the audit

More on Citi and the Business Press

LAT and NYT editors make fair points, provide valuable teaching moment
October 8, 2007

Editors from major dailies on both coasts wrote to say I blasted with too wide a blunderbuss last week in wondering why it was left to a small periodical to reveal how Sandy Weill built Citigroup on a foundation of subprime sludge.

We press critics learn early to dread the polite but firm notes that begin: “Perhaps you are unaware…”

Perhaps you are unaware of the L.A. Times‘s aggressive coverage of Ameriquest Mortgage Co. beginning in early 2005 — long before others got on to the subprime mess.

That came last week from John Corrigan, a deputy business editor at the L.A. Times.

Other notes are just, um, firm. Some I would describe as “spirited.”

Almost all signed correspondence, though, performs a valuable service beyond the obvious one of personally humiliating me, my employers, and my parents in front of thousands. For one thing, they call attention to and allow me to redistribute work I usually like anyway. They also provide an opportunity to clarify what The Audit is trying to do, thereby creating a teaching moment.

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Third, and most important, all comers appear to agree with me on the basic principle: the business press can and should be more and unapologetically aggressive in exposing bad corporate behavior. If The Audit can create a consensus on that point, I, like Abraham Lincoln, the Great Emancipator himself, will endure all the grossly unfair, offensive, and hurtful attacks on myself and personal habits.

Jim Schachter, a former New York Times business editor and current deputy editor of the Times magazine, notes correctly that I missed work by Pat McGeehan and Rich Oppel in 2000 that was right on the mark in exposing Associates First Capital for the corrupt organization that it was, just as Citi was buying it and Wall Street was cheering.

Schachter writes:

I have no quarrel with the notion that the business press should be more aggressive, more ambitious and more brave. But I think you’ve picked a poor example on which to build that case.

The timely 3,700-word story [1] pointed out that Associates faced more than 700 private lawsuits, had been fined by Georgia authorities, was the subject of legislative scrutiny in North Carolina and elsewhere, and was under investigation by the Justice Department, the Federal Trade Commission, and the North Carolina attorney general.

The story noted that Citi was fully aware of Associates’s problems, but promised to fix them.

These include eliminating loans with large ”balloon” payments; starting a pilot program to have branch offices ”refer up” customers with good credit ratings into less-expensive conventional loans; limiting prepayment penalties to the first three years of a loan; and limiting the amount of certain up-front fees to 9 percent of the loan value.

The story said that Charles O. Prince, then chief administrative officer, now CEO, was on hand to reassure community groups in Durham:

‘I am absolutely confident we would change any practice in any part of our company to make absolutely sure that our reputation remains intact.’

It was a nice of Citi to limit “certain up-front fees” for subprime customers to a mere nine points, which is like throwing a drowning person a shot put. Now that’s living richly.

As it turns out, though, Citi didn’t change Associates’ practices, or at least not enough; that’s why the FTC lowered the boom two years later, and Citi was forced to settle for a record penalty.

I wonder, by the way, how that pilot program to “refer up” customers turned out? Maybe they meant to “reefer” up customers with some decent weed, so they wouldn’t be so upset when, after the merger, a CitiFinancial manager threatens to send someone with an “arrest warrant” to tell a customer’s boss she was a “deadbeat.”

(I’m not sure when corporations got police powers, but maybe in the Patriot Act somewhere. I’m half waiting for the Washington Post’s Dana Priest to break the story of a Blackwater-run subprime debtors’ prison at Guantanamo, and for the WSJ editorial putting it in context. )

But, to be fair, Associate executives, the Times story notes, used to curse at borrowers’ children [2] so, it cannot be said that Citi did not improve things.

Anyway, back to the Times story. Like many investigative works, it rewards a close reading with darkly comic moment.

The story notes, for instance, that while Citi officials emphasized how different the two companies were, Associates’s CEO (and future Citi vice chairman) stressed the opposite.

Last month, in an investor conference call, Keith W. Hughes, the chief executive of Associates, who will join Citigroup as a vice chairman after the merger, cited the strong cultural similarities between the companies. But in an interview last week, Marge Magner, a Citigroup executive who previously oversaw Citigroup’s consumer finance business, stressed what she said were big differences, particularly in how the sales staff is paid.

So, the similarities are, um, different.

It also noted that the Clinton Treasury Department, which Robert Rubin headed before becoming Citi’s executive committee chairman, called a product known as lump-sum credit life insurance, “unfair, abusive and deceptive.”

Associates called the product “bread” and “butter,” as Oppel and McGeehan write:

One interoffice memo, written to group managers in 1988, instructed Associates employees to ‘insist that the insurance offer is written on every application, NO EXCEPTIONS.’

What does Citi think?

CITIGROUP officials say the problem is not with the product, but in the way that it is sold.

All right, then. Apparently Rubin thought one thing at Treasury and another at Citi. What happens when he becomes the chairman of the executive committee of Rent-a-Center?

Bottom line, Audit to Schachter: Good story. Thanks for pointing that and others [3] out.

Corrigan, from the L.A. Times writes:

In a series of stories by staff writer E. Scott Reckard and contributor Mike Hudson beginning in Feb. 2005, the L.A. Times shone a light on the ‘boiler room’ culture in some Ameriquest loan offices, the use of fraudulent appraisals to win loan approvals, and the fact that Ameriquest’s ads rarely mentioned that it was a ‘subprime’ lender — even though at the time it was the nation’s largest.
We subsequently learned that our coverage was closely followed by regulators who ultimately negotiated a $325 million settlement from Ameriquest. You can find those stories at

That was indeed a remarkable story.
(I happened to have seen that one, but missed the other 29 that Reckard did on the defunct Ameriquest and its founder, Ambassador Arnall.

Since the topic today is Citigroup, I’ll limit myself to quoting only two paragraphs describing a typical day around an Ameriquest office in suburban Minneapolis:

Slugging down Red Bull caffeine drinks, sales agents would work the phones hour after hour, he said, trying to turn cold calls into lucrative ‘subprime’ mortgages — high-cost loans made to people with spotty credit.

The demands were relentless: One manager prowled the aisles between desks like ‘a little Hitler,’ Bomchill (an ex-Ameriquest staffer) said, hounding agents to make more calls and push more loans, bragging that he hired and fired people so fast that one worker would be cleaning out his desk as his replacement came through the door.

The “Proud Sponsor of the American Dream,” ladies and gentlemen. A David Mamet-meets-Hunter Thompson dream, but a dream.

Someone else wrote to point me to the remarkable work by the Times‘s Diana B. Henriques, whose byline I will not fail to notice in the future, including on this 6,200-word jackhammer written with the great Lowell Bergman on the crooked, Wall Street-abetted practices of First Alliance Mortgage Co., also now defunct.

MORTGAGED LIVES: A special report.
Profiting From Fine Print With Wall Street’s Help [4]

A couple of points here:

First, the people who wrote me are proud of their colleagues’ work, and that’s a good thing. Obviously, I don’t mean to slight that work; quite the opposite. I also understand the feeling of doing the hard work that others avoid, and then having it ignored.

Second, the two Timeses did hit hard at the subprime issue in general.

Schachter says:

I think that our paper’s coverage on this issue since then — by Gretchen Morgenson and many others — has lived up to the traditional standard of afflicting the comfortable and comforting the afflicted.

Of course, I already agree on that. (Gotcha! Boo-yah!)

L.A., you’re right. You were wrongfully ignored. On the other hand, this isn’t the Pomona Journalism Review, so lay off.

But third, and let’s face it, Hudson’s piece in Southern Exposure was groundbreaking in that it really did reveal not only that Citi bought a bad company in 2000, but that its roots—a significant part of it earnings, a case could be made, its very essence–lay in the subprime sector.

I suspect that’s why the story won a Polk Award.

That it was left to Southern Exposure to do that story, given the volume of Citi coverage, is, I’m sorry, troubling.

Also, given the amount of regulatory activity around Associates in 2000 and subprime lending in general afterwards, especially in 2002, it is worth asking whether it is more notable that these newspapers did the stories or that others did not?

Fourth, why is there an Audit?

One thing is for sure: it’s not here to attack the business press. The Audit, as an arm of CJR, is a friend of the press in general, the business press in particular, and of business reporters, who are on the front lines, most of all. And that’s how it will be as long as I’m running it.

The purpose of The Audit, obviously, is to make the business press do what I want. But that just seems to be what many but not all working journalists want, including the late Forbes editor, James Walker Michaels, as described Sunday by Morgenson:

He refused to play the access journalism game. (Better to have your nose pressed firmly against the glass than to be a guest of the people you report about.) He believed in congratulating true business achievers and slamming crooks and flops. What better way to celebrate capitalism, he argued, and keep it safe from the me-firsters who could wreck it?

If the business press doesn’t want to do that, then at least we can have a discussion about it.

So, I have a view on what constitutes good and bad reporting, and I often question editorial priorities. But that’s only because I think I have a healthy respect for the importance of what the business press does—especially in these times.

My generation of reporters—I’m forty-eight, (though still spry!)—came of age as President Reagan was winning the deregulation debate, ushering in an era in which corporate power has been ascendant and government regulators in retreat. People will argue about the merits of this philosophical shift and whether it’s about to end (and I hope it is), but not, I think, the fact of it.

And so, business reporting has faced extra responsibilities, even as its financial base has been about as stable as one of those whirling amusement park rides were the bottom drops out and everyone is pinned to the side, screaming.

These days, financial journalists need to, yes, provide timely information to shareholders, keep readers up to date on new technology, fashion, autos, food, and the like, write boardroom-level features, break news on deals, all of that.

But to remain relevant to readers, they also need to point out the good actors and go after the bad, no matter how big or mainstream. To me, that’s the main job; everything else is ancillary.

Basically, business reporters, to survive, must do what they want to do anyway.

1. Along With a Lender, Is Citigroup Buying Trouble?
22 October 2000
The New York Times


THE Mackeys complained of receiving harassing phone calls from the Associates after they missed some payments on the refinanced loan. They said that callers would even curse at their sons, and that they were eventually told that foreclosure proceedings had begun. Ibid

3. Lenders Try to Fend Off Laws on Subprime Loans
1585 words
4 April 2001
The New York Times

4. Profiting From Fine Print With Wall Street’s Help
15 March 2000

Dean Starkman Dean Starkman runs The Audit, CJR’s business section, and is the author of The Watchdog That Didn’t Bark: The Financial Crisis and the Disappearance of Investigative Journalism (Columbia University Press, January 2014). Follow Dean on Twitter: @deanstarkman.