Charles O “Chuck” Prince and Robert Rubin, Citigroup Inc’s former leaders, face a grilling by the Financial Crisis Inquiry Commission today on why they didn’t foresee the housing collapse and its record losses.
Commission Vice Chairman Bill Thomas said in an interview yesterday he wants to hear whether Prince, ousted as chief executive officer in 2007, and Rubin, who served as interim chairman, accept any responsibility for Citigroup’s performance. The panel is holding a second day of hearings in Washington to probe the mortgage-market collapse and ensuing bank bailouts.
Given the multimillion-dollar pay packages awarded to Citigroup executives, Thomas said he wants to know why they didn’t do a better job. Bankers 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.
“I’m struck by the fact that we can hide behind the statistical models,” said commission member John Thompson, who’s chairman of Symantec Corp. “Where was the intuitive leadership judgment that said something may not be right in this market?”
One executive, former trading chief Thomas Maheras, made $97 million in the three years leading up to the credit crisis, according to Thomas. Heather Murren, another commission member, called it “disingenuous” for Citigroup executives responsible for the risks to now blame failed statistical models.
During yesterday’s session, the panel was told Citigroup routinely bought mortgages that violated the bank’s own standards. Richard Bowen, former chief underwriter for Citigroup’s consumer-lending group, said he determined in mid- 2006 that more than 60 per cent of mortgages bought from other firms and sold to investors such as Fannie Mae and Freddie Mac were “defective.”
“I started issuing warnings in June 2006 and attempted to get management to address these critical risk issues,” said Bowen, who was chief underwriter for correspondent lending in Citigroup’s consumer-lending group. “These warnings continued through 2007 and went to all levels of the consumer-lending group.”
In a November 2007 e-mail headlined, “URGENT-READ IMMEDIATELY-FINANCIAL ISSUES,” Bowen said he warned top managers including Rubin, who was the board’s executive committee chairman, of “possibly unrecognized financial losses.”
“I know that this will prompt an investigation of the above circumstances which will hopefully be conducted by officers of the company outside of the consumer-lending group,” Bowen wrote in the e-mail, a copy of which he included in the prepared remarks. The missive was copied to then-Chief Financial Officer Gary Crittenden and David Bushnell, Citigroup’s chief risk officer.
By that time, Citigroup already was beginning to pay for its bad mortgage investments. The New York-based lender posted a then-record $9.8 billion net loss for the fourth quarter of 2007 and was forced in 2008 to get a $45 billion federal bailout.
Bowen said he didn’t copy Prince, now 60 years old, on the e-mail to Rubin because there was already speculation in the media that Prince would soon be dismissed. Citigroup announced Prince’s ouster on November 4, 2007, and Rubin, now 71, took over as interim chairman.
“The issues raised by Bowen were promptly and carefully reviewed when he raised them and corrective actions were taken,” said Molly Meiners, a Citigroup spokeswoman.
Last year, the US Treasury Department converted $25 billion of the bailout funds into a 27 per cent stake in the bank, and Citigroup repaid the remaining $20 billion.
The commission interrogated Citigroup executives who oversaw the bank’s accumulation of collateralized debt obligations, which were created by repackaging bonds that in turn were created from home loans.
The so-called super-senior holdings, the highest-rated of all CDO bonds, plunged in value as subprime-mortgage defaults surged and contributed to the bank’s record $28 billion net loss in 2008.
Maheras, the former trading chief, told the panel that Citigroup began its foray into CDOs on the recommendation of outside consultants and failed to see the risks.
The consultants were hired by “our senior-most management” in 2005 and conducted a “careful study,” Maheras told the panel. The consultants weren’t named.
“Even in the summer and fall of 2007, I continued to believe, based upon what I understood from the experts in the business, that the bank’s super-senior CDO holdings were safe,” Maheras said. The securities carried triple-A ratings and were deemed “super-safe,” he said.
One of the commissioners, Byron Georgiou, said during the hearing that Citigroup’s CDO business was akin to medieval “alchemy,” where mortgages made to borrowers with low credit scores were packaged into bonds with triple-A ratings.
Thomas asked Maheras and the other former Citigroup executives whether they lost sleep over the bank’s losses, and whether they deserved the pay they received in the years leading up to the financial crisis.
“You didn’t know what you were doing,” Thomas said. “Or, yes, you knew what you were doing, until you didn’t.”
Maheras, who said he was “paid handsomely” in the years leading up to the crisis, didn’t get a bonus for 2007, when he left.
The commission, led by former California Treasurer Phil Angelides, also quizzed Bushnell and Nestor Dominguez, who co-headed the bank’s CDO business.
The first to testify today was former Federal Reserve Chairman Alan Greenspan, 84, who defended the central bank’s record on consumer protection in the years before the financial crisis and said regulators can reduce the chances of another meltdown by requiring banks to hold more capital.
Bowen, who has 35 years of banking experience and is licensed as a certified public accountant in Texas, oversaw 220 underwriters at Citigroup and had responsibility for more than $90 billion annually of new mortgages, according to his statement.
In some cases, Citigroup executives in New York overturned Bowen’s recommendations on some mortgage purchases to “approved” from “turn down,” he said.
“Subprime mortgage pools, many over $300 million, were purchased even though the minimum credit-policy-required- criteria was not met,” Bowen said. “Beginning in 2006, I issued many warnings to management concerning these practices, and specifically objected to the purchase of many identified pools.”
The week after Bowen sent his e-mail to Rubin, he received a “very brief” call from a lawyer in the office of Citigroup’s general counsel, he said during his live testimony today. The lawyer assured Bowen his concerns would be taken “seriously,” he said. Bowen wasn’t contacted again until January 2008, when he explained “details” to lawyers in the general counsel’s office during a series of conference calls lasting a total of five hours, he said.
After that, Bowen said, he was no longer “physically” at the bank, and his employment ceased in January 2009. He said he didn’t know whether any actions had been taken as a result of the e-mail and conference calls.
In a discussion with reporters during a break in the hearings, Steve Kardell, a lawyer for Bowen, declined to comment on his client’s departure from Citigroup or say whether there was any pending litigation over his employment.
Bushnell, who was replaced as Citigroup’s chief risk officer in November 2007, said in a statement that he communicated with Prince “almost daily” about the company’s risks and had a “regular, weekly one-on-one meeting” with the CEO. He also regularly provided reports to the board of directors, he said. Bushnell said he oversaw a team of 2,700 “highly qualified risk professionals.”
The depth of the housing crisis took them by surprise, he said.
“In this case, our method of analysis was not enough,” Bushnell said. “Risk models, which primarily use history as their guide, assumed that any annual decline in real-estate values would not exceed the worst-case historical precedent.”
Dominguez, who was co-head of Citigroup’s CDO business from 2006 to 2007, said in a prepared statement that his business produced $400 million in “total annual revenue in 2005 and 2006.” The revenue included fees from setting up the deals as well as profits from trading them, he said.
The bank’s executives believed that retaining the super-senior CDO bonds was an “efficient use of capital and Citi’s balance sheet,” Dominguez said.
The bank took a $14.3 billion writedown on CDOs in the fourth quarter of 2007 alone, according to Bushnell.
“I believed then, and still believe now, that Citi’s CDO business was performing an important function in the capital markets” by serving investor demand for the securities, Dominguez said.
