Citigroup’s disastrous foray into complex securities before the financial crisis was partly based on the recommendation of outside consultants hired to advise the bank’s leaders, a former senior manager revealed.
In testimony on Wednesday to an inquiry into the turmoil, Thomas Maheras, a former co-head of Citi’s investment bank, lifted the lid on a move that led to more than $50bn in losses and forced the US government to bail out the company.
Mr Maheras said that, following a study by a consulting company – said by people close to the situation to be Oliver Wyman – in 2005, Citi decided to ramp up parts of its fixed income business, including in collateralised debt obligations. Oliver Wyman did not respond to a request for comment.
“Based in part on a careful study from outside consultants hired by our senior-most management, the company decided to expand certain areas of our fixed income business that we believed at the time offered opportunities for long-term growth,” Mr Maheras told the Financial Crisis Inquiry Commission, which was appointed by Congress.
Citi’s decision came when it was led by chief executive Chuck Prince, a lawyer who had served as general counsel and had relatively limited capital markets experience.
The reliance on outside consultants for strategic advice on credit instruments contrasts with the practices of rivals that fared better than Citi in the crisis, such as Goldman Sachs and JPMorgan Chase.
The top management of those two banks was directly involved in monitoring and reducing their exposure to CDOs as the housing market began collapsing in late 2006.
Citi, by contrast, did not begin reducing its CDO positions until early 2007 and retained a sizeable amount of those securities for most of the year, Mr Maheras said. “Even in the summer and fall of 2007, I continued to believe …that the bank’s super-senior CDOs holdings [the least risky tranches of those securities] were safe.”
Mr Maheras said under questioning that he had been “handsomely paid” at Citi and “lost a lot of sleep” over its losses.
In separate testimony, David Bushnell, Citi’s chief risk officer from 2003 to 2007, said Citi’s top management had been kept regularly apprised of the company’s risk positions. Mr Bushnell said he had been in “almost daily” contact with Mr Prince throughout his tenure and had a “regular, weekly, one-on-one meeting with him”. Mr Prince is to appear before the FCIC on Thursday, with former Treasury secretary and Citi director Robert Rubin.
Testifying before the FCIC, Alan Greenspan, former Federal Reserve chairman, sought to defend his record ahead of the financial crisis.
“In the business I was in, I was right 70 per cent of the time, but I was wrong 30 per cent of the time,” he said. “What we tried to do was the best we could with the data that we had.”
Mr Greenspan added his voice to the debate in Washington over financial reform, saying that setting higher capital and liquidity requirements for banks and increasing collateral requirements for globally traded financial products would limit the worst effects of future crises.
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