Prince, Rubin Defend Roles as Panel Criticizes Citi (Update1)
April 08, 2010, 8:01 PM EDT(Adds differening Citibank estimates of subprime mortgages beginning in the 21st paragraph.)
By Bradley Keoun, Michael J. Moore and Jesse Westbrook
April 9 (Bloomberg) -- Charles O. “Chuck” Prince and Robert Rubin defended themselves against claims by members of a panel investigating Citigroup Inc.’s $45 billion bailout that they should have known the bank’s investments in mortgage bonds were headed for collapse.
Prince, Citigroup’s former chief executive officer, and Rubin, who was head of the bank’s executive committee, said at a hearing yesterday in Washington that they weren’t aware of the size of Citigroup’s position in mortgage-related securities or the risks surrounding them.
The Financial Crisis Inquiry Commission was mandated by Congress to produce a report by the end of this year on the causes of the financial crisis. Members of the panel criticized Prince and Rubin for arguing that virtually none of their peers on Wall Street predicted that securities carrying the highest ratings would bring on a global credit crisis.
“What do you get paid for if it isn’t having some intuition, understanding or knowledge?” Commission Vice Chairman Bill Thomas said. “Or do you just do what everybody else is doing because everybody else is doing it, and if you don’t do it you won’t make money?”
Losses on the collateralized debt obligations -- created by repackaging mortgage bonds into new securities-- crippled New York-based Citigroup and triggered a $45 billion federal bailout, the largest of any financial firm. The U.S. government still owns 27 percent of the bank and has announced plans to sell that stake over the next year.
Citigroup, Fannie Mae
The commission is holding 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.
“I’ve been struck by frankly how much folks in the organization did not know about what was going on, and I’m particularly struck by how much the two of you did not know about what was going on within your organization,” Phil Angelides, the commission’s chairman, said. “At the end of the day, you were the head guys.”
Citigroup bankers and risk officers told the panel on April 7 that they relied on statistical models that failed to predict the severity of the crisis.
“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.
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.”
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.
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.”
‘Overriding Lesson’
Instead, “we experienced the most severe financial and economic crisis since the Great Depression,” said Rubin, who served as U.S. Treasury secretary from 1995 to 1999. “The overriding lesson of the financial crisis was that the financial system is subject to more severe downside risk than almost anyone had foreseen.”
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.”
‘Asleep at the Switch’
Angelides 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.”
Prince came to Rubin’s defense. “I think it is absolutely incorrect to suggest that Mr. Rubin had any central responsibility to what happened at Citigroup,” Prince said. Angelides also asked whether Citigroup executives understated to shareholders the bank’s exposure to the subprime-mortgage market as the U.S. housing market collapsed in 2007.
On an Oct. 15, 2007, conference call with analysts and investors, then-Chief Financial Officer Gary Crittenden said the company’s “subprime exposure” was $13 billion at the end of second quarter and had declined during the third quarter.
Subprime Estimates
Citigroup executives made a presentation to the board’s audit and risk management committee that same day that said “total subprime exposure” was $13 billion with an additional $16 billion in “direct super senior” and $27 billion in “liquidity and par puts,” according to an excerpt of an internal bank document released by the financial crisis panel.
Citigroup then issued a press release on Nov. 4, 2007, that said the company had about $55 billion of “direct exposure” to the subprime market.
“At the time, the financial people were working very intensely with the fixed-income people to try to determine exposures,” Prince said in response to a question from Angelides about the discrepancy. “This was an unprecedented time in which markets were crashing.”
Rubin said he didn’t remember the presentation that was made to Citigroup board members. The $13 billion figure represented assets that had a greater likelihood of triggering losses, he said. The remaining assets were “super-senior” and were probably viewed within Citigroup as presenting different “classes of exposure,” Rubin said.
--With assistance from Jody Shenn in New York. Editors: Steve Dickson, Erik Holm
To contact the reporters on this story: Bradley Keoun in New York at bkeoun@bloomberg.net; Michael J. Moore in New York at mmoore55@bloomberg.net; Jesse Westbrook in Washington at jwestbrook1@bloomberg.net.
To contact the editor responsible for this story: Alec McCabe in New York at amccabe@bloomberg.net.
