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Ron F

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Apr 08

We weren't dumb, we just blew it, ex-Citiguys claim

Posted by Ron F in RiskRegulationfinancial crisisFederal ReserveCitigroupBanksbanking reformBankingbank failuresbailouts

Ron F

Man, I just caught some of the last part of the financial crisis show this afternoon and I have to say it did very little to clarify who the hell was responsible for Citigroup's near-death experience during the mortgage meltdown, even though the panel had four former Citifolks on it.

Citi's ex co-CEO of markets and banking, Thomas Maheras, for example, testified that the bank was well aware that housing was heading south in late 2007 and was actively managing its balance sheet to deal with that.

So what went wrong? Maheras said that the bank underestimated how exposed it really was to those losses because it didn't expect the low-yielding, so-called super senior tranches of CDOs that it still held on its balance sheet to be affected by them.

In other words, Citi's risk managers were doing exactly what they were supposed to do. But, said Maheras, they blew it when it came to that one exposure, and there, so to speak, went the bank. "We missed it," he said in reference to that.

In his prepared remarks, Maheras offered up a bit more of a mea culpa: "We, like many other experienced member of our industry, failed to recognize there was a real possibility of the kind of catastrophic residential real estate crash that our country has experienced over the past several years."

Yet, there, too, Maheras insists that he nonetheless did a bang-up job of risk management.

"I cannot fault the fact that the business and most everyone in the industry, including our regulators, regarded these super-senior CDO tranches to be extremely safe."

The problem, of course, was Citi's reliance on models that showed little or no correlation between those securities and others that it had sold.

But it turned out that correlation was big time. Poof. Yet these guys still claim that no human being is at fault here. It's all because of the models the bank employed.

Now I'm sure it's possible that the commission will call the models' designers onto the carpet, but they'll just blame the academic theorists for the models' flaws, and once they bring in the math whizzes, everyone's eyes will glaze further over.

Seriously, Peter Wallison is asking a panelist as I write this about the models' ability to project cash flow, and the discussion is completely impenetrable.

About the clearest statement I heard about any of this was from David Bushnell, Citi's ex-chief risk officer, who claimed to have the most dealings with bank regulators of anyone at the bank. Asked by Heather Murren what kinds of exchanges he had with his overseers from the Fed and OCC, Bushnell said they never gave the slightest indication that they had any concern about the bank.

Nope, no one to blame there, either, I suppose.

Comments (1)Add Comment
written by Steve EM, April 08, 2010
I moved 15% of my 401K invested in Citi in July 07 because I saw that R/E values nationally were down 7 consecutive months. To think that Citi didn't notice that until end of 07 is a blantant lie. They were too greedy to notice in time to undo the hole they put themselves in and didn't bring it to light until it was too late.

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