WASHINGTON — No one is willing to take responsibility for the near collapse of Citigroup Inc.
Former executives and regulators, testifying Thursday before the Financial Crisis Inquiry Commission, all tried to shift blame for the giant company's problems.
Charles Prince, Citigroup's former chief executive, pointed a finger at the credit rating agencies and overly complex products — like collateralized debt obligations — that no one understood.
Robert Rubin, a former Treasury secretary and former chairman of Citi's executive committee, laid the blame on a confluence of market events while saying he was out of the loop for most of the company's decisions.
The bank's regulators, meanwhile — John Dugan, the comptroller of the currency, and his predecessor, John D. Hawke — criticized the institution, its managers, other regulators and the market in general.
If there was an underlying consensus, it was this: the financial crisis was either entirely unforeseeable or should have been spotted first by somebody else.
Even the apologies hit that point.
"I'm sorry," said Prince near the opening of the hearing. "I'm sorry that the financial crisis has had such a devastating impact on our country. I'm sorry for the millions of people, average Americans, who have lost their homes. And I'm sorry that our management team starting with me, like so many others, could not see the unprecedented market collapse that laid before us."
The political theorist Hannah Arendt, speaking about a very different situation, once said that "where all are guilty, no one is; confessions of collective guilt are the best possible safeguard against the discovery of culprits."
Perhaps for that reason, commission members attempted to place blame squarely on the witnesses. Commission Chairman Phil Angelides said that, no matter their defense, Prince and Rubin were responsible for the downfall of Citi.
"It just seems to me at the end of the day the two of you in charge of this organization did not have a grip on what was happening," he said. "I don't know that you can have it two ways. You were either pulling the levers or were asleep at the switch. … As we try to recover from this calamity, I'm not so sure apologies are as important as assessment of responsibility."
Douglas Holtz-Eakin, an economist and former director of the Congressional Budget Office, said that while Rubin perhaps could not have seen the crisis, he should have known that underwriting standards were out of whack.
"The question is not whether you could have foreseen the whole crisis," he said. "The question is, could you have foreseen the spark that lit the crisis, which is the poor standards in underwriting, the poor assessment of risks associated with mortgages, the inadequate hedging and capital provisioning against that?"
Bill Thomas, the commission's vice chairman, said that the executives had to take some blame.
"Something was created and assumptions were made and behavior has to have consequences," he said. "To say you are sorry and to make your stock argument Mr. Prince … to make the argument that a simple apology still allows you to maintain a certain income based on what devastated everyone else doesn't fit the scale test, no matter how often you feel sad about what happened."
Prince ultimately blamed much of Citi's problems on CDOs, which he said were complex and entirely misunderstood. He said the company, its risk officers, regulators and credit rating agencies believed CDOs were low-risk activities. As it turned out, they resulted in $30 billion worth of losses.
Still, Prince did not think that proved the company was engaged in too many activities to properly supervise them all. He said the board and management became aware of problems with the CDOs too late to do much about them.
"I personally do not think Citi was 'too big to manage,' " Prince said. "I do not think that the broad, multifaceted and diversified nature of Citi's business materially contributed to our losses or to the financial crisis more generally — indeed smaller, more narrowly focused firms suffered in similar ways."
Dugan, too, put much of the blame on CDOs, partly as a way of defending his own agency. He said the bank, which the Office of the Comptroller of the Currency oversaw, did not damage the holding company, while Citi's securities broker-dealers, which managed the CDOs and were overseen by the Securities and Exchange Commission, were at fault.
"The overwhelming majority of Citi's mortgage problems did not arise from mortgages originated by Citibank," Dugan said. "Instead, the huge mortgage losses arose primarily from the collateralized debt obligations structured by Citigroup's securities broker-dealer with mortgages purchased from third parties."
The OCC believed Citi had a handle on its risk, but the bank did not expect the damage the CDOs would do, Dugan said.
"Companies that thought they had limited exposure when it turned out they had much more risk," he said. "The difference with Citi and several other institutions we do not supervise is they had so much more of it."
For his part, Prince said regulators actively looked at the CDOs, but also misjudged their risk.
"What happened here is that the regulators also mistook the ultimate safety of these CDO positions," Prince said. "I don't think it was a situation where the regulators didn't know what was going on. As I said, they lived with us day by day by day. I think that the mistake that was made by everyone about the value of these instruments was fundamentally also made by the regulators."
Asked by Angelides whether regulators should have dug deeper, Dugan said the agency did the best it could. "I believe we followed up quite rigorously," Dugan said. "I'm certainly not going to say we were perfect."
Rubin, meanwhile, distanced himself from Citi's day-to-day decisions while listing a variety of causes for the financial crisis. He cited low interest rates, market excesses, excessive borrowing, a rise in housing prices, increased consumer leverage and a drop in housing prices.
The board "was not a substantive part of the decision-making of the institution," Rubin said. "I think all of us, not just at Citi, but all of us in the industry failed to see the potential for this serious crisis and failed to see the function of the multiple factors at work, bear some responsibility and I think we all have a great deal to regret in that respect."
He said the company was so big that management could not have seen the problems coming.
"There isn't a way for an institution with hundreds of thousands of transactions a day involving something over a trillion dollars that you are going to know what's in those position books," Rubin said. "I didn't know it when I was at Goldman Sachs and you wouldn't know it on the board of Citi either. You rely on the people there to bring you problems when they exist."
Yet he, too, said the size of Citi was not the problem.
"I don't believe that Citi is too big to manage," Rubin said.
He said the best solution is to give the government resolution powers, raise capital requirements and conduct stricter regulation. He also recommended more leverage constraints, derivatives oversight and enhanced consumer protection. "If you had greater capital and margin requirements, it would cause people to focus more on trying to understand the risk they were taking and probably result in less use of these instruments," Rubin said. "And I think, on balance, that would be a desirable outcome."
