April 8 (Bloomberg) -- Gary Townsend, president and chief executive officer of Hill-Townsend Capital LLC, talks with Bloomberg’s Betty Liu and Peter Cook about the Financial Crisis Inquiry Commission's hearings about the mortgage-market collapse.
Citigroup Inc. former Chief Executive Officer Charles O. “Chuck” Prince and Robert Rubin, who headed the bank’s executive committee in the decade leading up to the crisis, are testifying before the panel today. (Source: Bloomberg)
April 8 (Bloomberg) -- Peter Wallison, a fellow at the American Enterprise Institute and a commissioner on the Financial Crisis Inquiry Commission, talks with Bloomberg's Betty Liu and Peter Cook about the commission's hearings in the mortgage-market collapse and subsequent bank bailouts. (Source: Bloomberg)
April 8 (Bloomberg) – Robert Lamb, a professor at New York University's Stern School of Business, talks with Bloomberg's Margaret Brennan about Citigroup Inc.’s foray into collateralized debt obligations prior to the U.S. mortgage-market collapse.
Citigroup’s former Chief Executive Officer Charles O. “Chuck” Prince and Robert Rubin, who headed the bank’s executive committee in the decade leading up to the crisis, testified before the Financial Crisis Inquiry Commission today. (Source: Bloomberg)
Former Citigroup Inc. Chief
Executive Officer Charles O. “Chuck” Prince said he wasn’t
aware of the mortgage-related securities that caused the bank’s
biggest losses until the financial crisis struck.
Neither was Robert Rubin, the former U.S. Treasury
secretary who headed the bank’s executive committee in the
decade leading up to the crisis, he said at a hearing today in
Washington before the Financial Crisis Inquiry Commission.
Nobody could have predicted that the bank’s highest-rated
collateralized debt obligations -- created by repackaging
mortgage bonds into new securities -- would lose so much money,
Prince said. The chief risk officer didn’t understand the risks,
nor did Citigroup’s senior traders and bankers, he said.
“It’s hard to put yourself back mentally at that time,”
Prince, 60, told the commission. He said the company’s risk-
management controls were among the best on Wall Street.
Citigroup’s faith in the creditworthiness of CDOs “looks pretty
unwise” today, Prince said.
The commission, mandated by Congress to produce a report by
the end of this year on the causes of the financial crisis, is
holding three days of hearings this week to examine the impact
of the mortgage market’s collapse on Citigroup and the housing-
finance company Fannie Mae, which was seized by the government
in 2008.
Citigroup bankers and risk officers told the panel
yesterday they relied on statistical models that failed to
predict the severity of the crisis. The resulting losses
crippled New York-based Citigroup and triggered a $45 billion
federal bailout.
Record Loss
Prince was ousted in November 2007 as the bank headed for a
then-record $9.8 billion loss in the fourth quarter of that
year, much of it triggered by losses on subprime mortgages and
CDOs.
The board became “fully focused on the unprecedented
issues the company faced” from the subprime market in the late
summer and fall of 2007, Prince said.
“We had multiple special board and committee meetings to
apprise the board members of the issues as they developed in
real time and to solicit their valuable advice,” Prince said.
“Regrettably, we were not able to prevent the losses that
occurred, but it was not a result of management or board
inattention or a lack of proper reporting of information.”
‘Market Excesses’
Prince blamed the financial crisis on a combination of
prolonged low interest rates, the growth of the securitization
market, policies encouraging home ownership and the “patchwork
nature” of subprime mortgage regulation.
Without the CDO losses, which totaled $30 billion over six
quarters, Citigroup might have performed as well as any other
bank during the financial crisis, Prince said.
“This factor alone may have made the difference between
Citi’s ultimate problems and those of other banks,” Prince
said. Citigroup’s bailout was the biggest among its U.S. peers.
The government still owns a 27 percent stake.
Rubin, 71, said he spotted “market excesses” prior to the
financial crisis and predicted they would lead to a “cyclical
downturn” at “some unpredictable point.”
Instead, “we experienced the most severe financial and
economic crisis since the Great Depression,” he said. “The
overriding lesson of the financial crisis was that the financial
system is subject to more severe downside risk than almost
anyone had foreseen.”
No Resentment
Rubin, whose job was to meet with clients and advise on
“strategic and managerial issues,” said he doesn’t remember
learning of the CDOs until the fall of 2007, when Prince held
discussions “with the most senior management of Citi to address
issues arising out of pronounced market volatility.”
Warning signs that a crisis was coming “were not obvious at
the time,” Rubin said. “I feel confident that the relevant
personnel believed in good faith that more senior level
consideration of these particular positions was unnecessary
because the positions were AAA-rated and appeared to bear de
minimis risk of default.”
Phil Angelides, the commission’s chairman, took issue with
Rubin’s claim that his role at the company was limited.
“You were not a garden-variety board member,” Angelides
told Rubin. “You were either pulling the levers, or asleep at
the switch.”
The bank’s former trading chief, Thomas Maheras, said
yesterday that outside consultants hired in 2005 by the
company’s senior-most management encouraged the push into the
business of “structured credit,” which included CDOs. He
didn’t name the consultants. Maheras made $97 million in the
three years leading up to the credit crisis, the commission’s
Thomas said yesterday. Citigroup declined to comment on
Maheras’s pay.
‘Almost Daily’ Meetings
David Bushnell, who was replaced as Citigroup’s chief risk
officer in November 2007, testified yesterday that he
communicated with Prince “almost daily” about the company’s
risks and had a “regular, weekly one-on-one meeting” with the
CEO.
Prince said he believes “neither Mr. Bushnell nor any of
the senior bankers or traders understood the super-senior
securities to have any material risk of loss until October
2007.” He said Bushnell was the best risk manager on Wall
Street.
Prince fired Randy Barker, the bank’s co-head of fixed-
income trading, which encompassed the CDO business, in October
2007. He also reassigned Geoff Coley, the other co-head, and
accepted Maheras’s resignation.
Prince, who didn’t mention the personnel moves in his
testimony, said he was “deeply sorry” that he and the rest of
Citigroup’s management team were not more “prescient.”
To contact the reporter on this story:
Bradley Keoun in New York at
bkeoun@bloomberg.net.