Economy

Ex-Citigroup Officials Regret Missing Meltdown Signs

Former Citigroup officials said they regretted not foreseeing the the perfect storm of factors that i

Former Citigroup board member and Treasury Secretary pleads his case to the Financial Crisis Inquiry Commission as the financial giant's ex CEO Charles Prince listens. J. Scott Applewhite/AP Photo hide caption

itoggle caption J. Scott Applewhite/AP Photo
Former Citigroup officials said they regretted not foreseeing the the perfect storm of factors that

Former Citigroup board member and Treasury Secretary pleads his case to the Financial Crisis Inquiry Commission as the financial giant's ex CEO Charles Prince listens.

J. Scott Applewhite/AP Photo

The two men who led Citigroup when the financial giant nearly imploded in 2007 at the height of the credit market meltdown faced the Financial Crisis Inquiry Commission Thursday.

Both men, Charles Prince, Citigroup's one-time CEO and Robert Rubin, the former Clinton Administration Treasury secretary who later served on Citigroup's board, were grilled about their roles in the company before it required a $45 billion taxpayer bailout.

But it was Rubin who got the worst of it since he didn't accept responsibility to the degree that some of the board members wanted him to.

It wasn't that he didn't make a stab at it. For instance, in his opening statement, Rubin gave a lengthy recap of what led to the crisis, factors that would combine to create a perfect storm no one could have foreseen:

While I had thought for some time prior to the crisis that
markets, including the market for credit, had gone to excess, and that
those excesses would, at some unpredictable point, lead to a cyclical
downturn, this is not what happened. Instead, we experienced the most
severe financial and economic crisis in 80 years. In my view, that
crisis was not the product of a single cause, but rather the product
of an extraordinary combination of powerful factors operating at the
same time and feeding on each other.

Let me name just a few of those factors: Market excesses, low
interest rates most notably due to large capital inflows from abroad,
which contributed to excessive risk taking by lenders and excessive
borrowing by businesses and consumers; a sharp rise in housing prices,
which also contributed 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 too often abusive mortgage lending
practices; shortfalls in regulation; high levels of leverage in
financial institutions joined with deteriorating asset quality in
asset purchases and much else.

There were a few market participants or analysts who saw the
broad picture and the potential for a mega crisis. A larger number
saw one or a few of these factors. But almost all of us, including
me, who were involved in the financial system — that is to say,
financial firms, regulators, rating agencies, analysts and
commentators — missed the powerful combination of factors that led to
this crisis and the serious possibility of a massive crisis. We all
bear responsibility for not recognizing this, and I deeply regret
that.

Boiling it down, he essentially was saying, I'm sorry for not being omniscient.

But the commission members, particularly chair Phil Angelides and vice chair, former Republican House member Bill Thomas, didn't let Rubin off the hook. They openly expressed skepticism about another Rubin position, that as a board member there was no way he could have known about the degree of risky transactions Citigroup was involved in.

Not that they let Prince completely off the hook. But the fact that he fell on his sword earlier than Rubin by resigning in Nov. 2007 seemed to result in the commissioners cutting him somewhat more slack.

ANGELIDES: What I've been struck by in the documentation and testimony frankly is how much folks in the organization did not know what was going on. I'm particularly struck by how much the two of you did not know about what was going on in your organization. At the end of the day you were the head guys, you were the chairman and the CEO, you were the chairman of the executive committee. Not, I might add, Mr. Rubin, a garden variety board member. You were in the suite of executive offices...

... It just seems to me at the end of the day the two of you in charge of this organization did not seem to have a grip on what was happening. Now, Mr. Prince, I will say, on Nov. 4th (2007) you took responsibility and you resigned. Mr. Rubin ... you've gone out of your way in the interviews I've read and public statements to make a very fine point or a very large point about how you were not involved in operations...

I guess I would ask you Mr. Rubin very clearly, do you bear central responsibility for the near collapse, but for the U.S. government, of Citigroup?

No, was Rubin's essential answer and went back to his earlier comment that everyone in the financial-services industry who didn't see the disaster ahead have cause to regret. Prince came to Rubin's defense saying it was "absolutely incorrect to suggest Mr. Rubin had any central responsibility for what happened at Citigroup."

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