Page 291 - untitled
P. 291
FINANCIAL CRISIS INQUIRY COMMISSION REPORT
securitization and CDO desks is that their respective risk officers attended the same
weekly independent risk meetings. Duke reflected that she was not overly concerned
when the issue came up, saying she and her risk team were “seduced by structuring
and failed to look at the underlying collateral.” According to Barnes, the CDO desk
didn’t look at the CDOs’ underlying collateral because it lacked the “ability” to see
loan performance data, such as delinquencies and early payment defaults. Yet the
surveillance unit in Citigroup’s securitization desk might have been able to provide
some insights based on its own data. Barnes told the FCIC that Citigroup’s risk
management tended to be managed along business lines, noting that he was only two
offices away from his colleague who covered the securitization business and yet didn’t
understand the nuances of what was happening to the underlying loans. He regretted
not reaching out to the consumer bank to “get the pulse” of mortgage origination.
“That has never happened since the Depression”
Prince and Rubin appeared to believe up until the fall of that any downside risk
in the CDO business was minuscule. “I don’t think anybody focused on the CDOs.
This was one business in a vast enterprise, and until the trouble developed, it wasn’t
one that had any particular profile,” Rubin—in Prince’s words, a “very important
member of [the] board” —told the FCIC. “You know, Tom Maheras was in charge of
trading. Tom was an extremely well regarded trading figure on the street. . . . And this
is what traders do, they handle these kinds of problems.” Maheras, the co-head of
Citigroup’s investment bank, told the FCIC that he spent “a small fraction of ” of
his time thinking about or dealing with the CDO business.
Citigroup’s risk management function was simply not very concerned about hous-
ing market risks. According to Prince, Bushnell and others told him, in effect, “‘Gosh,
housing prices would have to go down nationwide for us to have, not a problem
with [mortgage-backed securities] CDOs, but for us to have problems,’ and that has
never happened since the Depression.” Housing prices would be down much less
than when Citigroup began having problems because of write-downs and the
liquidity puts it had written.
By June , national house prices had fallen ., and about of subprime
adjustable-rate mortgages were delinquent. Yet Citigroup still did not expect that the
liquidity puts could be triggered, and it remained unconcerned about the value of its
retained super-senior tranches of CDOs. On June , , Citigroup made a presenta-
tion to the SEC about subprime exposure in its CDO business. The presentation noted
that Citigroup did not factor two positions into this exposure: . billion in super-
senior tranches and . billion in liquidity puts. The presentation explained that the
liquidity puts were not a concern: “The risk of default is extremely unlikely . . . [and]
certain market events must also occur for us to be required to fund. Therefore, we
view these positions to be even less risky than the Super Senior Book.”
Just a few weeks later, the July failure of the two Bear Stearns hedge funds
spelled trouble. Commercial paper written against three Citigroup-underwritten
CDOs for which Bear Stearns Asset Management was the asset manager and on
