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FINANCIAL CRISIS INQUIRY COMMISSION REPORT
then it got bigger and bigger and bigger, obviously, over the next days.” In late
August, Citigroup’s valuation models suggested that losses on the super-senior
tranches might range from million to billion. This number was recalculated as
to million in mid-September, as the valuation methodology was refined.
In the weeks ahead, those numbers would skyrocket.
“DEFCON calls”
To get a handle on potential losses from the CDOs and liquidity puts, starting on
September Prince convened a series of meetings—and later, nightly “DEFCON
calls”—with members of his senior management team; they included Rubin, Ma-
heras, Crittenden, and Bushnell, as well as Lou Kaden, the chief administrative offi-
cer. Rubin was in Korea during the first meeting but Kaden kept him informed.
Rubin later emailed Prince: “According to Lou, Tom [Maheras] never did provide a
clear and direct answer on the super seniors. If that is so, and the meeting did not
bring that to a head, isn’t that deeply troubling not as to what happened—that is a dif-
ferent question that is also troubling—but as to providing full and clear information
and analysis now.” Prince disagreed, writing, “I thought, for first mtg, it was good. We
weren’t trying to get to final answers.”
A second meeting was held September , after Rubin was back in the country.
This meeting marked the first time Rubin recalled hearing of the super-senior and
liquidity put exposure. He later commented, “As far as I was concerned they were all
one thing, because if there was a put back to Citi under any circumstance, however
remote that circumstance might be, you hadn’t fully disposed of the risk.” And, of
course, the circumstance was not remote, since billions of dollars in subprime mort-
gage assets had already come back onto Citigroup’s books.
Prince told the FCIC that Maheras had assured him throughout the meetings and
the DEFCON calls that the super seniors posed no risk to Citigroup, even as the mar-
ket deteriorated; he added that he became increasingly uneasy with Maheras’s assess-
ment. “Tom had said and said till his last day at work [October ]: ‘We are never
going to lose a penny on these super seniors. We are never going to lose a penny on
these super seniors. . . . ’ And as we went along and I was more and more uncomfort-
able with this and more and more uncomfortable with Tom’s conclusions on ultimate
valuations, that is when I really began to have some very serious concerns about what
was going to happen.”
Despite Prince’s concerns, Citigroup remained publicly silent about the additional
subprime exposure from the super-senior positions and liquidity puts, even as it pre-
announced some details of its third-quarter earnings on October , .
On October , the rating agencies announced the first in a series of downgrades
on thousands of securities. In Prince’s view, these downgrades were “the precipitating
event in the financial crisis.” On the same day, Prince restructured the investment
bank, a move that led to the resignation of Maheras.
Four days later, the question of the super-senior CDOs and liquidity puts was
specifically raised at the board of directors’ Corporate Audit and Risk Management
