Controlled Implosion

Citigroup reported it’s first full year profit since 2007 in the manner we've come to expect from CEOs and liars, one in the same, namely that the worst not only is behind us, but it never really happened and it's business as usual from here on. That would be like denying that the World Trade Center was cratered into a molten lump of thermite and steel, yet to hear Citi tell it the profits party never went away and is here to stay. So, investors go and gobble up shares of Citigroup. But if the bravado is real profits are not and it is business as usual, but on an unparalleled scale.

It was beneath the crushing weight of thousands of flawed and fraudulent mortgages that Citigroup twisted and crumpled like tinfoil and then imploded. The implosion never reached terminal velocity, caught as it was in mid air by the tired hand of an unwilling taxpayer. That hand was forced to feed Citigroup $45 billion directly and prop up another $308 billion government guaranteed backstops.

Of course Citi is quick to point out that the $45 billion has been repaid and that the $308 billion backstop is removed. And standing in the wreckage of its own controlled demolition with swirling eddies of toxic mortgage stream payments rising in the background the bank still managed to pucker up a straight face and announce a $10.6 billion profit for 2010. What Citi didn't say is that $2.3 billion dripped down to the bottom line from a reduction in loan loss reserves.

More of Citigroup's customers were able to meet payments on credit cards and home loans. Its credit losses of 6.9 billion dollars were down 805 million dollars from the previous quarter, or 11 percent, marking the sixth consecutive quarter of decline. The reduced losses allowed the bank to release 2.3 billion dollars from the reserves that it had set aside for bad loans.

That sounds great as long as no one is going to miss a payment in 2011 let alone default. I would bet against it, but Citi sure seems to be banking on just that. In fact Citigroup doesn't even pretend to improve it’s loan quality standards.

Three years after bad home loans helped trigger the recession and six weeks after the government cashed in the last of its $45 billion Citigroup investment, the New York-based bank is still selling mortgages that violate quality standards, according to an internal Freddie Mac review obtained by Bloomberg.

Specifically these are loans issued between February and May of 2010. Liar loans, ninja loans, and the same old lame litany of junk paper the bank sold in the years leading up to the credit burst. Why does the bank continue writing mortgages they know cannot be repaid? Answer that question and a much darker vision of the company's business model emerges, a model to control the unstoppable implosion while sucking in everything in on its way down.

For its part the bank says is doing a great job, and if you don't believe it they will tell you themselves.

Sanjiv Das, New York-based chief executive officer of CitiMortgage Inc., the Citigroup unit that originates loans and buys them from smaller lenders, declined to comment on the Freddie Mac findings. He said the bank’s own quality control reviews show an improvement in underwriting that “is one of the most outstanding stories in our business.” Freddie Mac has no published standard for defect levels.

“My own information based on our defect rates tells me we are doing a fantastic job,” Das said.

That's all very nice Snajiv, but

Underwriting gaps that led to failed mortgages contributed to $83.7 billion in credit losses since 2007 for Citigroup and to the government takeover of the mortgage-finance business.

What Sanjiv Das is effectively saying is that 15% deficit is acceptable. It is acceptable to him because the taxpayer is bitting the bullet on Citi's defective loans. The target for deficit should be about 0% and if Citigroup were required to survive on its own that's exactly what it would be. Alternatively the bank is allowed to offload all of its toxic waste onto any government scum sucking entity with a designation GSE. The designation du jour is Fannie Mae and Freddie Mac.

The taxpayer should not be responsible for a single cent of the $83.7 billion, but Citigroup is allowed to parade its $10.6 billion charade while Pandit gets a healthy $1.75 million boost to his personal bottom line.

Instead of politely declining to comment on defects in it’s loan policy, Citigroup should experience the same vindictive ruthlessness as homeowners wrongly ejected from their homes under the rocket docket, and the gangster owned criminal MERS. Instead they get to extend the business model and to continue the original scam into perpetuity.

In the prelude to a depression no bank can generate profits in the traditional larcenous manner. Namely making loans that no one wants based on money out of thin air. So, it pulled money out of loan loss reserves and book them it profits, then the offload the fraudulently issued mortgages to be guaranteed by the government. Citigroup sold $15.5 billion worth of mortgages to Freddie Mac and $31 billion to Fannie Mae last year. Actually all of the big banks are scurrying to poke Freddie and Fannie and Bank of America has already shown the way.

The bank said it also paid $1.52 billion to Fannie Mae to settle disputes on $3.1 billion in loans, or about 49 cents on the dollar.In a similar scam, Bank of America agreed to settle with Freddie and Fannie. Countrywide (taken over by BofA) had faced $127 billion in buyback claims for faulty securities it sold. Again, the problem was that the underlying mortgages did not meet the “reps and warranties” the bank had provided. It paid Freddie $1.28 billion and Fannie $1.52 billion—a measly 2+% of the value of the fraudulent mortgages the bank sold.

And how are Fannie and Freddie faring under that strategy? They have imploded and been dropped onto the back of the taxpayer with a $148 billion thud. Now you understand why the zombie banks hand-in-hand with Fannie Mae and Freddie Mac will be with us until an asteroid gives us all something else to think about.

Sure Citigroup will be on the hook for buyback claims due to fraudulent mortgages. But by then it profits will have been booked and settled in fat wads in the back pockets of the usurers.