Poking holes in Citigroup testimony

Photo from C-SPAN

The third session of the Financial Crisis Inquiry Commission’s first day of testimonies focused on a group of former Citigroup Inc. bankers and risk managers, who played a role in the bank’s risk management and collateralized debt obligation (CDO) business.

The commission, a bi-partisan group collected to hold hearings and report its findings about the financial crisis to President Obama and Congress, as well as the American public.

David Bushnell, Nestor Dominguez, Thomas Maheras and Murray Barnes, former Citi bankers and risk managers all expressed their hopes in shedding light on the origins of the financial crisis. However, in written testimonies, there is no one to blame for the decisions made.

“I understand that it would be somehow more reassuring to conclude that we made an ill-conceived trading bet or that we invested in a business that was overly risky, or even that we lacked proper controls,” Maheras said. “But I do not believe any of those to be the case.”

It’s no coincidence that former Citi executives are testifying this week. In 2007, Citi led Wall Street banks in CDO underwriting–$617.6 billion, according to Thomson Financial data. For fourth-quarter 2007, the bank reported write-downs of $18.1 billion related to subprime CDO exposure. Citi received $45 billion in TARP money in 2008, which it has partially repaid.

A CDO is a type of security whose underlying value is derived from a fixed-income asset such as subprime residential mortgages. Depending on the type of underlying debt and maturity, the product is sliced into tranches and rated. The higher the risk, the greater the return on the CDO.

The ratings agencies used Citi-developed risk models, which were used to reinforce its ratings. While this is not an unusual practice for Wall Street, it’s a conflict of interest. Giving credit ratings agencies models to use puts pressure on the ratings agency to assign debt a higher-than-deserved rating because the bank helped create the offering.

But accountability of the crisis shouldn’t only rest with Citi, or even the credit-rating agencies, or other Wall Street banks. No one understood what the products actually were and the consequences if homeowners defaulted on their subprime loans.

“None of us fully appreciated the consequences such a collapse would have for even the senior-most rated tranches of these structured products,” Bushnell said. “In short, we did not anticipate these extraordinary developments or comprehend these interconnections.”

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