Citigroup Officials Pressed on Roles in Subprime Crisis

Former Citigroup Chief Executive Charles Prince, left, and Robert Rubin, former chairman of the Executive Committee of the Board of Directors at Citigroup, listen to questions at the Financial Crisis Inquiry Commission hearing on Capitol Hill April 8. (Reuters Photo)

Former Citigroup Chief Executive Charles Prince, left, and Robert Rubin, former chairman of the Executive Committee of the Board of Directors at Citigroup, listen to questions at the Financial Crisis Inquiry Commission hearing on Capitol Hill April 8. (Reuters Photo)

WASHINGTON -- Robert Rubin, a senior adviser to Citigroup Inc. at the time of its deep losses from subprime mortgages, and former CEO Charles Prince said Thursday they learned belatedly that Citi had $43 billion in high-risk securities on its books. 

But the head of an investigative panel pressed them on why they didn't monitor the bank's growing risk-taking and why it wasn't brought to their attention earlier despite frequent management meetings. 

The high-risk securities were deemed safe, and they were not discussed at those meetings before September 2007, Rubin said. He was testifying at a hearing by the panel investigating the roots of the financial crisis. 

Rubin, Prince and other former Citigroup executives have been sharply criticized for allowing heavy investments in high-risk mortgage securities. Citi was a major subprime lender. 

They said they didn't learn until September 2007 that the bank had held onto the investments composed of repackaged mortgage bonds. The next month, Citigroup publicly estimated it would lose $8 billion to $11 billion in the fourth quarter that year from those securities. 

A $43 billion bet "may sound like chump change" for a company of Citigroup's size, but it was a significant exposure to risk, the chairman of the Financial Crisis Inquiry Commission, Phil Angelides, told Rubin and Prince. 

Rubin, a former Treasury secretary, insisted: "There isn't a way ... that you're going to know what's in those (bank) position books," he said. "You really are depending on the people who are there to tell you." 

Rubin and Prince said the Citi executives who piled up the risky securities on the bank's books thought, as did others on Wall Street, that they were safe from default. They had received triple AAA ratings from credit rating agencies. 

Prince, who resigned in November 2007 when the bank acknowledged stunning losses from the high-risk securities, began his testimony with a mea culpa. 

"Let me start by saying I'm sorry," Prince said. He is "deeply sorry," he said, for the failure of Citigroup's management, starting with him, to foresee the crisis that wreaked devastation on the U.S. economy and ordinary Americans. 

Rubin said "We all bear responsibility for not recognizing this, and I deeply regret that." 

Critics have said Rubin, with his vast experience on Wall Street and as Treasury chief in the Clinton administration, should have picked up on the warning signs of the crisis and taken a more active role in preventing Citigroup's debacle. 

New York-based Citigroup was one of the hardest-hit banks during the credit crisis and the recession. It received $45 billion in federal bailout money -- one of the biggest rescues in the government's program. 

As borrowers defaulted, Citibank's losses reached nearly $30 billion on some portions of collateralized debt obligations, or CDOs. CDOs are complex financial instruments that combine various slices of debt. 

"Those losses were a substantial cause of the bank's financial problems and led to the assistance from the U.S. government," Rubin said Thursday. 

Prince said he wasn't aware of decisions being made on the bank's trading desks to keep on its books the "super senior" CDOs. Still, he says, given that they were widely perceived as having a low risk of default, "it is hard for me to fault the traders who made the decisions." 

"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 said. He said multiple meetings were held to inform board members of developing problems and to solicit their advice. 

The inquiry commission was created by Congress to delve into the causes of the financial crisis. 

The three sessions this week are focused on high-risk mortgage lending and the way trillions in risky mortgage debt was spread throughout the financial system. The goal is to provide a firsthand accounting of decisions that inflated a mortgage bubble and triggered the financial crisis. 

Citigroup is being examined as a case study because it was heavily involved in each stage of the process. The bank was a major subprime lender through its subsidiary CitiFinancial. Other divisions of Citigroup pooled those loans and loans purchased from other mortgage companies and sold the income streams to investors. 

When Citigroup announced the estimated losses of up to $11 billion in November 2007, Prince resigned, Win Bischoff became acting CEO, and Rubin stepped in as chairman, helping Citi raise billions in capital to shore up its sinking finances. 

Rubin came to Citigroup as a "senior counselor" in 1999. He had worked for 25 years at Wall Street powerhouse Goldman Sachs & Co., rising to co-CEO, before becoming President Bill Clinton's chief economic adviser in 1993 and Treasury secretary two years later.