]...;" "Sales Practices Compliance Programs... TBD..."; "Foreclosure Review... 14,980 total foreclosures in pipeline; 3,965 met criteria and have all been reviewed; 331 foreclosures suspended -- pending resolution"; etc..
It is material to this Citigroup - Banamex proceeding that the above-referenced changes have not yet been implemented, and do not even have a solid date for implementation (i.e., "TBD"). The volume of pending foreclosures -- "14,980 total foreclosures in pipeline; 3,965 met criteria and have all been reviewed; 331 foreclosures suspended -- pending resolution" -- is extraordinary, and should give pause to the FRB even considering approving additional expansion by Citigroup.
There are also numerous other Citigroup practices which evidence a lack of social, environmental and even human rights standards, which the FRB should inquire into and address before even considering allowing Citigroup to acquire the second-largest bank in Mexico, and to export these practices. See Section VI, below.
In a speech on August 25, 2000, at the FRB's symposium in Jackson Hole, Wyoming, the FRB's chairman noted some "resonat[ing] arguments" questioning the type of trade and investment regime represented by this proposal, through which a U.S.-based bank would come to control over 25% of banking assets in Mexico, and stated that "those of us who support continued endeavors to extend market-driven globalization need to understand and, if possible, address the[se] concerns...". See, http://www.federalreserve.gov/boarddocs/speeches/2000/20000825.htm; and see, "Protesters' Concerns Should Be Addressed, Says Fed Chief," National Post, August 26, 2000, Pg. D3. Consistent with that, the FRB should conduct a full-scope and transparent review of Citigroup's proposal to acquire Banamex, including holding the requested hearings. While Citigroup clearly "support[s and profits from] continued endeavors to extend market-driven globalization," it does not appear committed to transparency, or public participation. On May 17, Citigroup's senior officials bragged that Citi had already presented the Banamex deal to the FRB and its chairman. See, e.g., Agence France Presse of May 17, 2001 ("Sanford Weill, chairman and chief executive of New York-based Citigroup... said he discussed the merger with... Federal Reserve Chairman Alan Greenspan. 'They had a very favorable reaction,' Weill said at a news conference in Mexico City"); see also, Newsday of May 18, 2001 ("Robert Rubin, former treasury secretary under the Clinton administration who joined Citigroup as a board member in 1999, said... the combination has been received favorably by the Bush administration and Federal Reserve Chairman Alan Greenspan"). As we noted in connection with the Citicorp - Travelers merger in 1998 (see, e.g., American Banker of May 29, 1998, at 2, "Citi Merger Protester Critical of Fed Counsel's Role"), ICP believe that it is inappropriate for FRB staff to hold ex parte discussions with corporations which will soon submit applications, subject to public comment, for regulatory approval. According to Citigroup's two most senior officials, such communications have already taken place in this case. ICP has requested a summary of, and all records reflecting or relating to, these communications, under the Freedom of Information Act ("FOIA") and otherwise, but has yet to receive any documents or summary from the FRB. The documents and summary should be released forthwith, and the FRB should schedule and hold hearing on this Citigroup - Banamex proposal.
II. CITIGROUP'S APPLICATION SHOULD BE DENIED UNDER CRA, AND UNDER THE BHCA'S "CONVENIENCE AND NEEDS" STANDARD
According to the Form S-4 that Citigroup filed with the Securities and Exchange Commission on June 1, 2001, Citigroup has already "filed two applications with the [FRB]. The first, under Section 3 of the Bank Holding Company Act of 1956, seeks the Federal Reserve Board's approval of our acquisition of Banacci's U.S. bank subsidiary, California Commerce Bank. The second, under the Federal Reserve Board's Regulation K, is a notice regarding the acquisition of Banacci and its foreign subsidiaries and operations."
The FRB must consider the Community Reinvestment Act, 12 U.S.C. §2901 et seq. ("CRA"), including Citigroup's record of fair service to its communities, particularly low- and moderate-income ("LMI") neighborhoods. Since Citigroup's subprime lending activities, alleged to be predatory by the FTC and others, occur in every service area of each of Citigroup's banks, these activities must be reviewed and acted on by the FRB, under the CRA and otherwise. It is also significant that Citigroup controls a bank with a rare Needs to Improve CRA rating -- under the Gramm-Leach-Bliley Act of 1999, this is supposed to preclude Citigroup from acquiring another bank in the U.S. (in this case, CCB). In late 2000, after ICP asked the Board to notify Citigroup, pursuant to 12 U.S.C. §1843(l)(2) and the then-current version of 12 CFR 225.84(a), of its loss of GLB Act powers in light of Associates National Bank's Needs to Improve CRA rating, the Board issued a final regulation, "interpreting" (and ignoring) the clear language of 12 U.S.C. §1843(l)(2), and changing, without public notice, 12 CFR 225.84(a) -- a reinterpretation that benefited only one company: Citigroup. Citigroup's ANB still has a Needs to Improve CRA rating. In this context, ICP timely enters the information below into the record before the Board on these applications, and requests that the Board hold public hearings, and deny the applications.
Less than two percent of the banks in the United States have less than satisfactory CRA ratings. The Board has historically denied applications by holding companies which have subsidiary banks with less than satisfactory CRA ratings. See, e.g., Totalbank Corporation of Florida, Order Denying the Acquisition of a Bank, 81 Federal Reserve Bulletin 876 (September, 1995); First Interstate BancSystem of Montana, Inc., Order Denying Merger of Bank Holding Companies 77 Federal Reserve Bulletin 1007 (December, 1991). ICP urges such a CRA-based denial, in this case.
While discriminatory and/or predatory lending are clearly CRA-relevant, they also provides a separate ground for denial, even under the Board's own precedents. For example, the Federal Reserve Board denied a Shawmut Bank application in New Hampshire, while a Department of Justice investigation of Shawmut's lending was pending. Shawmut National Corporation, Order Disapproving Acquisition of a Bank and Formation of a Bank Holding Company, 80 Federal Reserve Bulletin 47 (January, 1994). Here, the allegations against Citigroup's Associates are longer standing. ICP, for example, began documenting Associates' practices to the regulators in early 1997: see, e.g., "Activist Group Targets Ford Unit, Calling Its Card Rates Excessive," American Banker, January 27, 1997, at 1; "Ford Unit on Defensive Once Again Over Its Payments to Loan Brokers," American Banker, January 29, 1997, at 1; "OTS Suspends Associates' Application," National Mortgage News, February 16, 1998; "Law Denies CRA Clout to Citi-Associates Foes; Federal Regulators Cannot Consider the Issues," American Banker, November 27, 2000, Pg. 1. Under the Board's Shawmut precedent (see above), prior to any final Board action on the applications, the predatory lending issues documented by the FTC and others must be fully investigated and addressed. In the interim, the Board should schedule and hold public hearings.
Beyond the CRA and the above-cited FRB precedents, Section 3 of the BHC Act provides that in "every case, the Board shall take into consideration the financial and managerial resources and future prospects of the company or companies and the banks concerned, and the convenience and needs of the community to be served... The Board shall disapprove any application under this section by any company if... in the case of an application involving a foreign bank, the foreign bank is not subject to comprehensive supervision or regulation on a consolidated basis by the appropriate authorities in the bank's home country."
As to the first part of the above-quoted, ICP contends that the "communit[ies] to be served" for purposes of these application are not only the market area of CCB, or of Citigroup's existing banks. In 1998, Citigroup acquired Confia and its 400 branches. By February 2001, Confia had only 197 branches left. See, e.g., LatinFinance, February, 2001, "Citibank's New Start." Banamex has over 1,300 branches in Mexico (as well as, in the U.S., not only CCB, but also agencies in New York and Texas). Citigroup's projected cost savings rely on "rationalizing" (i.e., imposing its branch closing axe to) Banamex's operations. ICP contends that an inquiry into Citigroup's branch closing and service reduction practices, not only in the U.S. (where Citigroup proposes to close 24 branches, in connection with a proposed acquisition of 97 branches), but also in Mexico, is necessary in this case.
On Citigroup's under-service with branches of low-income neighborhoods, even in its headquarters city, an ICP representative on April 17, 2001 asked Citigroup's CEO about the settlement Citigroup reached earlier that month with the NYS Attorney General, regarding Citigroup's lack of automatic teller machines in low-income sections of New York, where Citigroup has the contract to distribute public assistance and other government benefits. The ICP representative asked Citigroup's CEO whether Citigroup now intends to install new ATMs in these low-income neighborhoods, or simply contract with other institutions to waive their fees. Citigroup's CEO's response was not clear to ICP; for the record, Thomson Financial's publication "CardLine," of April 13, 2001, reported that
Attorney General Eliot L. Spitzer found that Citigroup had few ATMs in neighborhoods with high concentrations of beneficiaries, according to a Wednesday announcement by Spitzer. The agreement gives Citigroup the option of deploying new ATMs that impose no surcharges on EBT cardholders or contract with local ATM deployers to provide surcharge-free ATM access.
The FRB should inquire into this. The ICP representative also asked Citigroup's CEO why, if Citigroup claims to be a leader, it is seeking "confidential treatment" from the FRB for even the list of subprime lenders with which it and SSB do business, in this proceeding. Citigroup's CEO indicated that he was unaware of his company's requests for confidential treatment for this information.
The ICP representative asked Citigroup's CEO why, despite his claim that Citigroup is a "leader" in consumer protection, Citigroup has expended significant funds lobbying against anti-predatory lending legislation, most recently in Philadelphia and Chicago. No response was proffered. Citigroup's initiatives to dominate the legislative process would, needless to say, be further exported and expanded if these applications were approved.
While the FRB in 1996 made a FRBSEA determination as to Banacci (see, e.g., Grupo Financiero Banamex Accival, S.A. de C.V., Banco National de Mexico, S.A., Banamex USA Bancorp, Order Approving the Formation of a Bank Holding Company and a Proposal to Engage in Certain Securities Activities, 82 FED. RES. BULL. 1047, 1049 (Nov. 1996), in the half-decade since then, Banamex, Citigroup's Confia and at least four other institutions have been subject to money laundering-related enforcement orders, and controversy has grown around privatization and bail-out deals, including with respect to Banamex and Citigroup's Confia. A detailed and updated inquiry into the "comprehensive supervision or regulation on a consolidated basis" statutory factor is needed -- frankly, the FRB's failure to take action on Citigroup's questionable subprime lending (see above) raises questions about the U.S. / FRB's compliance with this standard of the BHC Act, and core principle of the Basel Committee on Banking Supervision. It is imperative that the FRB hold public hearings on Citigroup's proposal to acquire Banamex.
III. QUANTITATIVE EVIDENCE OF CITIGROUP'S DISPARATE LENDING IN ITS U.S. COMMUNITIES
The analysis below uses the most recent Home Mortgage Disclosure Act ("HMDA") data available from the Federal Financial Institution Examination Council ("FFIEC"), 1999, and Citigroup's 2000 Loan Application Register ("LAR") data.
In the New York City Metropolitan Statistical Area ("MSA") in 1999, Citicorp Mortgage made 1236 conventional home purchase loans to whites, and only 56 such loans to African Americans, and only 58 to Latinos. Meanwhile, Citicorp Mortgage denied 14.9% of applications from African Americans, versus a 4.5% denial rate for whites. Citicorp Mortgage denies African Americans 3.31 times more frequently than whites (other lenders in New York deny African Americans 2.0 times more frequently than whites).
Adding Citicorp Mortgage and Citibank, N.A. together, Citigroup is still worse than other lenders in the market. The industry aggregate in the NYC MSA in 1999 made 5385 conventional home purchase loans to African Americans, 4841 to Latinos, and 36,467 to whites. Among these three groups, 11.5% of the industry aggregates loans were to African Americans, and 10.4% to Latinos. The figures for Citicorp Mortgage added with Citibank, N.A. are only 7.0% percent of loans to African Americans, 8.0% to Latinos: both less than the industry aggregate. Meanwhile Citigroup denied African Americans three times more frequently than whites, versus the industry aggregates two-to-one disparity.
* * *
The years of 1999 and 2000 (see below) are by no means the first years in which Citi's lending has been disparate in New York. When Citicorp and Travelers proposed to merge in 1998, ICP documented Citicorp's disproportionate exclusion of communities of color, including in New York's Bronx County. The New York Banking Department (the "NYBD") required a commitment from Citigroup, to increase its lending in majority-minority census tracts in New York State. Specifically, Citi's regulatory counsel, Carl Howard, in a July 22, 1998 letter to the NYBD, committed inter alia that for all of Citicorp's mortgage lenders, "the percentage of their HMDA-reportable lending in 1998, 1999 and 2000 in the majority minority census tracts in the following areas: 1. Nassau and Suffolk counties combined, 2. Westchester and Rockland counties combined, 3. Queens County, 4. Kings County, 5. Bronx County, 6. New York County and 7. Richmond County, will equal or exceed the adjusted Aggregates' percentage of such lending."
Citigroup claims to have increased its lending dramatically in majority-minority census tracts, and to have complied with the 1998 commitment. However, a close review of Citigroup's 1999 Home Mortgage Disclosure Act ("HMDA") data showed that the vast majority of these purported improvements consist of loans, under $1,000, reported as home improvement loans.
Citibank, N.A. reported making 1,931 HMDA-reportable loans in The Bronx in 1999. But fully 1,751 (or over 90%) of these were home improvement loans. These 1,751 home improvement loans in The Bronx were generated off 1,805 applications, for a total dollar volume of $4,064,000 -- an average of $2,252 per loan application, much lower than other lenders' average home improvement loan in The Bronx.
It appears clear that Citigroup initiated this "micro-home improvement loan" program in order to create the misleading impression that it was complying with its 1998 commitment. This becomes apparent, for example, when one considers the racial demographics of Citigroup's marketing (mail solicitations) for these loans. Of race-specific applications for home improvement loans in The Bronx, based on Citibank's marketing, it reported in 1999 410 applications from African Americans, 590 applications from Latinos, and only 66 applications from whites. This is entirely inconsistent with the demographics of The Bronx, and with the marketing and lending patterns in the Bronx of other lenders, including home improvement lenders. This pattern would not have resulted from obtaining credit history information for all of The Bronx's residents and homeowners; this is clearly a program of "micro-loans" directed as majority-minority census tracts, in order to purportedly comply with Citigroup's 1999 commitment, in terms of number of loans, but not dollar volume. The $4 million that Citibank lent in The Bronx under this program in 1998, claiming thereon over 1,000 loans, is dwarfed by Citigroup's (and Citibank's) "real" mortgage lending, in Manhattan below 96th Street, for example. Even in The Bronx, note that Citicorp Mortgage, with normal-size loans, made, in 1999, 44 loans to whites, and only six to Latinos, and only five to African Americans.
ICP has obtained 2000 LAR data from Citigroup; ICP urges the FRB to request and analyze 2001 data (and not simply Citigroup's summaries thereof) as well. Consider:
Dozens of pages, 32 records / applications per page, consist solely of $1,000 home improvement loans. While many of these "micro-mortgages" are granted to applicants for whom no gross annual income is reported, in a number of cases, applicants from the South Bronx, African-Americans or Latinos, are in fact DENIED even these $1,000 loans, despite having a reported income. (Hereinbelow, "South Bronx" is defined, as it is by the NYC Department of City Planning, as Community Districts 1-6). For example, in South Bronx Census Tract (CT) 233.02 (in the Tremont neighborhood), Citibank in 2000 denied a Hispanic applicant a $3,000 home improvement loan (page 60 of Citibank's LAR). The reason given is "debt-to-income ratio." But what, then, of the approved non-minority applicants for whom no income level is reported? Similarly, on page 79, an African-American applicant in Bronx CT 16 is denied a $1,000 home improvement loan, on "debt-to-income ratio" grounds. On page 90, an African-American applicant in South Bronx CT 121.01 (Crotona Park East) is denied a $1,000 home improvement loan, on "debt-to-income ratio" grounds. On page 95, an applicant listed as "Race Not Available" is denied for a $1,000 home improvement loan -- this in South Bronx CT 379, Bathgate (a nearly entirely "minority" census tract). On page 96, a Latina applicant in South Bronx CT 119 (Longwood) is denied for a $24,000 refinance loan -- despite having an income of $68,000. On page 101, a Latino applicant in South Bronx CT 25 (Port Morris) is denied for a $14,000 home improvement loan, despite having an income of $39,000.
On page 117, a Latino applicant in South Bronx CT 211 (Highbridge) is denied a $1,000 home improvement loan, despite having an income of $43,000. Incredibly, the ground given for denial was "debt-to-income ratio."
On page 121, an African American applicant in South Bronx CT 371 (Tremont / Belmont) is denied for a $5,000 home improvement loan, despite an income of $32,000. The reason given is "debt-to-income ratio."
On page 124, an applicant listed as "Race Not Available" in South Bronx CT 175 (Morrisania, over 99% "minority") is denied for a $5,000 home improvement loan, despite an income of $26,000. On page 136, an applicant listed as "Race Not Available" in South Bronx CT 75 (Melrose, nearly entirely "minority") is denied for a $20,000 home improvement loan, despite an income of $32,000. The reasons given were "debt-to-income ratio" and "other." On page 141, an applicant listed as "Race Not Available," in South Bronx CT 381 (Bathgate) is denied for a $20,000 home improvement loan, despite an income of $52,000 -- here, the entire grounds for denial is listed as "other." There is more; ICP urges the FRB to obtain this (and Citigroup's 2001) Loan Application Register, and to make appropriate inquiries.
Citigroup has proffered an "explanation" of the above-analyzed micro-mortgages, claiming that in order to "re-enter" markets like The Bronx, it began to offer small home improvement loans, to establish "relationships." In an April 20, 2001, submission to the FRB, Citigroup claimed 3,623 Citibank loans in "majority-minority" census tracts in the New York City MSA in 2000 -- but the submission, at page 10, showed that only 1,606 of those loans, less than half, were home purchase or refinance loans. More than half, then, were the misleading "micro-mortgages" analyzed above.
Of Citibank's / CitiMortgage's 150 LAR items in the South Bronx that are NOT $1,000 home improvement loans, Citibank's main claim to CRA credit consists of 25 home purchase loans made in a single census tract of the South Bronx, CT 69 in Melrose. It appears clear that this is a middle income, NYC Housing Partnership development, on which Citibank was designated the preferred "end-lender." There appears to have been pre-screening (in violation of the Equal Credit Opportunity Act, ICP contends): of the 29 similarly-sized home purchase applications from CT 29, 25 were approved, only one was denied, four were reported as "incomplete." This is to be contrasted with Citibank's high denial rate for home purchase and refinance loans in all other South Bronx census tracts, and elsewhere in the U.S. (that is, on actual retail, non-prescreened loan applications).
IV. WHILE CITICORP MORTGAGE DISPROPORTIONATELY DENIES AND EXCLUDES PEOPLE OF COLOR FROM NORMAL RATE CREDIT, THE ASSOCIATES TARGETS PEOPLE OF COLOR FOR HIGH COST LOANS WITH PREDATORY FEATURES
Beyond New York, Citigroup's conventional home purchase lending is similarly disparate in other markets in which it has a CRA duty. In the Chicago MSA in 1999, Citicorp Mortgage denied 29.2% of applications from African Americans for conventional home purchase loans, versus only 5.0% of applications from whites, meaning that Citicorp Mortgage denies African Americans 5.84 times more frequently than whites. In the Oakland MSA in 1999, Citicorp Mortgage’s denial rate disparity between African Americans and whites for conventional home purchase loans was 4.04.
Most of the worst predatory lending practices take place in the refinance mortgage and home equity loan markets. ICP's analysis, below, comparing the refinance mortgage lending of Citigroup's normal interest lenders, its banks and Citicorp Mortgage (at times, "CM"), and of Citigroup's subsidiary Associates Financial Services (at times, "AFS"), a high interest rate, "subprime" lender, finds that CM disproportionately excludes people of color for its (normal interest rate) lending, while AFS targets people of color with high-cost, predatory loans. Following this quantitative analysis is a review, including pending class actions and governmental investigations of discrimination, of Citigroup's Associates' practices, which ICP (and the FTC and others) contend are predatory.
For the record: in the Buffalo NY MSA in 1999, Citicorp Mortgage made 61 refinance loans to whites, and only two to African Americans, a ratio of 30.5 to one. Citigroup's subsidiary Citibank (New York State) in this MSA in 1999 made 109 refinance loans to whites, and only four to African Americans, a ratio of 27.25 to one. Citibank (NYS) denied the applications of African Americans more than three more frequently than those of whites -- essentially driving the disproportionately denied African Americans to higher-cost lenders, including one that Citigroup now controls. Associates Financial Services in Buffalo in 1999 made 85 refinance loans to whites, and 31 to African Americans -- a ratio of 2.74 to one. This Citigroup-controlled subprime lender is more than eleven times more likely to target African Americans with its high cost loans than is Citicorp Mortgage, and is over nine time more likely to target African Americans with its high cost loans than is Citibank (NYS), with normal interest rate loans. [snip - contact ICP for more recent data]
While ICP's data analysis has focused on Associates Financial Services, the Board should inquire -- including in light of the FTC enforcement action -- into the practices of all others Associates subsidiaries, including The Associates (TX), Associates First Capital Mortgage (TX), Associates Mortgage Group, Inc. (KY), Kentucky Finance Company, TranSouth Financial Corporation, First Family Financial Services, Associates' subprime auto lending business (including that acquired with Arcadia Financial), and Associates Home Equity Service (TX).
Beyond the above-cited March 6, 2001, Federal Trade Commission lawsuit, the public record is replete with other examples of Associates' predatory practices. See, e.g., "Loan Sharks, Inc.: High-Interest Rate Loans Are Soaking the Poor From the South Bronx to California -- And Wall Street Can't Get Enough," Village Voice, July 15, 1997, at 33 (reporting inter alia Associates' practice of loan flipping, in Brooklyn, New York and elsewhere); "Cashing In On Poverty," by Mike Hudson, The Nation, May 20, 1996, at 11 (reporting inter alia that former Associates loan officer Philip White routinely misled customers, at his employer's instructions, which he summarized as "If you had to lie about the points we charged them, lie to 'em. They're stupid anyway"); "A Man and His Loan: Why Bennie Roberts Refinanced Ten Times," by Jeff Bailey, Wall Street Journal, April 23, 1997, at A1 (in this case, the effective number of points, taking into account all refinancings, was 83: on an initial loan for $9,349, Bennie Roberts came to owe Associates $45,000, after ten refinances in four years, costing $19,000 in loan fees and points); and "Company Says It Will Battle Any Bias Lawsuit," by Jim Fuquay, Fort Worth Star Telegram, June 23, 2000.
The American Banker of March 13, 2001, at 11, reported that among "policies that raise the interest rate on customers who pay a bill late... [t]he highest such penalty rate, 29.99%, was charged by... Associates National Bank, a subsidiary of Citigroup Inc....".
See also, "FTC SUES ASSOCIATES FIRST CAPITAL; PROBED LENDER HAS POOR RECORD HERE," Madison (Wisc.) Capital-Times, March 9, 2001, reporting that "Associates does significant business in Wisconsin through a variety of subsidiaries, including credit insurance and home equity lending. It has 37 offices statewide, including two in Madison. Records filed with the state Department of Financial Institutions show 87 complaints filed by Wisconsin consumers against Associates since 1998. That is a high number of complaints compared to other financial services firms doing business in the state, said one regulator. 'They're one of the worst' said the regulator who asked not to be named. Associates Financial Life also collected $1.31 million in premiums in 1999, making it the 16th largest credit insurer in the state."
ICP has received a communication regarding practices at CitiFinancial, in which it is alleged that
a former CitiFinancial branch manager... was fired for failing to engage in predatory lending practices. Prior to being fired, he was told that is RBO (Refinance Balance Only) volume had decreased from the previous year. He was encouraged to increase the RBO's. An RBO is what is sometimes called "flipping." The company actually keeps records of the number of RBO's at each office. He knows of one case where a personal loan made in August was flipped twice in three months...
--Emphasis added.
While ICP is inquiring into the above-quoted communication, the FRB should inquire with Citigroup whether, inter alia, CitiFinancial "keeps records of the number of RBO's at each office," into the referenced "August" (that is, pre-Associates) doubled-flipped loan, and any loans like it.
As to Citigroup's Primerica subsidiary, ICP recently received the following complaint:
Dear Inner City Press
...We recently refinanced using someone in our church body who passed themselves off as a "personal financial analyst," but was really a salesman for Primerica / Travelers. The interest rate offered was higher than the one we already had and we have a spotless credit record. When we questioned this, the rep told us that "interest rates don't matter," "it's all smoke and mirrors," and "this bank calculates the interest differently." To make a long story short, we have come to realize that this bank does nothing differently but scam people, and if we want to get refinanced yet again, we are subject to a stiff prepayment penalty...
Citigroup is already expanding Primerica into Spain; if these applications are approved, it is foreseeable that these (and Associates') practices would be further expanded in Mexico. The FRB must inquire into and act on these issues, before even considering (other than denying) these applications.
V. CITIGROUP'S INVESTMENT BANK IS ALSO INVOLVED IN PREDATORY LENDING
Citigroup, through its investment banking operation, is also deeply involved in questionable subprime lending. For example, in 1999, Salomon Brothers Realty Corp. provided a $100 million repurchase line of credit to Long Beach Mortgage -- a subprime lender that was sued by the Department of Justice of race discrimination and pricing disparity grounds. In 1998 Salomon Brothers Realty Corp. provided warehouse lines of credit of $775 million to subprime lender New Century Mortgage Corporation ("New Century"), requiring New Century either to securitize $1 billion of loans through Salomon Smith Barney as sole underwriter, or, in the alternative, to sell $1 billion in loans to Salomon Brothers Mortgage Securities VII for their own securitization.
Salomon Smith Barney was the underwriter for the subprime mortgage backed securities issuances Centex Home Equity 1999-4 and 2000-A, and well as Ameriquest Mortgage Securities 2000-1.
To document for the record that the Citigroup/SSB-underwritten subprime lender Ameriquest disproportionately targets protected classes with its (Citigroup-enabled) high-interest rate loans, consider Ameriquest Mortgage Co.’s refinance mortgage lending in the New York City MSA in 1998: 371 loans to African Americans, 214 loans to whites, a ratio of 1.73 to one. The aggregate industry in this MSA in 1998 had a ratio of 0.240 to one. In the NYC MSA, SSB-underwritten Ameriquest targets African-Americans 7.21 times more frequently than the aggregate with its high interest rate refinance loans. What standards do SSB and Citigroup have for working with subprime lenders? Apparently none. Most recently, Citigroup has sought "confidential treatment" for even the names of the subprime lenders with which it does business. The FRB should obtain and release this list, and hold the requested hearings.
VI. CITIGROUP RUN AFOUL OF THE "MANAGERIAL RESOURCES" FACTOR IN NUMEROUS OTHER WAYS
Under the explicit "managerial resources" factor of Section 3 of the Bank Holding Company Act and Regulation K, and in light of the FRB's duties under the principles promulgated by the Basel Committee on Banking Supervision, ICP presents the following:
A recent Senate investigation into money laundering has found, once again, that Citigroup has insufficient controls in place to prevent money laundering. See, <http://www.senate.gov/~gov_affairs/022801_psi_case_contents.htm>. See also, New York Times of March 3, 2001, March 3, 2001, Citibank Admits to Lapses in Dealings With Offshore Shell Banks. This follows previous reports of similar deficiencies at Citigroup. See, e.g., the General Accounting Office ("GAO") report issued on November 29, 2000 (GAO-01-120; "Possible Money Laundering Through U.S. Banks"), which found that Citibank, until April, 2000, handled at least $270 million for "Russian companies" as to which Citibank "did not conduct due diligence...". Id. at 9, also citing GAO/OSI-99-1, "Private Banking: Raul Salinas, Citibank and Alleged Money Laundering"). See also, Money Laundering Alert, January 2000, and see the following, from Mother Jones magazine's December 2000 article, "Tax Cheater's Paradise:"
"Citibank's clients have included the family of Sani Abacha, the former Nigerian general who plundered billions of dollars from his nation's treasury, and dictator Omar Bongo of Gabon, for whom Citibank established a Bahamian shell corporation to stash his looted treasure. Citibank also helped Raul Salinas, brother of former Mexican president Carlos Salinas, by transferring tens of millions of dollars out of Mexico and depositing the money in European banks under the names of untraceable companies registered in the Cayman Islands. Citibank never used Salinas' name in bank communications, referring to him instead as 'Confidential Client 2,' or 'CC-2.'
'CC-1' was the code used to refer to Carlos Hank Rhon, who is currently facing civil charges by the Federal Reserve that he used secret offshore accounts to illegally hide his controlling interest in Laredo National Bank, the third-largest independent bank in Texas. A Mother Jones review of Fed documents reveals that Citibank handled more than $100 million for Hank Rhon, funneling his money through accounts in New York, Mexico, London, Zurich, the Bahamas, and the British Virgin Islands. According to one filing in the case, Citibank not only decided what offshore entities to establish, but designated its own employees as officers, directors, and trustees."
-emphasis added.
Since the above-quoted, the FRB on May 31, 2001, settled enforcement proceedings with the above-referenced Carlos Hank Rhon. Particularly in this light, and in light of the FRB's 1998 cease and desist order against Citigroup's Confia, ICP explicitly requests that the FRB act on a submission that Citigroup made to the California Department of Insurance ("CDI") last fall, in connection with its application(s) to acquire Associates First Capital and its subsidiaries. In response to the CDI's Question 8 ("Provide a list, and certified copies of all criminal, civil, regulatory and administrative actions(s) taken against applicant and/or applicant's ultimate controlling parent by any government body including actions outside the United States (within the last ten (10) years"), Citigroup stated:
California Certificate of Authority Application
Attachment C
Response to Item 8
To the best of Citigroup's knowledge, aside from certain environmental issues, there have been no criminal, civil, regulatory or administrative actions taken against Applicant (Citigroup Inc.) by any governmental body including actions outside the United States within the last ten years. From time to time, Applicant has come within the regulatory scope of federal and state environmental agencies through its acquisition or merger of companies previously engaged in manufacturing activities. In the past, these environmental agencies have required Applicant to undertake certain actions and all such issues have been satisfactorily resolved. Additionally, the direct and indirect subsidiaries of the Applicant are in regulated businesses and as a result are subject to regulatory examinations and actions in the ordinary course of business by the banking regulators, Securities and Exchange Commission and the insurance departments of the various states. Governmental bodies are also customers, account holders and insureds of the subsidiaries of Application, which may be involved in disputes or litigation regarding terms and coverage in the ordinary course of business. To the best of our knowledge, there have been no criminal proceedings brought against any subsidiary of the Application while they were subsidiaries within the last 10 years. Information concerning major proceedings had been described in the periodic reports filed by Citigroup and its predecessors with the Securities and Exchange Commission. Citigroup's Annual Reports Form 10-K for the past two years are included with this Form A application.
ICP hereby formally asks the FRB, as Citigroup's primary regulator, to consider the (in-) validity of Citigroup's above-quoted answer, to another regulatory agency which, under the GLB Act, relies on and defers to the FRB.
* * *
Finally, as matters concerning (and injuring) the public interest, consider that Citigroup is extensively involved in "resource extraction," much of it environmentally destructive, through such units as Citicorp Ventures Philippines, Inc., Citicorp Petrolease, Inc., Phibro Energy Production, and Phibro Commodities. Since November, 2000, Australian "natural resources" company BHP Ltd. has appointed Citi's Salomon Smith Barney to advise on its U.S. coal operations, including possible mine acquisitions. BHP's possible targets include U.S. steaming coal mines owned by the Peabody Group, the world's largest coal company, and the No.2 U.S coal company, Arch Coal Inc..
Citigroup's SSB has served as advisor and done underwriting for problematic projects like the Three Gorges dam in China, for the World Bank and controversial projects like the proposed Chad - Cameroon oil pipeline, and for the genetic engineering firms Deltagen, Orchid BioSciences, Genaissance Pharmaceuticals, and Genecor International. Citigroup's SSB has acted as lead underwriter, not only for presumptively predatory mortgage loans, but also for Wackenhut Corrections Corp.'s initial public offering of the private prison-based REIT, Correctional Properties Trust. Giving increasing public awareness of, and opposition to, such practices, Citigroup's involvement must be considered in connection with its applications and notices to acquire Banamex, under not only the "managerial resources" factor, but also (prospectively), the financial resources and ability factors -- as does the potential financial ramifications of the FTC's March 6, 2001, predatory lending lawsuit.
VII. CONCLUSION
For the reasons set forth above, the Board should schedule and hold a public hearing on these applications, and, on the current record, the Board must deny the applications.
If you have any questions, please immediately telephone the undersigned, at (718) 716-3540.
Respectfully submitted,
Matthew Lee, Esq.
Executive Director
(First) Report of May 29, 2001: On May 17, Citigroup's CEO Sandy Weill appeared at a press conference in Mexico City, to announced Citigroup's $12.5 billion deal to acquire Banacci / Banamex, the second largest bank in Mexico... The questions asked at Citigroup's May 17 teleconference with investment analysts were generally superficial and congratulatory (from analysts from Merrill Lynch, Morgan Stanley, among others). Asked about Banacci's 55% holding in the telecommunications firm Avantel, and whether continued ownership by Citigroup would be legal, Sandy Weill said "we're confident we can handle that." A question asking for an elaboration on Citigroup's planned use of Banamex in the United States was not answered. To a final question about "regulatory and political risks," Weill said Citi hopes to close in the third quarter of 2001, since "initial reactions on both sides of the border have been positive," but the closing has been set for the fourth quarter, since "you never know what comes up... we hope not too many hurdles."
In an interview on May 17, Robert Rubin hinted that Citigroup would move to open more branches in the United States under the Banamex name, targeting Mexican-American communities. Whether this targeting would include the allegedly predatory products of Associates / CitiFinancial was not disclosed. Nor were specifics given about branch closings in Mexico, as cost would be wrung out of Confia's and Banamex's operations...
Here is a summary of ICP's initial comment to the Mexican bank regulator, which has since been supplemented -- we'll appreciate from readers of this Report any further information about the regulatory process in Mexico (or, going forward, in other nations).
May 24, 2001
Comision Nacional Bancaria y de Valores
Attn: Federico Nunez Gonzalez, et al.
Insurgentes Sur 1871 Torre sur 10 piso
Colonia Guadalupe Inn
01020 Mexico DF
RE: The Proposal by Citigroup, Inc. to Acquire Banacci and Banamex and their affiliates -- request for copies of all related applications, timeline to submit comments, etc.
Dear Federico Nunez Gonzalez or to whom it may concern:
I am writing on behalf of Inner City Press/Community on the Move and its affiliates (collectively, "ICP")... ICP desires to submit formal comments to your agency regarding the proposal, announced on May 17, 2001, for Citigroup, Inc. ("Citigroup") to acquire Banacci, Banamex and their affiliates (collectively, "Banacci"), but first desires to receive and review all applications or notices that your agency receives concerning Citigroup's proposal.
The first purpose of this letter, accordingly, is to request that you send copies of all documents that are submitted to your agency, related to Citigroup's proposal..
The second purpose of this letter is to request confirmation of the Mexican statutory law, and regulations, applicable to Citigroup's proposal... We would appreciate a copy, or Internet citation, to the law and regulation that your agency will apply to Citigroup's proposal, and thank you in advance in this regard.
We have previously commented to the U.S. Federal Reserve Board concerning Banacci, and its affiliates Banamex USA Bancorp and California Commerce Bank. See, e.g., Grupo Financiero Banamex Accival, S.A. de C.V., Banco National de Mexico, S.A., Banamex USA Bancorp, Order Approving the Formation of a Bank Holding Company and a Proposal to Engage in Certain Securities Activities, 82 FED. RES. BULL. 1047, 1049 (Nov. 1996). As noted above, we desire to comment to your agency on Citigroup's proposal to acquire Banacci. You should be aware, and we hereby formally enter into the record before you, that Citigroup has been sued by the U.S. Federal Trade Commission ("FTC") for so-called predatory lending (essentially, the gouging of consumers in violation of law). See, e.g., Federal Trade Commission v. Citigroup, Inc., et al., Civil No. 010 CV 0606 (U.S. District Court for the Northern District of Georgia, Atlanta Division, filed March 6, 2001; available on <www.ftc.gov>. We have also noted troubling disparities in Citigroup's lending in New York to "Hispanics," a category encompasses the vibrant Mexican-American community here. In the New York City Metropolitan Statistical Area ("MSA") in 1999, Citicorp Mortgage made 1236 conventional home purchase mortgage loans to whites, and only 58 to Hispanics. The industry aggregate of conventional home purchase loans in the NYC MSA in 1999 was 4841 to Hispanics, and 36,467 to whites, along with 5385 to African Americans. Among these three groups, 10.4% of the industry aggregate's loans were to Hispanics. The figure for Citicorp Mortgage added with Citibank, N.A. was only 8.0% of loans to Hispanics: less than the industry aggregate.
In the Chicago MSA in 1999, Citicorp Mortgage made 361 mortgage refinance loans to whites, and only 69 to Hispanics (a ratio of 5.23 to one). On applications for these loans, Citicorp Mortgage denied Hispanics' applications 4.48 times more frequently than whites' -- essentially driving the disproportionately denied Hispanics, including Mexican-Americans, to higher-cost lenders, including one that Citigroup now controls, that has been sued for predatory lending by the U.S. FTC.
ICP desires to submit more extensive comments to your agency, including on Citigroup's record in Mexico and elsewhere -- but first desires to receive and review all applications or notices that your agency receives concerning Citigroup's proposal to acquire Banacci... We appreciate your prompt attention.
Very Truly Yours,
Matthew Lee, Esq.
Executive Director
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