Former executive challenged on role in Citigroup's risk-taking

WASHINGTON -- Robert Rubin, the former financial superstar once lionized for his global crisis-fighting prowess, was scolded Thursday over the mortgage-securities disaster at Citigroup Inc. when he was a top executive there. His claim he didn't know of the risks piling up drew a sharp retort.

"You can't have it both ways: You either were pulling the levers or asleep at the switch," the head of the panel investigating the roots of the financial crisis told Rubin at a hearing.

Rubin expressed regret but said he didn't know until late in the game, when the subprime mortgage crisis erupted in September 2007, about the $43 billion in high-risk mortgage securities on Citigroup's books.

The Citi trading-desk executives who built up that mountain of risk "acted in good faith and did what they felt was appropriate," Rubin said. He said they thought, as many others on Wall Street did, that the AAA-rated securities were safe from default.

But Phil Angelides, chairman of the Financial Crisis Inquiry Commission, told Rubin that as head of the executive committee of Citigroup's board, "You were not a garden-variety board member. ... I'm not so sure apologies are as important as assessment of responsibility."

Until the financial crisis struck with force in 2008, Rubin enjoyed renown as one of the most influential figures in global finance. After leading Wall Street powerhouse Goldman Sachs & Co., Rubin served as Treasury secretary in the Clinton administration.

In the late 1990s he worked with Alan Greenspan, then the Federal Reserve chairman, and Larry Summers, then Rubin's deputy, to contain financial crises in Russia, Asia and Latin America.

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

"All of us in the industry failed to see the potential for this serious crisis," he told the congressionally chartered panel on Thursday. "We all bear responsibility for not recognizing this, and I deeply regret that."

Angelides said of Rubin and former Citigroup CEO Charles Prince, who resigned at the height of the turmoil in November 2007: "The two of you in charge of this organization did not seem to have a grip on what was happening."

After Prince resigned, Win Bischoff became acting CEO. Rubin stepped in as chairman, helping Citi raise billions in capital to shore up its sinking finances.

Rubin referred several times Thursday to anecdotes from his experience as co-chairman of Goldman Sachs. He said he learned that running a huge organization requires reliance on underlings to monitor details.

And he said he hasn't abandoned his appreciation of innovative financial products -- even though some such products that skirted regulation helped ignite the financial crisis.

New York-based Citigroup was a major subprime mortgage lender and 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, Citigroup'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.

Prince also said he wasn't aware until September 2007 that the bank had held onto the $43 billion in 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.

Prince said he was "deeply sorry" for the failure of the bank's management, starting with him, to foresee the crisis that wreaked devastation on the U.S. economy and ordinary Americans.

"It is hard for me to fault the (Citigroup) traders who made the decisions," he said.

The federal regulators, too, failed to see the signs of trouble at Citigroup, Prince and Rubin told the inquiry panel.

Examiners from the Federal Reserve and the office of the U.S. Comptroller of the Currency were "embedded" in the bank, poring through its books every day, Prince said.

The same failure of judgment made by the bank's management "was fundamentally also made by the regulators," he said.

Prince told Angelides: "I think it is absolutely incorrect to suggest that Mr. Rubin had central responsibility, or any responsibility, for what happened at Citigroup."

In later testimony, John Dugan, head of the Office of the Comptroller of the Currency, which regulates national banks, said the examiners' impression of Citi executives was "they had a firm grasp of risk, but their appetite (for assuming risk) got bigger" and caused trouble once the risky securities infected Citi's balance sheet.

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 spread through 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.