Prince, Rubin Say They Didn’t Recognize Citi’s CDO Risk in Time

Prince and Rubin are sworn in at today's FCIC hearing
Charles O. "Chuck" Prince, former chief executive officer of Citigroup Inc., left, and Robert Rubin, former chairman of the bank's executive committee, are sworn in before a hearing of the Financial Crisis Inquiry Commission in Washington, April 8, 2010. Photographer: Joshua Roberts/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.”

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