The Norwegian port town of Narvik is 200 miles inside the Arctic Circle, but that's not far enough north to escape the long arm of Citigroup. One of four Norwegian towns that invested millions of dollars in complex "structured finance" products cooked up by Citigroup, Narvik is now facing huge losses after the investments went sour, presumably because of their exposure to subprime credit woes.
So acute is the funding squeeze that some towns, like Narvik, couldn't meet payroll for December. Cuts in everything from education to child care programs to elder care and holiday Christmas parties loom.
Terra Securities, the investment banking arm of a coalition of Norwegian banks, marketed the Citigroup products to the towns, and representatives of the broker are making predictable comments about how investment success is never guaranteed. Buyer beware! But there's a catch. According to Norwegian press reports, Terra Securities provided translations of the prospectus in both English and Norwegian. But the part of the prospectus warning of the risk that one might lose one's shirt (and one's Christmas parties) was somehow omitted from the Norwegian materials.
Funny, that. A skeptic might wonder whether a full translation would really have made any difference even if the risks had been spelled out and written across the sky in giant pulsating neon letters. Certainly, the Norwegian municipal politicians who made the decision to go for the big returns weren't anticipating one of the worst credit crunches to hit global financial markets in decades. How could their child care program funding possibly be connected to whether or not a homeowner in Granada Hills, Calif., made sensible decisions on whether to refinance her mortgage?
Citigroup is also denying any responsibility for the bad Narvikian investment decisions. But Citigroup has bigger problems. On Monday, it was vigorously denying a CNBC report claiming the bank would be forced to lay off of as many as 45,000 employees. (Thanks to Calculated Risk for the tip.) Meanwhile, a front-page article in the Wall Street Journal reported in great detail on problems Citigroup is facing working out loan modifications for homeowners facing foreclosure, especially for those whose mortgages are part of a $45 billion portfolio of subprime mortgages handled by AMC Mortgage Services, which Citigroup bought in September.
By September the subprime implosion had been well under way for many months. If this is an example of the kind of decision that got Citigroup CEO Charles Prince ousted, well, perhaps the sacking was justified.
From the Wall Street Journal:
AMC was the loan-servicing operation of ACC Capital Holdings, the parent company of Ameriquest Mortgage Co., for years the nation's largest subprime-loan originator. Citigroup also bought Argent Mortgage Co., another subprime-loan originator owned by ACC. Last year, ACC agreed to pay $325 million to settle regulators' claims that it charged excessively high mortgage rates and didn't adequately disclose loan risks.
Bruce Marks, executive director of the Neighborhood Assistance Corp. of America... characterizes Ameriquest and Argent as "the worst of the worst" subprime lenders.
ACC "didn't adequately disclose loan risks." It's a phrase that probably sounds familiar to a bevy of outraged Norwegians right about now. But again, one has to wonder, what kind of disclosure would have been required to change the financial decision-making process for Natalie Brandon, a Californian homeowner who refinanced her home five times in the last five years?
Again, from the Journal's report on Citigroup's troubled mortgages:
In Granada Hills, Calif., Natalie Brandon is fighting to keep the three-bedroom ranch house she bought in 1985 for $105,000. Mrs. Brandon, 51, does medical billing for doctors; her husband is a dispatcher for a local gas utility. Last year, she got a $625,500 mortgage from Argent, now owned by Citigroup. Her 7.99 percent interest rate isn't set to rise until next June, but she already is behind on payments.
Over the past five years, she has refinanced her home five times, each time taking out cash and paying prepayment penalties. Last year, all she had to do to refinance was state that she and her husband earned a combined $100,000. She says she used the proceeds to pay off $30,000 owed on her white Lexus.
This year, she says, their income fell after she suffered a short-term disability. Mrs. Brandon figures if she sold her home today, she wouldn't get more than $450,000 -- what a nearby home sold for in foreclosure.
What do Natalie Brandon, Citigroup and the town of Narvik all have in common, besides being caught up in a web of global capital flows that binds every human being on earth together in unpredictable and obscure ways? They all got greedy, and they're all getting burned.
And so will all the rest of us, if the backlash to all that greed is a U.S. recession and a global economic slowdown.
In other news, the major stock market indexes all took another big hit on Monday. They are now more than 10 percent off their most recent highs, which just happens to be the technical definition of a "correction."