Former Citibank leaders grilled by crisis panel
NEW YORK (CNNMoney.com) -- A Congressional panel investigating the causes of the financial crisis criticized two former leaders of Citigroup on Thursday for failing to understand the risks that eventually brought the company to its knees.
In testimony before the Financial Crisis Inquiry Commission, Charles "Chuck" Prince, former chief executive of Citigroup, apologized for his role in the crisis that roiled the U.S. economy.
Prince, who was CEO from 2003 to 2007, retired after Citi announced that it would write off up to $11 billion in losses related to its holdings of risky mortgage-backed securities. The bank eventually lost an estimated $30 billion on such securities and was forced to take a $45 billion bailout from the government.
"I'm sorry that the financial crisis has had such a devastating impact on the American people," Prince said. "I am deeply sorry that our management -- starting with me -- was not more prescient and that we did not foresee what lay before us."
Prince's remarks came on the second day of this week's three-day meeting of the commission, which was established last year to investigate the causes of the crisis. The hearings are aimed at exploring how the issuance of trillions of dollars worth of risky subprime mortgage debt contributed to the financial meltdown.
In addition to Prince, the commission heard from Robert Rubin, who was a board member and a top adviser at Citi until the end of 2009.
Rubin, who was Treasury Secretary under President Bill Clinton, said he had been concerned that market "excesses" would lead to a downturn. But he acknowledged that most regulators misjudged how severe the threats to the economy were.
"We all bear responsibility for not recognizing this, and I deeply regret that," he said.
In their defense, both executives argued that the scope of the crisis could not have been fully anticipated, echoing remarks former Federal Reserve chairman Alan Greenspan made before the commission Wednesday.
However, at least two of the 10 bipartisan commission members were not satisfied with the responses provided by the former Citi executives.
"It seems to me that, 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 going on," said Commission chairman Phi Angelieds. "I'm not so sure apologies are as important as assessment of responsibility."
Bill Thomas, a former Republican Congressman who is vice chairman of the commission, criticized the panelists for reaping huge rewards while being out of touch with the risks Citi traders were taking.
Thomas said Prince and Rubin earned a combined $150 million over a four-year period when things were going up. "But that same team, on the way down, didn't have a nickel clawed back," he added.
Rubin responded that Citi did not pay him a bonus in 2007 and 2008, per his request.
In response to an earlier question, Prince said the bulk of his pay was in the form of Citi stock, which he said he still holds today.
"My interests were aligned 100% with stockholders," he said. "I saw a substantial part of my net worth disappear because my company suffered as a result of these problems."
The problems he referred to stemmed from Citi's exposure to "super-senior" collateralized debt obligations, which were considered at the time to be the safest CDOs. These securities were backed by mortgages, in some cases subprime loans, which were believed to be at low risk of default.
However, after the housing bubble burst in 2008 and the financial markets went into a tailspin, the value of CDOs plunged and Citi was left with billions of dollars worth of illiquid assets.
Prince reminded the panel that most banks, regulators and rating agencies considered super-senior CDOs safe.
"In hindsight, it's very hard to see how these structured products could have been accepted in the way they were accepted," he said.
In his testimony, Rubin said the main lesson of the recent crisis was that "the financial system is subject to far more downside risk that almost anyone had seen."
He said the private sector should take steps to avoid repeating the mistakes of the past, but he maintained that the government also needs to overhaul how it regulates the financial system.
"Financial reform is imperative," Rubin said.
Among the reforms he suggested was "resolution authority," which would give the government power to break up institutions considered to be too big to fail. Rubin also called for constraints on leverage, derivatives regulation and increased consumer protections.