WASHINGTON — Two leaders of disgraced financial giant Citigroup on Thursday told a special panel looking into the origins of the financial crisis that they were unaware of the huge potential for losses from bad mortgages and argued that federal regulators failed to see the same threats.
Testifying before the bipartisan Financial Crisis Inquiry Commission, Robert Rubin, a former Clinton Treasury secretary and influential member of the Citigroup board of directors, acknowledged that he only learned in September 2007 in discussions with CEO Charles Prince that Citi owned about $43 billion in complex securities backed by U.S. mortgages.
Citi owned what was thought to be the safest level of complex financial instruments called collateralized debt obligations. These comprise pools of loans that are sold to investors in tranches, or layers of risk, depending on the investor's appetite for risk.
It wasn't necessary for senior management to take a closer look at the securities, Rubin said, because they carried top-grade ratings.
"I think all of us bear — not just all of us at Citi — failed to see the potential for this serious crisis," Rubin said, on several occasions putting blame on the credit-rating agencies such as Moody's Investors Service and Standard & Poor's for falling down on the job.
While rating agencies are a huge part of the story of what went wrong, Rubin's suggestion that banks blindly followed their lead — an allegation made a day earlier by former Federal Reserve Chairman Alan Greenspan, too — is false.
Hearings in 2008 and 2009 by the House Committee on Oversight and Government Reform and a subsequent McClatchy Newspapers investigation last year into Moody's revealed how the divisions in the ratings agencies that blessed the complex deals actually took their cues from Wall Street banks.
Ratings agencies helped package these complex securities that blew up the global financial system, working with investment banks to add more bad loans into a pool of loans — a process called credit enhancement — on the mistaken view that this would reduce the risk of losses through the broadening of loans.