why do I have the feeling that there are more than a few political types involved in this?
Sunday, January 4, 2009
How Citi bailed out an O.C. subprime lender (as Citigroup received the biggest federal bailout)
By JOHN GITTELSOHN, The Orange County Register
EXCERPT Biggest bank bailout Quick Loan Funding, which Sadek founded in 2002, wrote about $4 billion in subprime mortgages before it collapsed in 2007. Sadek made, and eventually lost, a fortune through Quick Loan. He bought a Newport Coast mansion, a fleet of exotic cars and a condo in Las Vegas where he became a high roller at the blackjack tables.
Citigroup, the New York financial giant, also boomed and nearly went broke because of subprime-related investments.
Poetic justice Citi's most-binding ties with Sadek are in the securities arena. In 2006, Citigroup Global Markets Inc. underwrote three pools of mortgage-backed securities totaling $1.5 billion, including $295 million in Quick Loan's mortgages. Still buried among its troubled assets are three pools of securities totaling $1.5 billion that include $295 million from Sadek's company. By November, 36 percent of the loans in the three pools were in default, according to Bloomberg data. Bank of America, Bear Stearns, Countrywide Home Loans, Lehman Brothers, Merrill Lynch and Morgan Stanley also securitized and sold Quick Loan mortgages.
Filings with the SEC show at least $2.3 billion of Sadek's Quick Loan's $4 billion mortgages were sold to investors after Wall Street firms packaged them as mortgage-backed securities, collateralized debt obligations and other complex financial instruments. "In some cases, Citi purchases loans which may have been modified by another servicer," Rodgers said. "If a loan is owned by an investor, the right to modify is subject to the agreement under which the loan is serviced."
In November Citi got the biggest taxpayer-backed bailout of any bank in U.S. history – $45 billion, double the $23 billion to General Motors and Chrysler. Citi also got $306 billion in federal loan guarantees for its securities, loans and other real-estate-backed assets.
$35 billion in loan mods Mark Rodgers, a Citi spokesman, said the bank wants to help borrowers repay loans when feasible. "This would depend on individual circumstances and an agreement mutually agreed upon by both the lender and the borrower." Citi modified 370,000 loans worth $35 billion to help customers avoid foreclosure, the company reported in November. Thousands more borrowers are trying to get a break. Rodgers said Citi does not have data on how many of these new loans have defaulted.
According to the U.S. Comptroller of the Currency, more than half of the loan mods in the first quarter of 2008 defaulted within six months. Mark Goldman, a lecturer in real estate at San Diego State University, said lenders have nothing to gain by giving a break to borrowers who probably won't repay their loans. "It doesn't serve the lender to do a loan modification that'll result in a default," he said. Which raises the question: Why did Citi give Sadek more time? --SNIP--
Filings with the Securities and Exchange Commission show at least $2.3 billion of Sadek's Quick Loan's $4 billion mortgages were sold to investors after Wall Street firms packaged them as mortgage-backed securities, collateralized debt obligations and other complex financial instruments. "In some cases, Citi purchases loans which may have been modified by another servicer," Rodgers said. "If a loan is owned by an investor, the right to modify is subject to the agreement under which the loan is serviced."
Sadek and Citi. Citi's business dealings with Sadek date to the founding of Quick Loan Funding in 2002. Citi's subsidiary, First Collateral Services, gave Sadek a line of credit – known as a warehouse line – to fund his mortgages. As Quick Loan grew – issuing a peak $218 million worth of mortgages in December 2005 – other warehouse lenders gave the company lines of credit. At its peak, the Citi warehouse line was $100 million, Pacific said.
When Quick Loan's collapse accelerated in the spring of 2007, Citi was the last warehouse lender left, Sadek said during an April 2007 interview at his Newport Coast mansion. During the interview, Sadek said Citigroup provided a $16 million line of credit to help him market his feature film, "Redline," which starred his then-girlfriend, Nadia Bjorlin, and his fleet of Ferraris, Porsches and Saleen S7 exotic cars. Sadek said he spent $31 million to make, distribute and publicize "Redline." The film earned $8.2 million in ticket sales worldwide, according to Box Office Mojo. Sadek is being sued in federal court by the Cartoon Network for failing to pay $845,000 in advertising for the film.
Other defunct Orange County subprime lenders New Century Financial and Ameriquest - also had mortgages in the three Citi 2006 securities issues. By this November, $386 million of those mortgages were more than 60 days delinquent, records show. Since 2007, Citi has written off $29.3 billion of subprime-related debt. Citi still has $16.3 billion in subprime assets on its books plus $13.6 billion in Alt-A securities, which are mortgages to borrowers with credit between subprime and prime. Those troubled assets – and Citi's place as a pillar in the financial community with 370,000 employees and $159 billion in revenue in 2007 – explain why the federal government has offered Citi so much help.
"The Feds just worried that it's so big, so interconnected with the rest of the financial industry, that they can't let it fail," said Kurt Eggert, a Chapman University law professor and former advisor to the Federal Reserve Bank. "It's poetic justice that Citi was in bed with this guy and they're stuck with him," Eggert said. "But why is it so hard for regular Joes to get loan mods when this guy, who seems like a terrible loan risk, can do it?"