Blaming Prince and Rubin

By Felix Salmon
April 8, 2010
more responsibility for the crisis than Prince does -- still refused to say that he was sorry, let alone accept any responsibility for anything, except in a vague "it was everybody's fault" kind of way.

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This morning saw Chuck Prince and Bob Rubin hauled up in front of the Financial Crisis Inquiry Commission, and they didn’t do themselves any favors at all. Even in the wake of Citigroup’s systemically-devastating collapse, they insisted that Citigroup’s risk management systems were “robust and proactive”, to use Rubin’s words. And while Prince apologized for his actions, Rubin — who bears more responsibility for the crisis than Prince does — still refused to say that he was sorry, let alone accept any responsibility for anything, except in a vague “it was everybody’s fault” kind of way.

The commissioners, especially Angelides, Holtz-Eakin, and Georgiou, asked some very good and pointed questions, most of which were ducked by the former Citi executives. At one point, despite the fact that Brooksley Born was one of the commissioners, Rubin even declared that he wasn’t in favor of derivatives deregulation while he was at Treasury. (In fact, he clashed so strongly with Born on the issue at the time that he effectively pushed her out of her position as chair of the CFTC.) Rubin’s position on derivatives regulation is a bit like Hank Paulson’s position on bailing out Lehman Brothers: “I’d love to have done it, but it was impossible legally.” And it’s even less credible.

The fact is, as Rubin is clearly aware, that the risk management function at Citi failed spectacularly, not least in the way that senior executives weren’t even told about Citi’s monstrous subprime exposures until the end of 2007. When pushed on this, Rubin repeated many times what he said in his testimony:

I first recall learning of these super senior positions in the Fall of 2007… I learned that Citi’s exposure included $43 billion of super senior CDO tranches. The business and risk management personnel advised that these CDO tranches were rated AAA or above and had de minimis risk.

My view, which I expressed, was that… these CDO transactions were not completed until the distribution was fully executed.

That said, it is important to remember that the view that the securities could be retained was developed at a time when AAA securities had always been considered money good. Moreover, these losses occurred in the context of a massive decline in the home real estate market that almost no financial models contemplated, including the ratings agencies’ or Citi’s.

This is all very slippery indeed. For one thing, Rubin well knows that you can’t be rated “above” AAA, although the people structuring synthetic CDOs certainly tried to imply that was possible. For another thing, as Georgiou pointed out, a lot of this exposure came in the form of “liquidity puts”, which required Citi to put up no capital. In fact, however, the liquidity puts were essentially the same thing as a multi-billion-dollar contingent credit line from Citi to its off-balance-sheet vehicles, which would have required lots of capital. And yet both Prince and Rubin told the commission with a straight face that Citi wasn’t in the business of regulatory or capital arbitrage.

As for those models of Citi’s, which failed spectacularly, both Prince and Rubin said that they trusted them at the time, and neither of them expressed any regrets about doing so: indeed, both had nothing but praise for the risk managers who put the models together.

The fact is, as Sean Park points out, that Citi got in over its head in the CDO business precisely because it loved being able to add tens of billions of dollars to its balance sheet without anybody (Prince and Rubin emphatically included) noticing or caring. Citi executives revelled in the bank’s enormous size, and considered it one of Citi’s strongest competitive advantages. But they never bothered to spend much time asking just where the growth in the balance sheet was coming from, or what the attendant risks were. It was a monstrous dereliction of their fiduciary duties, and I still hold out some hope that they will be held accountable somehow.

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