Two former Citigroup leaders -- ex-CEO Chuck Prince and ex-board member Robert Rubin -- faced the Financial Crisis Inquiry Commission today in hearings to investigate why their company needed $45 billion in taxpayer-financed bailouts. Before taking specific questions about his management of Citigroup, Chuck Prince began with an apology.
"I am deeply sorry that our management -- starting with me -- was not more prescient," he wrote in his prepared testimony (PDF), and repeated before the panel.
But that's where the apologies ended. The rest of the Citi execs' case fingered the failure of many other players and factors within the financial system. In Rubin's prepared testimony (PDF), he named a number of factors:
.... market excesses; low interest rates -- due notably to large capital inflows from trade surplus countries -- which contributed to excessive risk-taking by lenders and excessive borrowing by businesses and consumers; a sharp rise in housing prices, also contributing to increased consumer leverage; a subsequent, precipitous drop in housing prices; vast increases in the use and complexity of derivatives; misguided AAA ratings on subprime-mortgage based instruments; lax and abusive mortgage lending practices; shortfalls in regulation; high levels of leverage in financial institutions joined with deteriorating quality in asset purchases; and much else.
And Citi's only responsibility in the failure? An inability to predict the future. They were not guilty by reason of financial cluelessness, both execs argued.
"It was this extraordinary combination of many factors that came together .... that led to this crisis," said Rubin. "You look back and say, 'Well these were obvious warning signs,' but they weren't obvious at the time. They're only obvious in retrospect."
On Citi's participation in the sub-prime CDO market -- which caused the company to lose $30 billion -- the two execs argued they didn't know the risks because the securities were "super senior," and were rated "AAA" by the credit rating agencies, leading them to believe the risks were minimal.
"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," said Prince in his prepared statement.
But the panel's vice chairman, Bill Thomas, pointed out that "the very nature of the CDOs is they were a collection of the lower tranches," or riskier parts of the mortgage market. Subprime CDOs are a bundle of risky, sub-prime loans, and those bundles are further divided into risk categories. The Citi execs argued that Citi held onto the "super senior" subprime CDOs -- which were rated with the least amount of risk -- but Thomas argued that holding the least risky part of an inherently risky financial product was still, ultimately, unwise. He also questioned the executives' qualifications for leading a company, given their lack of knowledge about their own financial products.
"How do you get to the top if you don't have any experiential experience whatsoever?" Thomas asked. "What do you get paid for if it isn't having some intuition, understanding, knowledge -- or do you just do what everyone else is doing because if you don't do it, you won't make money? Because I do think it's all about money. And it's big money on the way up."
Prince stepped down as CEO of Citigroup in 2007, citing the billions in losses that occurred under his watch. He took with him a $12.5 million bonus on top of a $1.7 million pension, $68 million in salary and stock, as well as $53.1 million he took home in the four years prior.
After he joined Citigroup in October 1999, Rubin took home at least $115 million in pay ($), excluding stock options. In 2008, the Wall Street Journal reported he was "deeply involved in a decision in late 2004 and early 2005 to take on more risk to boost flagging profit growth." Rubin left the company in early 2009.
Yesterday Richard Bowen, a former senior underwriter at CitiGroup, testified before the financial crisis panel that he began warning the bank's senior executives about the riskiness of its mortgage products in 2006. In 2007, he sent an e-mail to Rubin and other Citi execs with the subject line, "URGENT -- READ IMMEDIATELY -- FINANCIAL ISSUES." Despite his warnings, Bowen said Citi "continued to purchase and sell increasing volumes of defective mortgage product."