Abacus Federal Savings Bank, a small bank with a major presence in New York City’s Chinese community, and 19 of its former employees have been charged with inflating the qualifications of mortgage applicants to meet federal loan standards, a scheme that prosecutors say brought the bank tens of millions of dollars in ill-gotten fees and sent hundreds of millions of dollars in risky mortgages to the investment market. The indictment against the bank and its employees describes the sort of scheme that led to the financial crisis of 2008, when the risk of mortgages to borrowers was disguised and passed on to investors. As those mortgages went bad, banks considered too big to fail were brought to their knees and bailed out by taxpayers.

These mortgages were sold to Fannie Mae, Freddie Mac and other investors. Although we did not underwrite these mortgages, Citi did rep and warrant to the investors that the mortgages were underwritten to Citi credit guidelines.In mid-2006 I discovered that over 60% of these mortgages purchased and sold were defective. Because Citi had given reps and warrants to the investors that the mortgages were not defective, the investors could force Citi to repurchase many billions of dollars of these defective assets. This situation represented a large potential risk to the shareholders of Citigroup.Testimony of Richard M. Bowen, III page 2I started issuing warnings in June of 2006 and attempted to get management to address these critical risk issues. These warnings continued through 2007 and went to all levels of the Consumer Lending Group.We continued to purchase and sell to investors even larger volumes of mortgages through 2007. And defective mortgages increased during 2007 to over 80% of production.