since the end of 2001. : r

it was long-term mortgage rates that galvanized prices, and by 2002 and 2003, >> by 2002 and 2003, it had become apparent that individual countries long-term rates were in effect be linked from the historical tie to central bank overnight rates that in 2002, i expressed concern to the federal open market committee noting that our extraordinary housing boom, financed by very large increases in mortgage debt, cannot continue indefinitely. yet it did continue. just bite the extensive two-year long tightening of monetary tightening that began in mid-2004. in addition to tightening monetary policy and warning of gse risks, the federal reserve

exercised oversight of consumer protection risks, under the home ownership and equity protection act, and it's general supervisory authority. in 2000 the board held hearings around the country on implement its transfer of authority, focusing on expanding the scope of mortgage loans covered by hoepa on prohibiting specific practices come on improving consumer disclosures, and of educating consumers. thereafter, we adopted rules that lowered the trigger for hoepa coverage and increase consumer protections including limitations and flipping. the use of balloon payments and the sale of single premium credit insurance. more broadly, the federal reserve carefully monitored in the subprime market and adjusted supervisory policy to meet evolving marketplace challenges.

in march 1999, the federal reserve issued its first interagency guidance on subprime lending, which addressed a pride of subprime mortgage risks, including the importance of reliable appraisals and the need for income and other documents, documentation. in october 1999, and 2001, and in 2004, the federal reserve issued detailed guidance addressing many of the loan features that have received recent attention. including prepayment penalties, low introductory rates, and low down payment loans, among others. a summary of these initiatives is included with my written testimony. the supervision of the federal banking agencies, including the federal reserve, is an important reason why banks and bank holding company affiliates were

not a significant originators of the most controversial loan products, as non-bank affiliated companies that operated outside the jurisdiction of the federal bank regulators. the recent crisis reinforces some important messages about what supervision and examination can and cannot do. the forecast of the letters has had a wolf will record of chronic failure. history tells us regulators cannot identify the timing of the crisis or anticipate exactly where it will be located, or how large the losses and spillovers will be. regulators cannot successfully used the bully pulpit to manage asset prices, and they cannot calibrate regulation and supervision in response to

movement and asset prices. knower can regulators fully eliminate the possibility of future crises. what supervision and examination can do, is promulgate rates that are preventative, and rules that are preventative, and that makes financial system more resilient in the face of inherently unforeseeable shocks. such rules would protect automatically without relying on a valuable human regular to predict the coming crisis. concretely, i argue that the primary imperatives going forward have to be, one, increased risk based capital and liquidity requirements on banks, and two, significant increases in collateral requirements for globally traded financial products, irrespective of the financial institutions making

the trades. we will also need far greater enforcement of misrepresentation and fraud, and that's been the case for decades. if capital and collateral are adequate and enforcement against misrepresentation and fraud is enhanced, losses will be restricted to equity shareholders who seek at normal returns, but in the process expose themselves to abnormal losses. >> mr. chairman, could you try to wrap up? >> taxpayers will not be at risk, and financial institutions will no longer be capable of privatizing profit and socializing losses. i thank the commission for the opportunity to submit these thoughts, and look forward to answering your questions.

>> good, thank you very much. so, mr. chairman, i will start with a few questions, and the pfister and then we will go to the members, the lead members on this hearing. so let me pick up on some of your testimony, both your written testimony as well as what you have talked about today. and i specifically want to focus on the area of subprime lending, which as you know and you indicated that exploded across this country from 2000 on, particularly the later years. and in your testimony, you pointed to the fact that the securitization of toxic subprime mortgages was a key driver of a crisis. and, of course, that securitization could not have occurred without the origination of those products. i want to focus very specifically on the action of the federal reserve could have taken, did or did not take with respect to regulating subprime mortgage products across this country. and specifically, i want to touch on something you mention, the homeownership and equity protection act.

i have other questions about other areas in which you could have acted. so let me lay this out for you. i mean, first of all there was a whole set of pieces of hub like action urging the federal reserve to act as well as public information, which would have urged you to do the same. and starting about 1999, a set of community groups begin to visit with the federal reserve warning about predatory lending practices. in january of 2000, both hud and treasury urged the federal reserve to use its authority under hoepa to curb abusive lending. in 2002, sheila bair that assistant secretary of the treasury worked hard to try to put in place best practices or mortgage subprime mortgage lending. in 2004, the fbi warned that the was an epidemic of mortgage fraud that if unchecked could lead to losses greater than the s&l crisis. in 2005, the mortgage insurers wrote a letter to the federal reserve as well as other federal

agencies warning that it is quote, deeply concerned about increased mortgage market fragility which combined with growing bank port louis at high risk products poses a serious potential problems that can occur with dramatic suddenness. in addition to that come their way number of internal actions, some of which you refer to. a staff member in 1998 to the community consumer affairs committee urging action in this area. a report by the staff called the problem of predatory lending in november 2000, in which the staff proposal urged that loans be banned to people who did not have the ability to pay and that there the broad prohibitions on deceptive lending. governor gramlich of course urged the promulgation of regulations that you did know that you issued guidance, not regulation, which showed an awareness of the subprime problem. and in our interview, by our staff of you, you noted yourself that i sent to innumerable

meetings on hoepa. the issues came up quite often, and she noted also at another point recently, that we at the federal reserve were aware as early as 2000 of instances and some highly irregular subprime mortgage underwriting practices. i mean, very simply, mr. chairman, y. in the face of all that did you not act to contain abusive deceptive subprime lending? why did you allow it to become such an infection in the marketplace? >> first of all, mr. chairman, we did. there is a whole series of actions that we take, which i have outlined in the appendix, which you have, and which i repeated some merely in my testimony. but you know let's remember that any document that you sent to us, which is a federal reserve document, it says in july 1998,

the federal reserve board and had submitted a report to congress and a mortgage reform, that report concluded that he proved his closures alone were unlikely to protect vulnerable consumers of unscrupulous creditors. the report recommended that congress consider the need for additional legislation. the remark made several recommendations for many recommendations to hoepa such as further restricting balloon notes, regulating minimum standards for foreclosure. now, i sat through innumerable meetings on the issue of hoepa, and we had, for example, detailed requests coming from a large group of representatives in 2000, and i think it was

seven senators about a month or so later requesting that we do a series of things. i mean, including taking the hoepa down from 10% to 8%, and a whole list of things which i won't outline here, but they are in the appendix. we did do almost all of the things that you are raising. and the consequence of that is that i think things were better than they would have been. worthy enough to stop a surge in subprime lending? they were not. and the reason for that is the extraordinary changes that were going in the marketplace. and indeed the actions of fannie and freddie, which we didn't know about until september 2009, which altered the structure of that market, from what was in, say, prior to 2002, a small well

functioning institutions. >> i want to press on this, because you didn't have the ability to regulate fannie and freddie. by the way, i have senior numbers and we'll have a whole day on them. and clearly, things did not go well at those institutions, given where they stand today, and over $100 billion of taxpayer assistance to them. but i just do want to know that you cited a number some 2003 in 2004, they were 13% of private labels equity market in 2005 and they were negligible in 2006. but what would you say is you did have the ability to regulate the products. so i do want to make sure we are not rewriting or forgetting history here. and so i want to focus on what the result was of what the federal reserve did. you mentioned the guidance, and, in fact, i know you issued guidance in 1999, 2001, 2004, 2006, 2007. that was guidance to examiners, not by me.

most important couldn't apply to the whole marketplace like hoepa could it. it could only apply to those institutions you regulate that not all the independent mortgage lenders across the country. so it's good that you issued guidance, but i think that's more evident there was awareness of the problem and a failure to act. but i want to specifically focus on the 2001 regulations, which you cited. in fact, i think he said in your interview to our staff quote we develop a set of rows that have held up to this day. but here are the facts. effects are you adopted those rules in 2001, and at the time they were adopted they were projected to cover 38% of the subprime lending activity in the country. when it was all said and done, and anybody which was done over those rules in 2006, not 2009, 2010, what in fact have happened is the rules you adopted covered just 1% of the market and so i returned to you again, was there just every left is to regulate?

was there just a believe that regulation was not the right tool to kind of constrain this level of abusive lending that ended up leading to the origination product and in the massacre session that you talked about? without the you could have the origination. but comment specifically on that 1% that are you aware that the findings of the rules only covered 1%? >> mr. chairman, just go back to what i said in my opening remarks. we at the board in 1998 were obviously aware of the nature of the problems. remember, the federal reserve board is a rulemaking. it is not an enforcement agency. we did not have the capacity to implement to the types of enforcement that the ftc has, hud has, department of justice. and consequently, we were extending what the rules should

be. and indeed we covered as much as anyone could conceive state that if you adopted those broader rules, the ftc can enforce them and others could have enforced them. >> we did adopt a whole series of the spirit but they only covered 1% of the activity. my view is and i want to move onto another issue is, you could have, you should have but you did that and i do think this is one area we have to explore, how this can take it could've been constrain. let me move on to a related issue, and it is the same issue but a different take. there was the issue of examination of not bank subsidiaries. in january 1998 you formalize a policy not to conduct routine consumer compliance exams of the non-bank subsidiaries under your purview. the gao criticized that policy in november 1999. governor ed gramlich proposed that they should be examination of consumer finance lenders, which would have covered depending on the calculation anywhere between another 12 to

18% of the subprime origination to cut would have covered everyone by any extent. there wasn't august 2000 memo from dolores smith and glenn loney, i think of your staff, called compliance of non-bank subsidiaries the bank holding companies suggesting a pilot program. in 2004 the gao weighed in again urgent action given quote a significant amount of subprime lending among holding companies subsidiaries year but again, no action. no willingness to go in and examine a non-bank subsidiaries, even though after your tenure, finally in 2007 with the federal reserve and ftc and lds and state regulators did launch a pilot. and the 2009 begin those examinations. why would you want to go in and at least examine these institutions speak as well, first of all let me say with respect to 2009, supervision and regulation evolves over the years.

and i felt the actions the fed took in recent years, while after i left, where appropriate, given the change in conditions. but let me take a second to give you a sense of how the decision-making operations at the fed took place. we have, of course, there's 100 largest very sophisticated professional group in the division of consumer and community affairs. we have an outside consumer advisory group. we had 12 community groups within each of the federal reserve banks. and we finally had the subcommittee of the board, which is a committee on consumer and community affairs, which essentially oversaw the whole operation. that operation as it worked its way through would come to the

board of governors with recommendations. now, all i'm saying to you is that with respect to a number of the issues that, for example, governor gramlich who, frankly, one of the best governors i think the board has ever had and a very close friend of mine, he was chair of that committee. and indeed, we always look to him to decide which we should be doing, which we should be done because he had the most knowledge. he chose not to bring those issues to the board. so i can't say quickly why an individual cases. but, frankly, i always thought his grasp of the situation was as good as anybody i have ever run into any issue of consumer affairs. >> well, he was one of -- one person, but they're also others and staff reports. i mean, let me just ask you,

would you put this under the category of moves? should have done is because i'm sorry what? >> would you put this under the category of hoops, we should have done it? >> you know, we have an income of 421 years as i have been, the issue of retrospective and figure out what we should have done differently, it is a real fuel activity at you can't in fact in a real-world do it. i think, myspace has been in the business i was in, i was right 70% of the time. but i was wrong 30% of the time. and there aren't an awful lot of mistakes in 21 years your. >> would this be one of them? >> would you put this in the 30% category? >> i'm sorry? >> would you put this in the 30? >> i don't know. >> let's do this then. i'm going to stop at this moment. i will have additional

questions. but what i would like to do is now moved to commissioner murren. to my dear friend bill thomas. bill thomas. >> thanks to my dear friend, the chairman. [laughter] >> you are in 2187, row six. i was in 28 from 1978 to january 2007. i used to think timing was really important. now i think timing is everything. and so, from your perspective and my perspective, looking back at it, and in this particular instance, probably more so than anyone i can think of, there are enormous number of would've could've showed up should us

from an enormous number of institutions in government and in the private sector. one of the things, and yet written a book, the recent paper in front of bookings, the crisis and your analysis here, does a pretty good job pointing out problems in a number -- and you focus to a certain extent on government and not the private sector, but it's easy to do in terms of risk management decisions that were made. i want to try and focus in a slightly different way on your role as the chairman of the federal reserve. during a period that you and i shared in terms of an economy that in your attempts to stimulate, you were beginning to

run out of basis points in the cupboard, and we were real close to job owning, because that was always going to have left. and it always, when you approach crisis, you approach it from today looking at tomorrow. it's unfair, as you said, but i'd like you to just for a little bit to turn around that because you have categorized concerns in a credit rating structure, risk management structure, obviously the gse's. and i'm not going to ask you to a sign awaiting. but i do want to ask you, since we're not going to be able to a cottage everything we want to a cottage and the timeframe. as i said in my opening statement. would you be willing to respond to written questions, in part based upon this hearing, but any other information that we might need moving forward?

understanding consideration of time, place and manner. >> most certainly. i would be delighted to do so. >> thank you very much. in your testimony, you point to a lot of the causes. none of them, not subprime mortgage origination, nor the housing bubble, nor the prudent regulation of large entities, like a citi that we will hear from, i really the narrow focus, and even to a certain extent the broader focus of the fed. so in your words, what exactly is the role, and therefore, the degree of fault that should fall on the federal reserve? >> well -- >> during that period. >> statutorily, we have a number

of authorities. fundamentally, it is monetary policy. that's way central bank does. we had supervision and regulation as secondary major issue. and we even, as we specify in some of our written document, the third one was systemic risk. so it's a very broad mandate that the federal reserve has, and it is structured according to meet those particular mandates. we have an organization that is the best in the business, as far as i'm concerned, any issue of monetary policy. i know of no better supervision in regulatory operation that exist within the total federal reserve system. and we are dealing basically

with problems by its very nature which are insoluble, that require us to make judgments about what the future is going to hold. as i mentioned before, if we get it right, 70% of the time, that is exceptionally good. and i think that what we tried to do is the best we could, and with the data that we had. and all i can say is, did we make mistakes? of course we made mistakes. i know of no way that that can be altered under the existing structure. and i make a special point, as you know, of trying to emphasize that the only type of regulation that works, and, in fact, works sufficiently and adequately, is those that do not. >> is it fair for me to indicate that the thrust of your

testimony was that the crisis to a very great extent was caused by the demand for subprime securities? is that they're? >> the fundamental cause of the crisis goes back to the end of the cold war, which is pretty obscure, but global prices, you cannot think of the united states crisis in any form without looking at the global context. >> i'm going to get into that as we go forward, but the narrow focus, and i do want to thank you for citing a book which i think is especially useful, reinhardt and getting taking us down memory lane on the history of bubbles. but if you're focusing on subprime securities, were they surely predicated to a degree on rising housing prices?

>> first of all, let's remember that the subprime mortgage market was actually a very effective market in its early years. it served a limited population, homeowner, potential homeowner population, which couldn't afford a 20% down payment that prime mortgages required to. >> i agree with you in the early history. i have looked at statements from 1999 as they were moving into this area, a number of people lauded the. isn't that the story of all bubbles, regardless of what it is? whether they all start out with good intentions, and somehow they go awry? >> i just i -- >> and what we're trying to focus on is in this particular bubble, what is it that went awry? would you feel comfortable saying that at least some of the concern with the housing bubble was the fed's monetary policy,

or not at all? >> i tried to explain in some detail in the brookings paper, i go to a lot of ecometrics and the like, that certain fundamental things changed in the world economy, which made monetary policy essentially ineffective in dealing with long-term asset prices. so are you asking -- >> i agree with you. i understand the argument. i'm just trying to move down a line and clearly, capital, the savings rate, the change in the movement of money. and that had you asked that it wasn't monetary policy in terms of your argument. because, frankly, longer-term yields -- >> league is recorded portion of former fed chair alan greenspan's testimony before the financial crisis inquiry commission. we are back live now to coverage

of the first of three days of commission hearings this week as it focuses on subprime mortgages. our next panel looking at how subprime loans were originated and packaged for sale on the market. >> do you solemnly swear or affirm under the penalty of perjury that the testimony you're about to provide the commission will be the truth, the whole truth, and nothing but the truth, to the best of your knowledge? thank you very much. this panel is about subprime origination and securitization. and we're going to ask each of the panels come here submitted to us via written testimony. 1c1çñ 1c

>> subprime lending company from the years, 2005. additionally i am author of confessions after subprime lender, insider tale of greed fought in ignorance i

currently publish several housing finance, real estate periodicals. securitization could be single greatest innovation come into the world of mortgage lending. before loans were securitized. consumer relied on bank to supply funding. process stayed with the same institution. since banks owned every aspect of the loan and heavily regulated motivated to manage risk and treat borrowers fairly. in addition to creating a renewable source of cap mortgage securitization also fragmented industry. instead of one institution that functioned in true cradle to grave capacity. functionality became diversified. this fragmentation gave each player a claim of what i like to call applauseability deniable. any original race about the loan. lender underwrote the deal using guidelines provided by investment firm so they merelied final products investors wanted to buy.

the wall street firms securities and investors who purchased them claimed to beholders in due course which proited them from any liability when lenders and protecters act illegally. while entire food chain contributed to the problems. fragmentation allowed the players to point a cuestory finger at everyone else. with minimal barriers to entry and historically low interest rates, loan originators entered business by droves. by some estimates number of new loan originators working for mortgage brokers increased by 100,000 between the years of 2001 and 2006. during the early years in subprime lenders, subprime lending very few states had licensing requirements which meant barriers to entry were minimal. even when states began requiring licenses prerequisites were easy to meet and passing multiple choice tests and having no felony convictions. level of fraud reviewed by

lenders was unprecedented in my firm's experience between 2003, 2005, more than 0% of all brokered loan files submitted for initial review were somehow deceptive fraudulent or misleading. issue was further complicated by the fact little could be done to rid system violators. for example if the lender found a broker was acting i am brotherly, in fact committing fraud, the options for enforcement were minimal. many states did not have licensing requirements. those that did have weaken force standards. assuming there was a state licensing authority a lender could submit documentation in effort to rescind a broker's license. in many cases path of least resistance for the lender to place the broker and do not do business with list which meant the broke was effectively barred from doing business with that firm leaving them to go somewhere else to do business. determining a property's value pose ad number of challenges for firms like mine. subprime lenders usually conducted second party

review for broker ordered appraisals, frankly majority of appraisals were considered unrelikeable. to put things in perspective nearly half of all the loans we underwrote, that we underwrote were originally overvalued in our opinion by as much as 10%. interestingly our experience 10% was most an appraisal could be overvalued and be purchased. another quarter of appraisals were overvalued by 11 to 20% and remaining 20 5% of appraisals we initially underwrote so so overvalued they defied all logic. throwing a dart at a board while blindfolded would have produces more accurate results. if multiple properties in area overvalued by 10% they in turn are comparable sales for future approgramsals. the process repeats itself. we saw this on several occasions. we close the loan in january and see subject property show up comparable sale in the same neighborhood six months later.

except this time the new subject property was being appraised for 10% more than comparable sale six months earlier. in end i believe subprime industry willingness to consistently accept overvalued appraisals and significantly contributed to run-up in property values that were experienced throughout the country. to complicate matters further the mortgage industry experienced a gradual shift between what was not and not an acceptable form of risk. credit score had been compel indicator of loan performance its lee ooiblt was predicated holding other credit factors constant. concluding but not limited to borrower's rental history, job stability and cash reserves. unfortunately the industry's ability to apply logic underwriting a loan file would serve as its undoing. no other example more prevalent illustrating a point. identifying how a row ear's payment history history was verified. they moved from requiring a borrower to provide 12 months canceled red checks or verification from rental management company allowing

for private verification. in other words a note from borrower's mother became acceptable form of rental history there should be no surprise loans defaulted at alarming rate. >> thank you very much. there will be plenty of time for questions, thank you. miss lindsey. if you can pull those mikes towards you and put them on, thank you. >> good afternoon. thank you inviting me to participate this afternoon. my hope for today's session is that i can bring a unique perspective to the, into subprime lending. i have a unique background. i grew up in the subprime industry. my father was a hard mon lender. i learned what fannie mae was 6 years old don't want to tell you how old i am but freddie mac wasn't around yet.

my father would show me how to vail eight a loan. i learned how to service loans, look at loans. look at properties. in biggest thing with hard money lending these were borrowers who didn't have good credit histories. so to offset that poor credit history they would the have a lot of equity in the property. we had three cs we looked at credit, collateral capacity. borrowers didn't have credit. later on in subprime they didn't have the credit but yet they didn't have collateral either. then we found out they didn't have the capacity. they would, they switched state the income loans. and they would just state whatever would qualify them for the loan. usually led by brokers because the brokers were the professionals in the industry who would know what they needed in order to qualify for the loan. those loans were submitted to lenders like new century mortgage who then sold them to investors on wall street

where they were packaged and resold into securities. i joined the new century as wholesale underwriter in 1997. i was kept on as part of a skeleton crew after we declared bankruptcy in april of 2007. i was kept there to help wind down part of the bankruptcy. i found the lending standards at new century significantly different than what i had grown up in the subprime lending industry. also i worked at beneficial mortgage from december of '99 6 until i was hired on as new century in december of 1997. beneficial was one of the original subprime lenders. they too would work with borrowers who had poor credit history and, they would offset it with the protective equity. so in other words, if the borrowers were going to detall -- default they would protect the portfolio so borrow could get out by selling property or refinance or, possibly do

something else in order to get out of their loan. as mr. bitner mentioned the growth in the subprime industry grew because of securitizations on wall street. before the banks like, beneficial, like some of the other local banks, they kept their loans on portfolio or would sell them off to fannie mae or freddie mac if they qualified for those loans. with the advent of the securitizations, loans were just sold in droves to wall street. there was a huge deman for the product because of returns. the problem with the returns though is they were based on a product that if anything hiccupped like the property values, they were going to potentially default. new century, was not able to originate loans without the use of warehouse lines of credit. we didn't have our own funds to loan. we were not a banking

inches. we didn't take deposit. so we got our money from warehouse lenders. these warehouse lenders provided us the ability to make loans and they were usually provided by the same people who would purchase our loans on wall street. there was such a huge demand from our product our loans were forwarded two or three months ahead of time. we had approximately, we were making at peak, approximately 20,000 plus loans per month. about $5 billion in product every month that was being sold and those loans were forward fold. one of the other things that changed was the originate to distribute model. a definition of a good loan used to be a loan that paid. it changed to a definition of a loan that could be sold. we did track the performance of the loans that we could because we would always say our loans performed better than the others. the problem with that we couldn't track all the loans because like i said most of them were sold and we didn't know what happened to them.

unless we were at the repurchase. one of the other problems was the loose guidelines. we had layered risk. we had people who didn't have credit. they didn't show the capacity, and they didn't have the collateral because they were at 100% financing. and then we added the interest-only loans. then teaser rates that would readjust of after two years. and it finalize my opening statement, this basically at end of the day we had a system that went into a ward spiral because of layering risk rather than mitigating the risk. and we just need to go back to core values of. thank you. >> thank you very much. mz mills. >> chairman angelides, vice

chairman thomas. members of the commission thank you for inviting me here today. my name is sues mills. head of mortgage group of citigroup global market group. securitization and underwriting mortgage back securities within citi investment bank. commission asked me to address the securitization activities of my group including our business model and our due diligence activities with emphasis on securitization of subprime and alt-a residential mortgages. i have done so in greater lent in written statement for the record. let address a few key points for you now. first while mortgage trading and securitization activities were part of intermediation business. we purchased mortgage loans from originators and sold the securities to sophisticated institutional investors. our objectively in purchasing mortgages, securitize them and distribute resulting mortgage bonds to meet demand from fixed income investors. secondly, citi's rmbs business was smaller than the rmbs business at many

other wall street firms. publicly available tables show we ranked 7th in underwriting mortgage-backed securities in 2004, 10th in 2000 five. 11th in 2006. and 10th in 2007. significant reason for this, was that unlike many other firms, in the period leading up to the market dislocation in 2007, we did not operate what is known as mortgage conduit which is entity used to apply our mortgages on ongoing basis to established relationships with originators. in addition, citi's investment bank did not have a direct relationship with affiliated mortgage originator from which we had the ability to directly resource mortgages for our securitizations. this meant that instead of originating and servicing mortgages in-house the securitization business, as many of our peers did, we exclusively purchased loans from originators in the marketplace in arms length transactions. as a result we underwrote our own rmbs according to the guidelines of the loan originators and not our own set of guidelines.

our due diligence had two principle components. first, before ever purchasing loans from a particular seller we would evaluate the seller and their operations typically through an on sight review. if we were not comfortable with a particular seller we would not do business with them. secondly, with respect to pools of loans that we were purchasing, we would perform a due diligence review, focused on insuring that the loans met the originator's underwritingfied lines. to conduct this review we engaged third party diligence providers we actively supervised. once we aggregate ad pool of loans of sufficient size we would then securitize those loans. as a part of this process we submitted loan level information to credit rating agencies. to determine the dollar amount of bonds in each rating category for the rmbs we would market the rmbs bonds to investors, solicit feedback from those investors regarding the transaction and finalize the structure and pricing. our offering documents described underwriting standards of originator or originators of the loans in the pool and also provided

extensive nate tiff strattifications concerning the loans themselves. i understand that the commission is particularly interested in our efforts to monitor the mortgage market and detect fraud. our diligence review served as primariliry and i believe highly effect testify means we evaluated loans we purchased and securitized if we identify issues in loans of pool of mortgages we agreed to purchase including concerns about potential fraud we would perform additional diligence until we were satisfied that our level of diligence was appropriate. we would not purchase loans that failed to meet the applicable underwriting guidelines of the originator, or that violated any compliance regulations or that appeared fraudulent. we also monitored the performance of the loans that we purchased and we typically negotiated the right to require the seller of loans that experienced early payment default, an indication of potential fraud, to repurchase those loans. to assist us with these efforts starting in 2006, we established a unit within finance to monitor the

performance of the loans we securitized and to manage our repurchase requests. unfortunately, our diligence practices did not detect what we now know to be the most significant downturn in the u.s. housing market in generations. results of unprecedented housing collapse which led to the decline of value of all mortgage loans, many of our rmbs have not performed as well as expected. however, we continue to believe despite the financial crisis and collapse of residential home prices the securitization of nrn agency mortgages plays a vital role making capital available to institutions to enable individuals to purchase homes and we are encouraged we're slowly starting to see the mortgage securitization market return. for our part we at citi committed to applying diligence practices as we adapt our business to the changing mark place. i appreciate the opportunity to discuss some of those practices with the commission today and i look forward to answering your questions. >> thank you very much, ms. millions. mr. bowen.

>> thank you, mr. chairman. i'm very grateful to the commission. the light is on. i'm very grateful to the commission to be able to give my testimony today. if it wasn't for this commission, if it wait a minute for you, then my story could not have been told. my name is richard bowen. i was promoted to business chief underwriter for citi in early 2006. i had responsibility for underwriting for over $90 billion annually of mortgage loans. these mortgage loans were not made by citi. they were made by other mortgage companies and citi purchased them. and it was my responsibility to make sure that these mortgages met citi's credit policy standards.

during 2006, and 2007, i witnessed business risk practices which made a mockery of citi credit policy. i believe that these practices exposed citi to substantial risk of loss, and i warned my business unit management repeatedly during 2006 and 2007 about the risk issues i identified. i then felt like i had to warn citi executive management. i had to warn the board of directors. about these risks that i knew existed. on november the third, 2007, i sent an e-mail to mr. robert rubin, mr. dave bushnell, the chief financial officer and auditor of citigroup.

i outlined the business practices that i had witnessed and had attempted to address. i specifically mr. ruben about the extreme risks and unrecognized financial losses that existed within my business unit. i also requested an investigation and i asked this investigation be conducted by officers of the company outside of my business unit. my warnings to mr. ruben involved two different areas within my responsibility. the first one was called delegated flow. the delegated flow channel purchased $50 billion annually of prime mortgages. these mortgages were purchased one mortgage at a time. these mortgages were not underwritten by citi before they were purchased. but the underwriters reviewed a sample of the

files after they were purchased. this was to make sure that citi's credit standards were maintained. most of the mortgages were sold to fannie mae, freddie mac or other investors. even those citi did not underwrite these mortgages, citi provided warrants to the investors that purchased them. these reps around warrants guaranteed to the investors that the mortgages were underwritten to citi credit guidelines. in june of 2006, i discovered that over 60% of the mortgages in delegated flow were defective. and by defective i mean the mortgages were not underwritten to citi policyfied lines. citi had given reps and warrants to the investors that these mortgages were not defective. and the investors could

force citi to repurchase many billions of dollars of these defective mortgages. this represent ad large risk of loss to shareholders of citi. i attempted to get management to address this critical risk issue. i started issuing warnings in june 2006. these warnings were in the form of e-mail, weekly reports, committee presentations and discussions. i even requested a special an investigation from the management that was in charge of internal control. and that investigation confirmed that we had very serious problems. and i continued my warnings through 2007. but, citi continued to purchase and sell even more mortgages in 2007. and defective mortgages during 2007 increased to over 80%. i told you that my warnings

to mr. reuben involved two areas of responsibility. delegated flow was the first area. the second area involved was wall street subprime. wall street subprime purchased pools of subprime mortgages -- >> mr. bowen can you try to wrap up as quickly as you can just because of time. >> wall street subprime purchased pools of subprime mortgages from other mortgage companies. and the underwriters were responsible to make sure that the mortgages in those pools met the citi credit policy standards. beginning in 2006, i witnessed many changes in the way that credit risk in these pools was evaluated. as an example, the credit decision on purchasing a pool of subprime mortgages was based upon the numbers of approved decisions given by the underwriters. in some subprime pools, large numbers of underwriter decisions were changed. the decisions were changed

when turn downed or approved. the pools were purchased. there were many other variances to citi policy. beginning in 2006, i issued many warnings to management. and many identified pools were purchased anyway, over my specific objections. thank you, mr. chairman. >> thank you very much. and there will be lots of time for questions. i really appreciate the brevity of all the witnesses. let's do this now. i'm actually going to start with mr. thomas, to see if you have questions you would like to lead with. i will defer my till the balance of the commission members. >> thank you, mr. chairman. first of all, thank you all for coming and, for anyone who grew up in california through the '50s, the '60s, the '70s. '80s. '90s sets, a lot of this

stuff is pretty familiar with us now especially following the last several years. and i'll address my initial questions to mr. bitner. ms. lindsey. what was the last straw? what made you walk away? was it kind of like the cannibals, start with the cold water in the pot and starting getting a little hotter and then eventually, you realized circumstances you were in? >> i think for me it was combination of a couple things. >> is your mike on. >> i believe so. >> closer then for me it was combination of couple things. starting a as early as two three. forget about the fact that have a subprime business model. we had a model, which makes wigets and, every month you're making more of them and making less and yet you're also noticing quality of wigets you're producing is of a decreased quality. you're watching this trend.

hey, can you tell them. what's that? >> can you sell them. >> we can sell them. . . or could you still do those but

not at the volume that you could do these? >> what i referred to is acceptable level of risk by looking at the matrix that was put out, whether with the citi financial or whichever group saying in order to get a 95% loan-to-value loan, the loan must now be meeting this criteria, so it wasn't a case of whether i had more or less of those that were available to me. it is just that the decision-making capabilities--. >> your targets change. >> targets change absolutely. what ultimately happened was a couple of things occurred. when we had record-setting month in terms of volume in terms of the number of loans we close. number 2 we also found ourselves in a situation where as we were looking at it from a risk perspective and analyzing the volume of loans that we did, we noticed we had also hit a record level members of state income loans, record number of hundred% finance loans which was different from when we started. when we started in 2000 much as

chairman greenspan alluded do we had a business model that was more of a minor part of the business center mortgage lending where the average down payment was 10 to 15%, stated income loans were only--. >> mr. bitner i have a a time limit as well you. what i want to focus on those of us who grew up in southern california were well aware that the first thing you try to do was to get get enough money to borrow from your parents to do whatever you can to get into a home because the home would appreciate. and that was one of your principle forms of saving. and that over time, you could then get equity out of that house and buy another one. these events were occurring because that was just the climate we were in. do you feel you have got into a point and i notice you are from texas, and there were savings and loan problems in california and savings-and-loan problems in texas and there was a way to apparently make the machine work faster. did you see a level of what i guess we could call fraud at

some point get the appreciation higher by virtue of the relationship between the appraiser and the real estate agent in terms of buying and selling homes or flipping them as it is termed? >> it was one of the greatest problems we had what i talk about this in some great depth in the book there is an issue in the relationship between the appraiser and the agent. what we are really talking about is the fact that the appraisal is direct hit from the broker in this particular case, not the real estate agent and one of the things i concluded in my belief is, let me finish this, the broker did not need to apply the direct pressure to an appraiser. the way the industry worked with simple. you placed an order in front of the appraiser and he said i need $235,000. if that appraiser was not able to then ultimately they went to somebody else. >> and so, you did not sell your product and that is how you've made money, so people conform to

a certain business practice to make sure they could sell their product? was there a degree of uniformity on how you begin to produce these mortgages? >> could you be a little bit more specific? >> there is a slow way, there is an old-fashioned way, there is a ccc way or the quickest way to get it done under the new rules. was there a general understanding that your job was to produce these so you could make money? and therefore you do it in the fastest, most convenient way possible? >> well, the easiest way to answer that. >> why did you get out of the business? >> why did i get out of the business? because my house caught on fire. you are going to go what does one have to do with the other? you have moment in your life when you look and start watching the house and interesting the house had the-- he start questioning the validity of the work that you have an doing overtime and whether or not his

parting value that it provided five years ago when he started the business and the answer to me was pretty clear, that it wasn't. >> do you think much of the self-examination and frankly what we used to call guilt was evident on wall street in terms of the continued desire to purchase whatever it was you were producing because when you step aside there were others who felt-- filled your shoes fairly quickly. >> i can't speak for all of wall street but i know when i left it certainly met-- meant that it was a little easier to sleep at night. >> okay. let me reserve my time and i will come back on the second round so everybody gets a chance to get into the questions mr. chairman. >> ms. georgiou. >> thank you. my first question is for

mr. bitner and for ms. lindsay. you reference the fact that some of the requests from your customers for the types of products that they wanted had evolved over time and i was curious as to whether you could comment on whether they are due diligence practices also in-- he fault overtime? >> i was primarily in charge of the fraud detection and prevention and i will say i did try to keep up with that piece of it. one of the problems that i had specific to fraud prevention was the advent of stated income loans, so in other words, if you couldn't prove the fraud, it became a business decision. the only time we had any teeth, risk management on the backend, was when we could groove defrauded when we had something in writing, when we could hand productions something and show them otherwise they would seek-- say prove it. show me it is a bad loan and then you couldn't and therefore

it was a business decision and it would moveon. did that answer your question at least somewhat? >> it does. >> i very much agree with what ms. lindsay said. i would add to that point. let me is the example of the stated income loan because i don't think our processes and procedures changed any. it just became very much the sort of the same challenge. you get a particular documentation or file that comes in with the person who claims to be, to make an income that appears to be relatively reasonable for that particular occupation. there were ways we could check that. we could go to salary.com and other ways you could make sure you didn't have the strawberry picker who is making $450,000 a year. >> to the person purchasing the loans from you, they are due diligence when they came to look at the products you generated did they change their due diligence practices over time? the city banks of the world?

>> i don't think so. for what it is worth, i felt we had strong due diligence practices and didn't change relative to those types of loans in terms of what we were looking for because we still felt one of the reasons why those of us who have been lifelong in the mortgage industry and i came from the side of working from the investor before was at the end of the day the one thing that drove our opinion was our belief, can this person make islam? can this person make this payment at the basic level. if the answer is that we probably don't have a reason to be doing this loan. >> one short question, when you look back on this to think that there should've been some sort of regulatory supervision of your business activities and that of your industry specifically that segment that was not necessarily monitored by the federal reserve as a bank would he? >> i think the person who is investing the money should know what they are investing in. as a hard money lender myself i love my personal funds and i grew up in the industry. i need to know the risk that i am taking, and know what it

involves. i don't think the people ultimately invested their money in this new any, had any idea what the risks were involved, so i think that there should be some regulation to the effect of showing the investors, who at the end of the day are the ones who are purchasing the loans, the bond buyers or the retirees who are investing, i think everybody needs to understand what the risk is, so they can make an informed decision. in that respect, yes it definitely. >> there is a little bit of a conflict in that you both just dated you felt that the due diligence practices that were exercised by people that ultimately were either passing through these loans or they were end-use investors were adequate, but yet, clearly as we have seen, they didn't fully understand the risks that they were taking, and i guess-- is that correct? >> that is correct and they had a set of underwriting guidelines so they were kind of following

the guidelines but they didn't understand what the underlying risk was. i think we would run out of product, we would run out of customers with a certain product and they could no longer qualify because the property values have gone up so much so here comes the interest-only loans. it just kept layering the risks and the people-- it wasn't the wall street investors who are purchasing these who were taking the losses. they were passing them along, passing them down the line five or six levels, and that is where the money was coming from. so i just think the person who is ultimately investing in these needs to be aware of what the risk is. i think there are too many levels that it went through. >> thank you. >> you are welcome. >> to follow up really on that topic which is risk in the assessment of risk, both i guess from mr. bowen and ms. mills, perhaps ms. mills he could talk a little bit first within your unit, what contribution or what importance did risk have in the

way you ran your business? >> risk meaning the department risk or just the evaluation of risk? >> the evaluation of risk and then in particular where i'm headed with this is to try to determine to what extent your ability to understand the underlying risk of your business was related to your performance in your duties within your unit, so was your performance review based on your ability to determine risk? >> when we bid on pools of loans from originators, so people who were aggregating loans, we purchased, or we agreed to bid on pools of closed loans. there was on average a 30 day time period from when we were awarded the transaction to when we actually had to pay for the loans and in that dirty day period is when we conducted our due diligence and are due diligence had two components

when it came to long file diligence. we look at valuation so we look at the property. we looked at credit so we made sure the loan was originators to the originator guidelines and then we looked at compliance to make sure they didn't-- lending laws and sometimes we do 100% diligence. more often than not we would use a sampling methodology where we would select both randomly selected and adversely selected loans. the randomly selected loans were to just get a snapshot of is the pool as described on the low-level data filed that you got from the seller? the adverse selection was to try to identify the riskier loans in the pool and spend a little bit more time focusing on the riskier loans to make sure that in fact they were as described. >> but then when you get to the end of the year, when compensation is determined. >> my own personal compensation? >> s.. >> i don't know exactly what

factors went into my own personal compensation. i know the people that worked for me, their compensation was based on the way they did their job, whether or not they were performing adequately and up to the standards i maintained. it was based on the profitability of the business and it was based on the profitability of the firm. >> was there a revenue component to its? >> yes, that is what profitability is. >> a arguably profitability is after you take losses or any kind of responses-- expenses related to the revenue stream. >> there was a can't often we knew how much money the business made at the end of the year and there was a bonus pool allocation amongst the various businesses, and my management decides the final word on who got paid what. i didn't have the final word, i just made recommendations. >> was risk discuss with you during a time of your

performance evaluation, risk to the firm, riggs to your unit? >> i can't remember specifically. because their business model is one of intermediation and that we buy loans and we distribute von tinley think that we disclose the risk to our investors and offering documents, which we believe are compliant with all required securities laws and we sold bonds that had ratings, there was risk that was monitored and maintained on the trading desk itself. i am not a traitor so it was not my responsibility to manage the risk of the firm. >> when you interact, you have had some interactions i believe with the sec and federal related to your business unit as part of the fact that the regular dated body that hotties the investment bank would be the sec and not so much the federal reserve. is that right? >> i've only had interaction with venrock. >> could you talk about your interactions with regulators in terms of the kind of interest they might have had when they

were evaluating your business and its importance to the of-- parent company? >> my interaction with venrock was related to some inquiries that they made, transaction specific so they had some questions on some securities that we had issued off of our shelf, and i had some meetings with our council and then i had one and face meeting with finra where they asked me questions about the deals that they had questions about. they were specifically related to issues with the reporting of delinquencies and was i aware of situations where delinquencies may have been misreported on remittance reports. >> when you think about the regulatory regime that governs the investment bank, is there any discussion within the firm about how that relates to the overall safety and soundness of the parent company? was that discuss? >> those are not discussions i would be involved in. >> thank you.

mr. bowen if i may? you stated in your testimony that there were a number of practices that you had raised with regard to the quality of the loans that were being generated in your unit. if you could talk a little bit, a similar line switches to what what extent was there regulatory oversight of this issue to your knowledge and to what extent they can do to feedback to management or did management relate to you the importance of that to the parent company in total? >> i did not interface with any regulators. underwriting was considered to be a part of risk and i escalated all of my concerns up through the risk structure as my manager did. as it relates to the quality of the loans, again, as i indicated

when i took over this responsibility in early 2006, i was charged with ensuring that the mortgage loans that came through my area were underwritten according to citi policy guidelines, and i attempted to follow through on that. and identified those that came through my area that did not meet that criteria. >> and, do both of you report up to the same risk management unit? >> i reported up through-- i ultimately, they met at the chief risk officer at the citigroup level. i was in a completely different part of the organization. >> so the concerns might not have been shared within your two divisions than, if there were any concerns about the quality of the underlying assets?

>> i do not know. >> i don't know if if there where risk intersected between the two business is. >> thank you. thank you. >> thank you ms. murren. mr. wallace in. >> thanks mr. chairman. i have a lot of questions for all of you, and i would like you to be as concise as you can be. i will try to make these questions that don't require a lot of expansion. but we start with you mr. bitner and then i will try to go along the line. what you describe in your testimony was an industry engaged in what might be called mortgage fraud, defrauding lenders and possibly investors with the quality of the things that the industry is selling and not you personally. did you ever come across predatory lending? >> i would say, yes i think we experienced it in terms of watching loans that i knew that we denied, which i thought was a

blatant effort on the part of the broker to act in a predatory manner within subsequently taken to some morals and eventually gearing it was closed with another lender, yes. >> but in terms of percentage, of what i would call making, taking advantage of the naïveté perhaps or the greed of the lender or the investor as compared to predatory lending, that is taking advantage of the borrower, what relative percentage would you see there? >> i don't know that, given the microcosm of the world that i live than that i would be accurate. i could give you a best guess, 10 to 20%. >> when you sold a loan did you make warrantees? >> absolutely. >> did loans get returned to you? >> yes and it was required for repurchasing. >> what percentage of loans were returned to you and can you

generalize between the kind of institution that did return them? >> absolutely. the repurchase requests were fairly small. they were consistent in terms of guidelines. the first payment default, borrower did not make their first payment. in the case of countrywide they had our worst of that at the bar went as late as 90 days in the first one near the loan was on the books but in most cases it was because of some sort of a case of fraud. typically if a borrower was behind on their loans and loan would go through a strict quality control process and it was usually the next level of investor so specifically for me that was gmac and household finance, city financial and countrywide. >> they would return those loans to you. what percentage were returned? >> small, maybe two to 4%. >> despite the fact that they were poorly underwritten. >> no, no, no know you are talking about my underwriting qualities. remember i was the broker.

>> i accept your correction. but these were risky loans. >> the were sub-prime loans, of course. >> nevertheless the returns were relatively small. >> the repurchase requests. >> they probably weren't as risky from the point of view of the underwritten qualities of the loans? >> i don't believe they were necessarily any more risky. i believe we had a strict diligence process. trying to make sure that they were vetted out for that. >> you talked about loans to wall street, a lot of the loans i think he said went to wall street. are you aware that fannie and freddie were buying loans? did you ever come or were you aware of where your loans ultimately went when you sold them? >> i don't know i would say my phones directly went to wall street. i guess you can call citi technically you could call that a wall street firm.

so i apologize, what was the second part of the question? >> were you aware if any of your loans went to fannie mae and freddie mac? >> know i was not aware once they got sold to the investor. >> were you aware that fannie mae and freddie mac plus fha actually help more or guaranteed more sub-prime and all-day mac loans in 2008 that is to say on their books in 2008 in wall street? >> i was very familiar with that or can this be how did you become familiar with that? >> i run a somewhat respected media outlets that reported on that. >> were you aware of the time you were making these loans? >> you are talking about 2008? i had exited the industry at that point. >> when you were in the industry were you aware? >> by 2006 it came to my attention. what i left my organization and joined a different firm i notice things like the community homebuyer program which if you look at it from fannie mae's underwriting, we underwrote to

our major investor's. >> thanks very much for your time on this. ms. lindsay, can i ask you a few questions? were you aware of what companies were buying new century loans and you know what the loans went to wall street or the gse's? >> we did have some that went to the gse's. i went with-- met with representatives to show them what we were doing in order to prevent fraud. but, yeah we have pretty much every wall street investor who was securitizing buying our loans. >> did you actually sell loans directly to fannie and freddie or was it to a conduit that eventually went to fannie and freddie? >> i believe they bought them directly. i believe they put them in a security specific to our loans. that was my understanding. >> that is to say your loans. >> new century, sub-prime. >> new century put them in a pool and they eventually got to fannie and freddie? >> yes.

>> through some intermediary or directly? >> i believe it was directly. i read in one of our sec filings that we completed a securitization to freddie mac. i believe that was in 2002 or 2003 and then i met with fannie mae affably around 2003, and i'm not sure, but i know they were buying our loans and i don't believe it was there a conduit. >> now, you spoke during earlier testimony about the fact that as prices increased it became much more difficult to make loans to people who are at least to sub-prime borrowers and maybe even prime borrowers. i suppose you are aware of the expression of the affordability gap. >> yes. >> is that what you think you were in countering at that.? >> yes. >> in other words, would you explain the affordability gap to us? >> basically the housing prices

soared so much that they exceeded the normal income. i am not sure what it is called, the income allocations for specific areas. and i can't remember what it is called, but. >> you are talking about fannie and freddie though right? they had a certain loan limit. >> i am sorry. >> i'm talking about the affordability gap, that is to say prices got so high for loans that many people could no longer qualify for a 30 year loan amortized over the 30 year period. they wanted interest-only loans. >> yes, exactly so yes that was the advent advent of the interest-only and just kept expanding the limits. we also started doing a 40 year loan to stretch it out a little bit more, so yes we kind of accommodated the snowball started going down the hill and it got bigger and bigger. >> let me ask you the same kind of question i asked mr. bitner

and that is most of what you are describing in your testimony and in your prepared testimony and so forth is something close to misleading investors or possibly the buyers of these loans or the lenders that were buying the loans. did you encounter any predatory lending? >> it was my understanding that the people who were buying the loans were the ones who approved the guidelines and they were the ones who said we will take that risk, we will buy that 100% interest-only loan for whatever reason. i have no idea why somebody would want to do that but apparently they did. >> but did you encounter any loans in which there was advantage taken of the borrower rather than a blender or the investor? >> we ran across that occasionally. >> how often would that be? >> it was pretty rare.

as mr. bitner mentioned, if we ever saw it we would decline it. every once in a while we would have somebody from one of the local law enforcement agencies contact us regarding predatory lending or we would contact them if we knew of it. but a very small amount. >> were these loans high interest loans or were they normal and just loans? >> they were all sub-prime so they were higher than a traditional bank loan. >> how much higher? do you recall? >> depended on the product, at least two or 3% depending on the product. there was actually one time in our history that the sub-prime interest rates were lower than the prime interest rates for about two months so we had a lot of people coming to us for loans because we could get them done quicker than the traditional bank good and the interest rates. >> and there was a lot of competition for those loans. a tremendous amount of competition, that's right. i'm sorry i can't take more time with you ms. lindsay. maybe there will be in addition to the question period later but i would like to talk to

ms. mills. mr. bowen and you were at the same institution. your descriptions of the risk management in an institution are wildly different. can you explain that in any way? >> i can only explain it in the context that we worked in businesses that had have different business models, and being a part of the investment bank and working for a broker-dealer and working in the fixed income division, our job was to meet demand from our fixed income investors and there was tremendous demand from our investors to buy mortgage-backed securities, prime or all-day mac or sub-prime, so in the context of us being a market maker, and an underwriter of securities which is our primary business, we either underwrote securities or we bought whole loans and issued than. >> your investors were? >> our investors were institutional investors, sophisticated institutional

investors typically pension funds, money managers. >> they bought rackley from you? >> fannie mae and freddie mac? what percentage to fannie mae and freddie mac? >> i don't know. >> can you give us a ballpark? >> i would have to follow a. >> can you provide that later? i would appreciate it very much. you said in your testimony you underwrote to originate standards not citi standards and this is interesting because mr. bowen's group wrote to citi standards. why was there this different business model? why would a customer want to loans underwritten to the originator standard instead of citi standards? >> we mostly bought from large low capitalized originators, who were known in the market, and so there was an acceptance of new century's guidelines or america west guidelines or wells fargo's

guidelines to so when the offering document for the prospectus we would be technically the issuer but we would describe the originators guidelines. >> you mentioned three companies that were largely sub-prime lenders. >> they were large counterparties of hours a. >> you brought from them? they were the originators but they were largely some prime, at least they were. >> the pools that we bought were sub-prime pools. wells fargo originates many different kinds of loan so we don't want to stay. >> your buyers were actually perfectly happy with the originators, standards of underwriting? >> i don't know i would use the word happy. >> they were accepting about the what what they bought were securities, so they bought aaa down to bbb and then. >> you had gotten the ratings, but the underlying loans they understood to be sub-prime loans bought from these well-known sub-prime originator's. >> as did the rating agencies. >> okay, thank you very much.

ai go on now to mr. bowen? what percentage mr. bowen of the mortgages that were improperly underwritten where prime mortgages and what percentage were sub-prime? or could you make a distinction between them? see there were different channels that originated each. the largest volumes were on the prime side. >> so, let me ask this. win the ms. miss underwriting, like ms. underestimating, wendy ms. miss underwriting occurred, did it occur more frequently with the sub-prime or with the prime, or did it not matter, it just happened generally? >> i virtue of the larger volume and the prime side, the absolute numbers were certainly greater. >> okay, so the percentages would have been about the same but the numbers were greater

because there were more prime loans. >> i cannot make comparison. >> understood. that is perfectly good. do you know of any difference between the reactions of the gse's, fannie and freddie and the reactions of the wall street firms to improperly underwritten loans? >> i did not interface with any of that area a. >> so you would know if investors forced citi to repurchase or whether the gse's for city to repurchase? you were aware of the risks that citi was taking because of a possibility of repurchase but you don't know whether it actually happened to? >> no, that was a different area of the organization. >> do you know the actual delinquency rates on these loans that were improperly underwritten? >> on the prime side, there was reporting that was developed at the end of 2007 that did

indicate, and this was the first reporting to my knowledge that had been developed, that did indicate a significantly higher delinquency rate. >> that was the first time in 2007 when that seemed to be occurring? >> this was as of 2007 what it looked at all of the loans that were underwritten from 2006 to 2007. that was solely on the prime side. >> thank you, thank you. that is interesting. mr. chairman i only have one more question and that is, your memo to robert rubin. >> let me yield. >> i just need them in a. >> i will give you to. >> thanks. your memo to robert rubin, an extraordinary document that we have the privilege to see, and that was quite candid. did you ever receive a response from anyone?

>> at what point commissioner? >> that is a good question. from that time until the time you left the institution? >> from the point, and i am attempting to clarify, from the point at which i sent the e-mail to mr. ruben? >> right, that e-mail. >> i sent the e-mail on november the third. i received a very brief phonecall on tuesday, november the sixth i guess. from a general counsel within the company. he said that they had received my e-mail, they take it seriously, they were doing some background investigation and they really didn't need to talk to me at that point in time. i sent to follow up e-mails to general counsel. one in november and one in december of 2007.

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>> physically or from their employee? >> are you a lawyer? i would say their employee. >> i left the organization officially january the 23rd of 2009. >> so you were there about a year after the point where you had that conversation with the general counsel's office? >> i was not there physically. >> oh, okay. please, would you enlarge upon this a little bit so we can understand what you mean by this? >> can i make an observation? i do not believe that a subject that we should be discussing our specific employment matters, mr. wallison. >> all right. i won't ask any further questions.

>> thank you all for your indulgence in answering my questions so quickly and with such concision. >> mr. georgiou. >> thank you. i guess to initially to mr. bitner and ms. lindsay, what incentives were there on the part of the originating brokers and others involved in the origination to deliver higher interest rate loans, if any? >> it was standard operating procedure that a broker could become as it is one of two ways. they could either charge the borrower an origination fee, and/or they could sell at above market interest rate that by doing that they would be paid a yield spread premium. typically up to a maximum of 2% of the loan amount in most cases is the maximum upside for them. >> when you say he'll spread premium, that is above the

amount that they would otherwise receive as a brokerage fee for originating the loan? >> that's correct. a quick example, today's rate may be 7%. if they sell 7.5 present, they may be paid an additional%. >> who pays that additional about? >> that come strictly from the letter. in this case companies like myself and news into doing business directly with a broker. and would you then pass that additional cost on to the ultimate purchaser of the loan? >> well, that would have been factored in, yes, to the ultimate the i would have been able to obtain by selling the loan than in bulk to the larger investors in the food chain. >> now, let's assume for the sake that the broker gets a higher fee for originating a higher interest rate loan. say at the high end where they are getting 2%. would there ever be any circumstances under which the

broker, anybody would go back to the broker in the event that that person who signed onto that loan were not able to perform under its? >> well, boy, i wish we could have. that's where the rubber meets the road to pick the average broker typically meant that a net worth of an organization of around five to $25,000. good luck getting blood out of a turnip. so the answers we would have loved to, but the practicality is it couldn't have been done. >> and now did you charge a differential fee going up the chain basically from your company to whomever it is that's reselling them to? did you charge a differential fee for having originated alone that charged higher interest? >> i'm not sure if i do than what you mean. >> i mean, did you -- u. buffalo, you sold alone. did you get an additional amount

for having originated higher interest rate loan? >> certainly the end of the day, they would be of greater value to myself or any letter that was trying to some in the open market, yes. >> and now, there's been discussion that some of the wires had recourse back to you in the event that there was an early payment defaults, or fraud. and was it your testimony that 2% of the loans were repurchased? >> roughly in that range. less than 5%. >> okay. turning to you, ms. lindsay. did you in seven mortgage brokers to provide loans at higher interest-rate? >> yes, we had a rate sheet. so the brokers could basically pick their rates that they were doing there supposed to discuss it with their clients, the borrowers, and they would have

what's called pardon, meaning the broker doesn't pay -- the barber doesn't pay and the letter doesn't pay the broker. and then in the same token, the borrower can also buy down the rate at a discount. so it can go either way. if it is a lower rate the borrower would pay for the. if it was a high rate the lender would pay the broker for that. >> the lender in your case being new sentry? >> correct. >> and would you in turn, of course, al qaeda had a price from whomever you sold it to? >> yes. how we had our loans were in bulk sale. so we would sell $100 million at one or 2%, depending on what the market would bear. >> i'm sorry, one or 2% -- >> of the whole package. we would package them in one big ball. $100 million, and some investor would pay us one or 2%. in the early days we would get as much as six and 7%. but later on it was one to 2%.

>> and you get that as an up front fee when you sold a loan? >> yes. so if we have $100 billion, the investor would wire us a check for 2% over the $100 million we would send them all the loves. >> you would be able to sell the highest interest-rate loans -- >> yes. >> at the higher priced? >> yes and investors will look at that and evaluate what price they're willing to pay us. that was probably the difference between the one and 2% after going to pay on a full package. >> commissioner wallace and asked you about whether there were predatory lending practices, which would be practices that were intended to take advantage effectively of the borrower as opposed to mortgage fraud, which was by the borrower against the lender or the investor at the end of the day. werther practices that could be characterized as predatory and that they attempted to steer

borrowers to higher interest-rate loans who might otherwise qualify for lower once? >> not that i'm aware of. i'm sure it probably happened that we had about 7500 employees in our organization at one time so i'm sure that some people did. it was discouraged. we had our policy and procedure. we had our fair lending grew. we had a compliance group, and we would talk about predatory lending, and for example, we would look at somebody's income potential. so somebody was of retirement age, for example, we would not put them in interest only loan, or in some sort of an adjustable-rate mortgage. so we did do things to discourage anything that would appear to be predatory. >> mr. bitner, can you respond to that? >> i can give you an example of that. i think an example, the use of a specific mind that a 620 or 640

credit score. we would question to ourselves why did the broker not take this long and perhaps run it to fannie mae or freddie mac's automated underwriting system because it appeared it is very possible they could of got a slightly better rate and a better deal for the borrower to do. what we so i think with such a large influx of new originators who came in who are so heavily called upon firms like mine and others that i think the path of least resistance for people are nazis in any in the industry was happy to say i'm going to send to whoever i am, and they will take it and turn it quickly for it. turned alone quickly around and we will close it and will make our money and go down the road. i think we started seeing a lot of that type of thing where a borrower may very well have gotten an industry that could've been three quarters of the point or a point that even better with a little greater diligence on the part of the broker. >> how is it that you capitalize your company be buying all the huge volume of loans? did you have any warehouse last we were? >> idea. when energy industry, the dollar

amounts that were used to fund the coming like mine were substantially less than they were maybe by the time i exit the industry in 2005. loans from parents and a right of other things to capital is a company where several hundred thousand dollars that got me into the business. >> but you had a line of credit available to you from somebody to actually provide the loves. >> correct. through cities warehouse division and gmac, great. >> what do they charge you for that privileged? >> i would have to go back and remind myself but i think it was one was a libor based, plus a couple points. and typically 50, 25 to $50 transaction fee per loan. >> would they then by the party that provide the warehouse line of credit customarily by all the loans that you originate pursuant to its? >> well, it depended.

in this case with the gmac which was our largest investor, they were also our larger warehouse line. they offered us better terms if we were able to use both the warehouse line and sell the loans to them. >> okay. i guess turning to ms. mills, if i could. how often did you require parties from whom you bought the loans to purchase the loan back because of early payment defaults or any other provisions that you had any agreement? >> initially when we first started to purchase large blocks of loans in 2005, we saw about 2% of the loans, the early pay defaults. and the last number that i remember in 2007 is about five or 6% early pay defaults. >> so and then you would go back to institutions like mr. bitner's? >> no, we don't with larger

institutions. we would never bought loans directly from a firm like mr. bitner's and we did not by loans from mr. bitner's firm. so in the example of wells fargo, just because they are still around, if we bought loans from them and we had early pay defaults, we had a system that track them. and we had a unit inside of my department that works with all of the firms that we bought loans from. and it was somewhat of a process. we would send a notice that said you sold us these loans and they did make a payment and youd to buy them back. >> and they were happy? >> it was a fair amount of back and forth. >> i know this will be difficult to answer, and maybe you can't, but how often we able to actually enforce these buyback provisions? i take it you can only enforce it for people who were left with an adequately capitalized down the chain from whom you have bodies loaned?

>> it was a very purposeful and our business bottle that we only dealt with will capitalize institutions. for a lot of the reasons we're talking about today. we place a lot of value on the wraps and warrants that we got from the source when we bought the lowest degree also felt that was important that they have capital to back up those reps and warrants. and so we were very successful in getting firms to repurchase early pay defaults, and tell the firms went out of business. >> right. and then you were stuck. somebody was talking waste. >> we were stuck. >> tell me, were you involved in the securitization thereafter? i mean after collecting all these loans, were you involved in the process of structuring them and selling them as ari be a? >> my group was involved in preparing the offering document. so that i did we perform the diligence on the loans when we purchased the polls, then once we owned the loans, we work with our trading desk in decide what loans would be securitized, and it was my group to work with the

rating agencies and the lowest and the accounts to put together the prospectuses that were used to sell the seekers to our investors. >> so you're the perfect witness answer the question i'm about to ask. that the last year and when we had some of the heads of these organizations before us and recently, i have been sort of reflecting that perhaps the system might have worked better if a variety of people along the way had additional skin in the game, if you will, or had to beat their own cooking was the term that i use, where maybe rather than take all their fees in cash at every step of the process, including the mortgage brokers, the intermediate purchasers, the purchasers, yourselves, you know, the lawyers who wrote the prospectuses, the investment bankers who got paid on the underwriting, the credit rating agencies, that maybe they ought to take any actual security

themselves a portion of their fees so that they are actually long in the security. and that maybe under those circumstances they would have a greater incentive to do a appropriate diligence and to be certain, more certain, that they would perform in accordance with the representations that they made to the investors. have you given any thought to that question, or anything similar? do you think that citi could operate your securitization of these mortgages if you got paid at least in significant part in the security and self? >> in the context of when we purchased loans as a principle, and then securitize of those loans, there was always a risk that we would wind up not being able to sell all of the bond. and would have some of the bonds left in our position. also when we did subprime securitizations, there's a component of the securitization where it's an equity piece that there was no market for, that we wound up owning in almost all of

the transactions where we bought homegrown. >> would that be in cbo's? >> no. >> the first round can you still couldn't sell a portion of those. >> it's called equity off of the name. ninjas net interest margin security. >> but isn't that like 2% of the offering. it very depending on the loans that are in the particular securitization. >> but you would charge maybe 7% underwriting fee off, just these issued a billion dollar art in bs. i mean, you customarily get a 70 million-dollar fee. >> i'm not sure where those number are coming from but in the context of us by call loans and selling bonds the only way to business makes money is if you sell the bonds for more than you paid for the loans. >> okay. all right. so you're saying that your pricing -- so openly, but i thought the impression i got was that you have pretty ready and willing buyers for these bonds,

is that not her? >> we did, but dependent on market circumstances or investor appetite, it is possible that we would have bonds left interposition. but we are a market maker and we bought interposition all the time and bonds that would buy on the secondary market. >> you wouldn't acquire them without the intention ultimately of selling? >> it was always our intention to distribute. >> okay. i guess -- >> we like some additional time? >> just a minute or two of. >> i will yield you too many. >> thank you. >> three minutes. >> and i take it your compensation or your groups compensation i guess somebody touched upon this already, probably heather, but dependent to some extent on the amount of revenue that you generated through the securitization process for your group, is that right? >> i believe that is a component, yes. >> deed you ever -- did any of these securities ultimately fail in the hands of the investors?

if you know. >> failed is a difficult word to use, because it's not a pass/fail said no. >> how about lose i? >> i can tell you they've lost five and a performed worse than we expected. >> now i any time did they come back to see? >> as a market maker, you always have the possibility that someone that you sold bonds to comes back to you and says i don't like this bond that i want you to buy it back from the. >> but how often did that happen? >> i'm not on the trading desk. i couldn't answer that appropriately. >> let me ask you this. if you are country and your incentive compensation of your group was dependent on the origination fees of creating the securities, do you ever have an occasion when they didn't perform as well as expected of any clawback optimization that went to the group? >> that's not a citi policy as far as i know.

>> i guess, mr. boone, i guess i'm not entirely certain i understand, thank you very much, ms. mills. i'm not certain i understand the different area that you had. you had an area that was reviewing the acquisition of loans and for what purpose that's a? >> i was business chief underwriter of the correspondent area. we actually purchased loans. that part of the organization did not originate mortgages. other mortgage companies originated those loans, and they were purchased by citi. >> for what purpose? >> again, it was my understanding on the prime inside, most of them were sold off to investors.

>> with a securitized? i guess they were. >> i was not on that side of the business. >> well then, i think thank you very much, all of you. you have exhausted my questions here. >> thank you very much. mr. thompson. >> thank you, mr. chairman, and good afternoon ladies and gentlemen. mr. bitner, it's not often that someone would have and epiphany quite like yours that would cause you to change your career. and so i applaud you, not so much for the disaster that you had, but the fact that you chose to take some action as a result of that. i'm struck, however, by the fact that they would appear to be no state regulations over this part of the business. but you yourself and many others who participate in this could see where there were obvious flaws that action should have

been taken. so in your opinion, whether obvious steps that state or federal regulators should have taken that would have reigned in this crisis long before it got out of hand? >> i always felt it's very interesting when you look at people in the financial world who were responsible for managing money for individuals, people have to get series of seven licenses, i think most financial professionals they go through pretty strenuous testing. it amazed me that to become a mentor or a broker, which argument is the greatest investment as most of us as humans will ever make in the course of our lives, oftentimes requires nothing more than a fingerprint check and a multiple-choice test. the state of texas has probably most stringent standard and is to just a pass/fail 70% multi-guess. not exactly what i would consider to be rocket science for the purposes of entry. i would have liked to have seen stricter standards just to get into the business. as a baseline.

both for lenders and brokers to. >> so useful saw up the food chain as well, and that is the people who were buying the bundles of loans from you, what would you say about regulations in that sector? >> well, i'm a very big believe and i realize this panel is not focusing on the rating agencies. i have a very strong belief -- >> we will. >> i'm struck him for the purposes of this discussion, excuse me. i know you will. >> you're in line ahead of them. that's the only difference. [laughter] >> and i feel fortunate for that, thank you. the reality is this. we talk about the originating distribute model. we talked about a situation where one is efficient usable all of the responsibility. securitization broke that up where no one truly had skin in the game. the only impartial group really that was supposed to act anywhere the rating agencies.

it still continues to this day to boggle my mind that three years later there has been literally nothing that has been done. this is not a sign of this commission because i realize that's not what this commission is tasked with duty to get back to the days when we could create an arms length distance or find some other way by which they are compensated. that has nothing to do with the bottom of work. >> we are going to try to do something with that down the road. >> that surrey is an area as mr. georgia says, has come to our attention and will certainly look into it a little later. ms. lindsay, can i move to for just a moment, please? >> yes. >> don't take this question the wrong way, but given the class a new century, it literally imploded. wouldn't be fair to say that the risk management function as it existed within the organization was more window dressing by senior management to keep this fraud perpetrated on as many

people as they possibly could? >> with respect to my department, i strictly was in charge of fraud detection and prevention. so i would like to think that we did a pretty good job. as far as the rest of the business unit does come as far as producing loans, that borrowers couldn't afford, the guidelines that were created, yeah, i think it was a mess. one of the problems was sense of values kept going up, one of the questions, for example, i dealt with repurchase request as part of my job. and when i started seeing some of the repurchase request comment specifically the 100% financing, it would bring that to the attention of senior management, and they would say, that's just one loan or to loans. we make 20,000 loans last month. you know, so there were no significant numbers because the values kept going up. and all of the fraud was masked,

and production always wanted to see the numbers to show me the numbers that show me where we're taking a loss. that was the big thing. we couldn't show anybody that we were taking a loss because we were in such an upswing again another time we figured out that there was a problem, it was too late and new century exploded, or imploded. >> so would be fair to say that you were pressured by senior management to ignore those things that your normal barometer would have said are problematic? >> we were basically told to stick to the fraud. if we had concerns about a loan, we had risk managers that were put throughout the country to review loans. and some of their requests were ignored. some of the production teams would override their decisions. and other groups were really good and would sit down with them and figure out why they were making the recommendations they were. part of the problem was the lack

of depth or knowledge in the industry. and so the sales people -- says it was such a new industry, we have so many new employees throughout the country and subprime that had never been in mortgage lending before. so i think part of it was just their inability to understand what the problems were to make informed decisions. so they did ignore the more seasoned professionals who may have had a better insight into what. >> so how much did the competitive pressure, particularly between new century and countrywide, contribute to the level of risk that the organizations were willing to take? >> it was huge. i mean, the account executives would come in and say if we don't do this low, if we don't get this pricing i make this particular bone, arjun, countrywide, and they would name off in other of our competitors who will do it right now, can we do it faster, better, quicker at a better price.

so yes, it was huge. >> ms. mills, the vernacular is all about a proxy for market share in your business. and in my experience with wall street, that's everything. every investment bank, every corporate loan officer, everybody who looks at themselves wants to compare themselves favorably against industry league tables. yet you are proud of the fact that you were sliding. that seems counterintuitive to me to the culture of wall street. what am i missing? >> i won't say that league tables were not something that people talk about, but i can say that there was never pressure to do business just to gain league table position, in my business. so my management was focus on being profitable and being a

presence in the market. but there was never any pressure to be one, two or three. it was, as you know, do business that makes sense. by little you think you can make money and distribute the bonds. and i'm not aware of any pressure to just do business to be higher in the league table. >> so you are an island in the sea of wall street, or an island in the sea of citi? because other parts of the citi certainly had pressure split i cannot speak about my business and my interactions with my management. >> thank you very much. ideal, mr. chairman. smack thank you very much. ms. born? >> thank you very much. mr. bitner, you have just spoken about the inadequacy of state regulation, or oversight of

mortgage lenders and brokers. you also say in your written testimony that there were two statutes in the early 1980s that you think laid the groundwork for subprime lending. and i wonder if you could comment on those. they are the depository institutions deregulation, and money control act of 1980. and the alternative mortgage transaction parity act of 1982. what role do they play in laying the groundwork for subprime lending? >> well, i would be remiss if i said, or inadequate if i said i was truly experts on these winners researching my book and attempting to try to find were sort of a foundational point for the industry began. several different scholars have pointed me to these particular

acts as sort of starting point for we saw a foundation for that. the depository -- the monitory -- the money control act, excuse me, was by and large allowed businesses and lenders to charge higher rates in future borrowers that have not been in place. so there was structure that was put in and around that. the alternative mortgage transaction. act in 1982 also really gave rise to the use of variable interest rates, or what we really now referred to as arms or adjustable rate mortgages. those two in and of itself are certainly a very starting point. i think what really started to kick the industry into gear although those were very minor come the third sort occurred in the early '90s when they came out of a refinance weight in 93. and subsequently like most originators when you find yourself, this time i was not originate in the industry when interest rates go higher and there's no other way to do loans

because people stop refinancing. you look for alternative. it wasn't until a few years later until we saw the securitization of these products initially that was just more portfolio lending at that time specs are basically the role that those two statutes played was to give the flexibility to design new kinds of mortgage products because correct. at that time we just saw people dipping their toes in the water. it was not any sort of major entry point. >> thank you. go ms. lindsay, may i ask you about new century. it was, we avert, the third largest subprime lender in the country from 2005 to 2007. and i wondered what, in your view, caused it to go bankrupt?

>> that's a good question. we just -- we grew too fast. it got really competitive. and then that coupled with a repurchase requests starting to come in as the market kind of flattened out, as the values stopped going up, to mask any fraud or any problems. we started seeing repurchase requests. we had rats and worms with all of our invention as well. and the primary reason to repurchase loans were fraud or first payment defaults. we also a compliance and missing documentation, but the first payment defaults started growing exponentially. it was pretty, pretty busy. the middle of 2006 we create a specific repurchase desk to handle all of the repurchase is. and i just think we couldn't keep up with them.

>> so in other words, you just, because a larger number of the loans that you were selling, were slow in payment for not paying. you had a lot of liability with respect to them? >> that's correct, yes. >> and wasn't also because the mortgage market itself was slowing down, the originations were slowing down the? >> originations were slowing down. i think we pretty much exhausted all of the products we got out as far as we could, and there were no new borrowers out there. i think that was part of it as well. >> thank you. ms. mills, you describe in your testimony how diligently your operation has been doing due diligence on the underlying loans for your mortgage-backed securities. and also how you cut back on

purchases when you saw problems in the housing market. did your operation and kurt any losses relating to the implosion of housing markets? and if so, what were they caused by? and how great were the? >> i can give you a specific lost numbers. i will tell you that whole loan prices started to drop because of the dislocation that was occurring in the market. we had loans in our position that we owned that suddenly were worth less. just by virtue of the fact as to what was happening in the market. we had loans on our books that were supposed to be repurchased by companies that had gone out of business, and there was no one to go to to repurchase those loans. we also had a large book of hold loans that we bought at district

values, and those loans also lost value. so the business lost a lot of money. we can follow up on the exact dollar amount, but as the securitization market went away, there was no venue for us to sell the loans and securitize them. and because our business is already a portfolio, you know, we spent a lot time the last couple of years managing the whole loans that we owned. >> so has that been a primary focus of your group in the last couple of your? >> yes. >> i would appreciate it if you could provide the information on the losses to the commission. >> okay. >> mr. bowen, you described the significant problems with citi's implementation of its -- and

it's -- of its underwriting standards for mortgages. and you said that you saw significant number of defective products. being purchased in 2006 and 2007. and that you try to alert people go, and that the purchase is nonetheless went forward. what do you think the motivation or the impetus for going forward with these noncomplying loan purchases were? >> again, that would call on speculation for my part, and i -- i don't know. >> thank you. i will yield the rest of my time. >> thank you very much. mr. thomas.

>> thank you. commissioners need any additional time for any follow-ups? i want to -- go ahead. >> how much time do you need, mr. wallison? >> i will give you four and a half. >> we will negotiate the five, go ahead. >> microphone, mr. wallison. >> i have some questions for ms. lindsay. you refer to buyers of securitize subprime mortgages as unsophisticated. and that's quite interesting to me. these are buyers, after all, they are people in this business all the time. why do you regard him as and sophisticated? >> they were sophisticated and putting financial deals together. the reason i use the word unsophisticated is because they didn't know the risk of the underlying product. these are all very high risk

loans. >> and then they didn't know that. you thought of them as putting together the pools very well and negotiating i suppose about how these tools would be eventually marketed. but you didn't think they really understood the underlying loans. why would that be too? why do you think that is what i mean. >> my personal opinion is because what i have learned growing up in working in finance and working for hard money lenders and other subprime lenders who actually had a stake in the game, who had an interest in whether the loan performed or not. these were extremely risky loans. so if they would look back at a beneficial mortgage, for example. the highest loan-to-value and officials loan would have loved somebody with a poor credit score, and if they had spots on the credit, or on their employment history, they wouldn't loan than any more than 65% loan to buy. so they would have to come up with that other 35%. so the default -- anybody

defaulted on these loans, the linda was going to take a loss immediately. there was no protective equity, no cushioned. >> you so love to fannie mae and freddie mac? >> yes. >> with a unsophisticated come in your the? >> i don't know. >> was there any -- budget on but the others either. the point is did you think from looking at what they were buying that they might also be in sophisticated? >> i didn't see the actual product that they're buying other they were buying the subprime loans that had the higher credit risk, or the lower credit scores. i'm not sure what loan-to-value's they were using. so i'm not sure which packages. they may have been by a particular pool of loans that had a lower loan-to-value but i don't know the answer to that question. >> okay. ms. mills, in february 2007, you started reducing your subprime

exposure. why? what signaled you to do that? and that paper 2007 was early. >> we had started to see a deterioration in the quality of the loans that were being originated and as the deterioration in the whole loan prices that where loans could be sold. and so because we let money to a lot of people that we also bought from, we have access to the financial statements, part of what they require to do was to send as quarterly financial statements and they were all sorts of financial covenants related to the profitability. so on the fairest of microlevel we started to see that the types of loans that were originated these companies were not making money. and that in combination with the fact that whole loan prices continue to drop, we have started to step with a little bit from the business in the middle of 2006. we slow down our purchase activity. we stipulate our bits. we tried to buy, if there is

such a term, sort of the core subprime product. so nothing goes like an outlier as far as risk. because the credit, the rating agencies were increasing their credit enhancement levels, which was reducing the amount of proceeds that you could raised by selling bonds. so we had to pay less for loans, and because everything we bought was competitive bid, we also weren't winning pools. >> who you bidding against? >> primarily other wall street firms. >> did they do the same thing you were doing, or -- you were selling to others it seemed to me from what you are saying. they were selling directly to investors? >> in very general terms, most of the firms that were in our space i believe bob loans and securitize them. but i can't speak, you know, definitively that that's all they did a. >> but the bidding is still strong? >> number still a lot of activity, yes.

>> one more question. you describe a process of working with investors and the credit rating agency. you said you would get a dollar amount and a rating for the rmbs. then you, you would market to investors and solicit feedback. his house like a very process. i think all of us would like to understand a little bit more have this really worked. >> okay. >> please. >> once we own a pool of loans, we would send a data file to the rating agencies. we primarily dealt with movies, snp and historic each rating agency had their own data requirements so what they they want to see and what format they wanted to see again. we would send them the information, the rating agencies have models that they sort of run the cash flows of the underlying mortgage loans through this model. and their comeback is and tell us how many bonds we could issues that were rated aaa, aa, single-a, tripled it, and the

with the over globalization amounts underneath the bbb needed to be. and then based on, that was sort how we size up the bonds in the offering process. and then we went out to investigate you went out with pricing. so you might try to sell the aaa at libor plus a spread. and you either had investigators or you didn't. if you have investor interest you might be able to tighten the spread. if he did have investor interest, you would have to widen the spread to. >> tightened the spread, with disparate, did the rating agency have any role speak i'm going to yield by the way an additional, we are over, and additional. >> i appreciate that. after you got the initial structure from the rating agency? >> you don't technically get the structure from the rating agency. you just get bond sizes and other features of the deal that are related to credit enhancement. they are involved up until the

actual day the deal closes. the pool could change during the marketing time. loans could drop out. love to go delinquent. so there was always this sort of final to up that goes on. on the day that the deal closes you get a letter from the rating agency that says i, rating agency, cuba, in relation to the security will let you issue this many aaa's and so on. >> did you ever go back to the rating agency during the time you're in the middle of talking to the investors and say we need a change here in this structure or that part of the rating or the number of bonds involved and that kind of thing? so that they changed their assessment and responded to your request and. >> i don't have any specific recollection of that happen in the subprime space. i do in there and i know we're not focused on prime, but in the prime securitization market, i do number instances where investors wanted more credit

enhancement levels in the rating agencies were requiring. >> mr. wallison, we will move on. thank you. ms. murren, you have a couple of minutes, if you would like, and mr. georgia, two minutes each. >> thank you but i do question all of you but it may be a simple yes or no answer. in listening to your commentary, it appears that we've talked about declining underwriting standards and the fact that this is a business where there were fairly low barriers to entry. and that the prices of loans declined over the course of the boom. so when you think about in their own minds weighing the factors that drove the boom, was it demand driven or was it supply driven? when you think about the relative importance of these two things. and then, in consideration of that, do you think that having had better oversight and reasonable barriers to entry, that things might have been different? >> i guess i will take that first pic i think it is a combination of both. i don't think what happened without the other.

and yes, i very much believe had been some barriers or, i'm sorry, not various but greater levels of oversight that we could have prevented this mess in happening, or at least minimize it to a certain degree. >> i agree as far as the load originators go, there needs to be more oversight with that. definitely. as mr. bitner point it out there were several states that didn't even require licensing, and they were allowed to originate loans and that was part of the probl problem. >> from my perspective i think it was both supply and demand driven. i don't really -- i can't really speak that well about the impact of regulation, just because the people that we bought from we believe are regulated or well-run or well-capitalized. so i did have the same sort of negative experience in dealing with smaller i'm regulated

counterparties. >> i was not involve any actual origination of the loans. these had already been originated by the time that i reviewed them. so i really can't opine on that pic. >> all right. thank you. >> mr. george of? >> thank you, mr. chairman. ms. mills, could you tell us in the typical structure that you had when you did these bonds, how were the credit rating agencies paid? >> they were paid the fee that was driven by the transaction size. so it -- >> they got a certain number of basis points up to a maximum cap dollar amount. and then they were sort capped out at the dollar amount. >> but they got a basis points based on the sides of the issue? >> the dollar amount of the transaction, yes. >> that didn't matter how they rated it. they got a. how many times did you take to

market or attempt to take to market a pool of loans that didn't receive ratings that you thought were necessary to sell them? >> i'm not sure i understand the question smack to the rating agencies ever provider rating that was too low for you to be able to market effectively a pool of loans that you securitized? >> what the rating agencies gave us was the dollar amount of bonds in each rating categories. uis have bonded each rating category. and there was typically appetite for bonds with various ratings. >> differential returns spent risk appetite in yield requirements. >> okay. you provided warehouse lines to argent to the tune of about $3.5 billion, is that rights because it was a

argent/ameriquest platform. i think we might've had once more warehouse line with mr. ar. >> later in the process you folks ended up buying argent, is that right? >> yes. >> how did that work out for you? >> could have been better. [laughter] >> that's good enough i think. thank you. mr. thomas? >> a couple of quick follow-ups all along that line and then moving in another direction. in terms of the rating agencies that you are sending new material to them and getting them back, was there ever something that could be described as negotiations that is as you get something back from them, you argued back they re-examine or look at it? was there anything that could be fairly characterized as negotiating with the rating agencies in coming up with a final package and agreement? >> what you could do is you could change the composition of the pool. so in other words, if you got that credit enhancement levels

that were not sufficient enough number of aaa bond, you could remove some of the riskier loans from the pool and resubmitted to the rating agencies spent when it was submitted to you in that regard, was there any guidance or clear understanding of what you could do to make it work of? >> what do you mean? >> were there any negotiations with the rating agencies? if using a package and i sent back to you, i can give it to you called and you got to figure out what to do, or i can give you a couple of hands in terms of moving it in a particular direction. but, of course, it would be up to you to make that decision. >> i don't believe so. i think that we knew if you pulled out riskier loans you have less credit enhancement. >> i could probably even handle that level of understanding. so you mix it up in santa back. were the situations you had to send back two or three times to get what you were looking for? >> i'm not sure that i know how

to answer -- i don't know i can answer that. >> the answer is yes or no, i don't know. so you don't don't? >> i don't know. >> and i want to say this. i appreciate your willingness, because unlike other you are in current position and we're asking you questions about your employer. and so i am very sensitive to that. now having said that, i'm going to ask both of you a series of questions. >> can i make a follow-up to the last question? >> with every instances where you might have given the same bundle of loans to two different rating agencies, to essentially shop for the best rating? >> there was a requirement from investors primary on the aaa side that bonds have two ratings. and it was typically moody's and s&p. but the demand for rating agencies was driven by the investors. so that we could sell bonds

specs of the answer is just? >> typically -- well, i don't like the workshop, because that wasn't really the process. the process was in order to sell bonds you needed to have more than rating agency to. >> okay. >> did you ever choose the worst one? >> no. >> we currently have what's called a new party or an emergency party, let's call it a tea party. in the history there was a political party called the know nothing party. that was the response that people would give when questions were answered. what i heard from both of you, one formerly employed, one currently employed, is i think one of the reasons i was very interested in looking at a citibank was in terms of its structure. and basically the answer that we got back from you whenever we wanted to inquire about what i

think most of us would think would be an aspect of the work you were in, or a partnership in some way. the answer was i don't know, because they were somewhere else. i know it's an enormous operation, and i know the history is more kind of a conglomerate than a synthesizing integrating structured. was this done just because of the way the company was billed? or did you go there might have been a design to the separation in terms of the information? and ms. mills come if you want to you can take a pass on that question. mr. bowen? >> mr. vice chairman, i cannot render an opinion as to what the organization structure was why it was. i -- it was very heavily segmented. and i was responsible for my

peace, and other people were responsible for theirs. >> let's revisit your e-mail once again very briefly. was that the first e-mail you ever sent? >> to mr. rubin? >> yes. >> yes. >> did you send into others'? >> at corporate -- >> i'm just asking you, were you an e-mail in terms of communicating with folks higher up the chain about what you saw as problems? >> there are in excess of hundreds of pages of documents that i submitted. >> i'm looking at something that could be characterized as sending an e-mail to hire a in this segmented operation to try to explain something that concerns you. >> i know that the warnings went to the highest levels within my

business unit, which was called the consumer lending group. >> i mean, your analysis of all is going on was a can to the fellow in the field who calls an airstrike on his location because his position is being overrun. and that was about the only way that you could resolve the problem that you are in. so i was just wondering if you have found yourself in those predicaments more than. >> you're talking about prior to citi? i don't understand. >> no, let me ask you. it was segmented and you wanted to send an e-mail. and you have, i use them, a book with people who are in your company, and you have a choice of selecting who is you want to send it to. my question would be, why did you pick move in and not prince?

>> there was speculation in the press leading up to that weekend that mr. prince would no longer be with the company. there was announced that there was going to be a special board meeting. but there is. >> but there was no water coming with folks in the coming have this info? you had to go find out about in the press rather than the scuttlebutt in the company's? >> i don't understand your question, mr. vice chairman. i'm sorry. >> we will just leave it at that. but you decided based upon what you read in the press, there may be a structural change in your company. and that putt did you do e-mail to rubin. is that because he wasn't speculated as being removed? >> i was -- i knew that there were issues that were being considered by executive management.

and the board of directors. and i felt like i needed to get these in front of them because to my knowledge, they had no -- they had no knowledge. >> and if you were giving it to the board of directors, it made sense it could've been rubin within the board of directors. was that a motive to get it to rubin? >> it was again speculated and the press going up to that weekend, that mr. rubin would be taking over for mr. prince. >> thanks. i'm interested because i don't know anything about it, how you operated in terms of -- i was a relatively small amounts of money. mr. bitner, you talk about how you got your company up and going. and would be correct to say that there was no chance of growing that company, save for the

warehouse concept where you could use these other folks money to do what you would otherwise do because you couldn't bootstrap itself, is that active? >> i think i understand your question. we did grow the company. the reality is warehouse lenders is based on amount of leverage. typically a 10 to 15 to one. so the amount of loans that i could find was i think limited to initial 10 to $59 on a monthly basis. about my country chosen of the companies that i knew also, we took most of our money and put it back in the company, to our net worth to grow the size of her warehouse lines to try to be able to find a more business is. >> at least in terms of new century, you were involved in that as well. >> yes. >> i guess i'm kind of figure out how you find out about this stuff. we discussed earlier state regulation, and perhaps problems that were not there. you have professional

organizations, don't you, where there are newsletters that were going out? . . >> you know, we did talk about that. nobody ever talked about, -- some groups did talk about the increasely risk with the interest only loans and when they readjust. that was more of our compliance department and fair lending group who would talk about stuff

like that. >> was there a discussion when you got into the whole business about the risk associated with that? >> the risk with boring the money to make the loans? if we didn't sell the loans, that was probably pose the biggest risk to us. >> but there was plenty of opportunity. >> there was plenty of opportunity for a long time, yes. >> long time is what in your business? >> well, we were founded in -- we made our first loan in january of 1996. then we declared bankruptcy in april of 2007. >> that was a long run? >> for subprime, sadly, yes. >> you were in at the beginning and collapsed when everybody else did. >> yeah. >> thank you, mr. chairman. >> thank you, mr. thomas. terrific. let me i have questions first for mr. beau than.

i'm going to start is with you. i want to try to get a good understanding of what i do look at the data in the citigroup, it appears in the various lines of business where citi was buying, selling, securitizing, or holding mortgages it shall with looks as though the writedowns would be in the business of this would exclude what happened in the collateralled debt business. i'm trying to get an identical of risk. how the losses occurred. how they might have been avoided. in your opening statement today you talked about how your review, i guess of the underwriting standards in the business lines you were in which is the wine of mortgages for portfolio and mortgages for sale. >> i was not involved on the selling side.

just on the purchase side. >> purchase side. all right. you made the comment on what was happened made a mockery of citi's business. i want to go to your e-mail on december 3. i believe mr. prince stepped down, what on the 5th? so hastened down a couple days later. looking at your memo and having looked at the transcripts of the interview of our staff with you, it appeared from the sale of the third parties, you indicate that's a $50 billion business. you underwrite a small sample of those who see to what extent i want to get clear -- to what extent they met your policy criteria. you were concerned that the sample size was too small. that the policy called for 5% sample, is that correct?

that you believe there was undersampling? >> yes. that is correct. >> okay. secondly i want to understand if 40 to 60% of the files are either outside of the policy criteria have documentation missing from the files and then it rose to 80% tell me specifically what that means. these were standards that citi was selling for what it would buy, or was it verification that the loans were what the sellers represented they were? in other words, is it a standard you set or you sampled these things to see if they meet the standards that the sellers say they meet. the sellers represented that they sold to citi according to our standards. and it was our standards i measured those loans against. so again i'm trying to understand your question, mr. chairman. >> well, i guess what i'm understanding is you had

standards then. you were saying they were efficient but the purchases were happy notwithstanding that; correct? >> the purchasing of the mortgages was against our step. we did not underwrite all of the -- in fact, we did not underwrite any of the mortgages there prior to, purchased. >> correct. what are you judging. when you say they were deficient, how? >> they were deficient in one of two ways. one, they were not underwritten by the expressed guidelines by citi or they were underwritten and proported to be against the underwriting guidelines by citi. but they did not have documents that were required by citi policy to support the assumptions that were put into

or made in the underwriting decision by the originating lender. >> okay. what were the risk that flowed from that? that were you getting loans that weren't underwritten properly that had risk and risk layering for mortgages you would hold and potentially resell; correct? >> the risk from my standard point as i outlined in my memo to mr. rueben, we in tern being citi represented to the investors that these mortgages were made according to our guidelines. >> and they were not? >> correct. they were not. >> all right. does that also apply to the wall street purchasing the same essential problem? >> we did do underwriting in the wall street subprime channel.

>> but you were overwritten; correct? >> yes. >> you believe the risk were too great. and you were overwritten. >> there were many instances where my underwriters decision was overriden. >> how long have you been in the business? >> having run a business, there's always someone who recommend for and against certain transactions. did a see a market change? >> i'm sorry. mr. chairman, i'm having a hard time -- >> i guess i'm saying did you see more overrides, in other words, absolutely. >> all right. so you saw accelerating overrides. all right. let me talk to you about another party. ms. mills, the one you said could have been turned out

better, one of the most aggressive lenders located in the state of california. and as i understand it, from looking at documents that our staffs put together, there was an interview to acquire a captive subprime originator to give you a flow of loans. you reviewed that transaction didn't you mr. bowen? >> i was involved as mr. davis was in the due diligence of that acquisition. >> and you recommended against it? >> yes. >> and on the basis of? >> we sampled the loans that were originateed by argent and we found large numbers that were not underwritten according to the representations that were

there. >> okay. large numbers. what kind of percentage? i do not recall, mr. chairman. >> i have no access to that document. >> okay. you don't have access. >> it was enough to cause you some concern. because obviously you state that as the reason for your decision. >> yes. >> there was a lot. >> yes, sir. >> all right. whatever that means. terrific. let me move on now to ms. mills. you mentioned there were certain underwriters you didn't feel comfortable doing lending business. were you in the ware house business? >> yes. >> my understanding is citi extended $11 million to ware house lines. so in a sense, and i'm sure there are many other institutions that provided

these, so you were providing fairly significant credit report. i guess my count there were about 26 of them across the country. let me start by picking up and saying when you said they are somebody we wouldn't be comfortable with, give me an example of entity either purchasing or providing the warehouse line. >> sometimes when we go to visit a company that wasn't a start up but hadn't been in business for that long, we would go out and conduct an onside review and meet with senior management. having done this and having people on my teams that had done it for many, many years, there's a reaction to whether or not the companies knows what they are doing. where that's the management, whether or not they are making money, what the business plan is. so there are con treat examples that you can look at such as

profitability, but there's also a sense that, you know, maybe they are not ready to do business with us. maybe they need to have a little bit more time under their belts before we would be comfortable they had worked out the kings, for instance. >> would you normally also get a commitment to having them funnel product to you? were they linked agreements? >> no. >> of course there was the relationship. >> part of the reason was to establish relationships with the originators. but there was no direct linkage. >> there were 2600 companies. which i believe is -- excuse me, sir. >> my concern is how much you rejected. >> i can't remember. i know there are company that is

we went to see that we did not lend money with. i knew we did not review because of the comfortable operations. >> did you have an average? >> our minimum capital requirements, it's not like there were hundreds of companies to choose from. you know, i really would not -- i wouldn't want to speculate. >> you wound up with 26. so it's like 100 batting average? >> i like right now is 26 is every warehouse line that we've done. some of them have nothing to do with subprime. they are current lines that were financing fannie and freddie fha loans. >> there's agency and nonagency. correct. it's one of the documents which i'm sure the staff with classify. let me proceed on this. one thing that mr. prince, and we'll have a chance to talk to him tomorrow morning. one the things he said, he said two things. i want to see if you share his

views on these matters. he said, i believe in the hindsight, the lack of adequate originate of mortgages create the situation on the demand side found a place where more raw material would be created and created safely. more and manufacture these mortgages were created as raw material for the securitization process, not surprisingly in hindsight, more and more of it was lower quality. at the end of that process, the raw material was bad, tockic quality. that's what ended up coming out of the other side of the pipeline. the second thing he said is, i found out at the end of my tenure, about the warehouse lines, he found out they would be extended,dy not know it before. $11 million of warehouse lines. getting that close to the origination function, being that involved in the origination of some of these products was

something i wasn't comfortable with. on reflection. do you share his view about the tock silty of the -- toxicity of the problem and mix the business lines between what you did as the third party buyer of originator and sellers. >> i'm not sure what mr. prince was referring to when he talked about the types of loans that he referenced. i don't think there was a mistake for us to lend money. i think it was a way to facilitate the business. that was to create mortgage-backed security. we were not that close to the origination side of the business. we bought loans that cloned, we never set money to the originator, we set up the warehouse lines so that there

were mechanisms where we couldn't be deemed to be the originator. we were in a different position than an originator of loans themselves. we had complete control over what we bought and what we were willing to finance. our warehouse lines had restrictions as to the types of loans we would finance. we would not finance every type of loan, we will limited as far as types of loans, ltvs, season of the loan, how long the loan could stay on the line, it wasn't a blank check to an originator that we would finance anything they originated. >> all right. let me -- okay. john, do you want to ask? okay. yeah. well, it'll be hopefully surgical here. this is an origin point. after mr. thomas asks his question, i may return to ask all of this you question. i want to go to the responsibility of a market

maker. everyone here at some level has their business model, they are originating, securitytizing, and you've said today and others have said, we are market makers. whatever people want to sell and buy, we will be market makers. what's the responsibility of a market makers to ensure that the product they are moving into the marketplace is a good and sound product? in other words to undertake the responsible level of due diligence that you would feel absolutely comfortable that this was the kind of product to move akin to manufacturer who makes a technology or a -- you know, a toy manufacturer understanding whether or not that toy manufactured perhaps in another country had led in it. what's the responsibility of market makers in the financial system to warrant the products they are moving? >> what was the last part? >> the warrant to stand behind the quality of the products they

are moving through the system? and just, you know, it's a large question. to the extent that everyone is saying i'm just passing this along. where's the responsibility along the chain for ensuring the quality of the products moved into the system? because i understand, can i ask you a question, duh not have your own underwriting standards, you relied on underwriting of others. >> correct. we believe we conducted the appropriate diligence which is a document that you deliver to investors that we had high confidence that what we were telling investors about the loans were accurate. there were pages and pages of with information about the loans, there were page of risk factors where we told investors every possible scenario that could describe something that would go wrong with the securities. there were pages that described

the origination and guidelines of whoever the originator was for that particular pool. there were ratings from rating agencies on these bonds. and our job as an underwriters is to comply with securities laws and, you know, this business is regulated by the scc. we used outside council to make sure citi as a form and underwriters was protected. it's the investor decision to buy the bond. >> all right. well, you did have different standards for the loans that you were buying to hold; correct? different standards. in other words, in the business, you accepted whatever was given you to; correct?

>> i believe so, yes. >> and then on the other side of the business where citi was originated to hold, they had a higher standard is my understanding. >> i'm not familiar with the standards. >> are you familiar? >> i was not involved in the origination channels, mr. chairman. >> do you agree with ms. mills characterization of the responsibility of market makers? >> i can't express an upon on that. >> all right. last question here. >> mr. thomas, do you have? >> the phrase market maker, i guess in your analogy, which i would like to follow through on, that you have people who make products. we're talking about what motive they had to make sure the product wasn't toxic or if you sell a baby plan cell. -- blanket to make sure it doesn't burn easily.

there are actions, plus you have other folks looking at it. you started off your testimonying indicating that was the responsibility of the people who were buying the product. i mean a good old fashion, we're putting it out there. but it doesn't have anything to do with us if it goes the direction that apparently almost everything was going. i was hearing a little bit of that out of you as well. commissioner, georgiou said maybe if you had some skin in the game. do you think if you were on the line, you wound up with a lot of loss. in terms of each and every product you put out there, it would have been sobering, or there was just so much to make that, you know, $20,000 out of $2 million isn't that big of a number. keep shoving product? >> yeah, i think that if you

have skin in the game, you're going to protect it more. i think it got so overwhelming at the end to try to get product to sale that the product did go downhill. but, yeah, having the skin in the game is very important. >> everyone using the skin in the game as euphemism, if it wasn't a euphemism, it would be better. >> just very quickly. when you referred to the wall street purchases, that ms. mills shot? no, it was not. >> okay. you were talking about the overrides, that wasn't refer to ms. mills? >> no. >> my final question, ms. mills is for you. that is from what we've learned, you began to slow down. >> you're privileged, you're lucky to get the questions.

no, it looked like from what we see is you began to slow down because of the risk. one is i'm looking at a march 28, 2007 nonagency strategy memo. i don't know if that was yours. it was not yours? okay. because would you know who's it was just because it speaks about even as late as march 28, 2007, it talks about gaining additional access to mortgage origination, both full and bulk to enable citigroup to grow its home loan purchase business. you know, for instance, when it would have emanated and where it ended up? >> i believe that presentation was put together by the business management unit of global markets. >> which would have been above you or -- >> business management is sort of, you know, they management the business. >> but it was not your document? >> no. >> so i will put that aside and ask them about that document.

i do understand that you slowed down your purchases, but at the same time, and they'll be here later today, the collateralized debt obligation was ramping up. it was raising its limits from $30 billion to $35 billion. there was a unit that had $30 billion in writedowns. was there any communication between you directly as someone who's buying, seeing things in the market, securitizing, and yet folks on the other desk who are ramping up, buying their residents, you know, their mortgage-backed collateralized debt obligations being able to ramp up the same time you are pulling down? >> no. >> all right. thank you. mr. thompson. >> ms. mills, pardon me with tables.

if they didn't matter, why buy argent? were you involved? >> i was involved in the diligence that went on for the argent platform because they were a client of ours that i had done business with over the years. at that time in the market, a lot of other wall street firms were buying originators and their -- we didn't think that the end was there. we didn't think that it was over. we didn't think that was the end of subprime. >> so lead tables did matter? >> this is not about lead tables. >> market share did matter. >> i didn't say that. this is about having access to originations so that we could supply bonds to our fixed-income investors. and so with all of the other origin originators, independent being bought by other wall street firm for our business and our business of creates mortgage-backed security we were

concerned about having access of supplies. argent was a platform that was available, we knew them, it was a very long month to month diligence process. in that time, call it the summer of 2007, the subprime market and securitization essentially dried up is our view. i think we thought of it as akin to fall of 1998 where the capital market froze for a couple of months. then they balm unfrozen. argent had stopped originating loans because our purchase was bending. and our thought was until subprime came back, we would use the platform which was just an origination platform, if it didn't have any loans in it. and we would originate agency eligible loans and fha type loans until subprime came back and because it was out, we could control the types of loans. we with all know how that worked

out. >> thank you. >> on that question, at some point, somebody decided it would be better to have them in house than the business model you were following. >> to buy the platform? >> yeah. >> in the context that there weren't that many independent originators left. >> and it was easier not to do that because you didn't have that other side load to attach? do you know where that decision came from? where were the groups that discussed moving in that direction? >> moving in the direction of? >> i know i discuss it with my management. and i know that i was involved in some discussions with the two gentleman or one of the two who ran fixed income. after that, i was not involved in any direct discussions. >> would you say that you were rightfully so kind of one of the originators of the idea? >> no.

>> no. do you know where it was originated? >> no. >> okay. consistent. thanks. >> all right. members, we are close to on time considering our lights out problem earlier in the day. i want to thank all of you for the time you've given us. and for your answers to our questions, i appreciate it very, very much. we are going to take a 10 minutes break, ladies and gentlemen. and we will be back here in 10 minutes. thank you very, very much. [silence]

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[inaudible conversations] >> we are in the first of three days of hearings by the financial crisis inquiry commission. earlier today, the testimony of former fed chairman alan greenspan, this panel just wrapping up on how subprime loans were originated and packaged for sal on the market. still to come today, a group of former citigroup risk managers on their company subprime products as their live coverage tonights here on c-span. and our coverage will continue

tomorrow with citigroup executives and friday with fannie mae executives. both of those days starting at 9 a.m. eastern time. our live coverage of this afternoon's testimony before the financial crisis inquiry commission will continue live. >> this year's c-span studentcam competition asked middle and law school students to create a 5-8 minute video with one the country's strength or challenge its facing. here's one of the third place winners. >> there are many challengers our country is facing. some would be the h1n1 virus, drug abuse, the war in iraq, and our economy. however, the greatest of these challenges is the abuse by alcohol by minors. >> the united states have many strength, however with each strength there is a countering

weakness. >> how bad is if? are americans teams really being consumed by alcohol? >> alcohol is far and away the top abused drug of america's teen. children under 21 drink 25% of the alcohol consumed in the united states. more than 5 million high school students admit to binge drinking at least once a month. the age at which children begin drinking is dropping. since 1975, a proportion of children who begin in 8th grade or earlier has jumped by about 1/3. >> alcohol abuse has become a weakness in the united states. every day three teens die because they were driving under the insurance. six more people die because of other alcohol-remitted causes. that's a total of 9 a year. every year 3,285 people die because they abuse the beverage. >> we all know that drunk

driving has been leading fatal crashes. in 2008, 1/3 of highway deaths for alcohol-related. >> i'd say probably 1/3. >> at the liquor store. and they try to buy. but if they are cautious, check their i.d., don't sell underage at all. >> about 50% that we go in and try to buy alcohol we actually have to arrest because they sold alcohol. >> 16.4% of 6th graders buy their beer at a store, bar, or restaurant. >> while the experts say they are trying to limit alcohol, where else could they be getting it? >> home. home. a child's home or a child's friends home is the major source of alcohol for young children and a major source for all

children. >> the national academy of science reports itself says most of the alcohol consumed is not bought by the underage folks. it's bought by adults. >> when alcohol is ingested, it heads to your stomach, liver, small intestine, and effects the circulatory system. it will disrupt the normal function. >> the function of multiple systems in the brain, including those involved with the and allows the behaviors on a daily basis. involved with learning a memory which would change our behavior as the office experience and well within control which allows the provisional behaviors and emotions. >> not only can alcohol cause physical trauma, but it can also lead to other addictions. >> teen drinking is number one source of adult alcoholism. children who begin drinking

before age 21 are more than twice as likely to develop alcohol-related problems. and those who begin drinking before age 15 are four times likelier to become alcoholics. underage drinkers are at greater risk of nicotine and illegal addiction. >> if you abuse the substance, the outcome can be the have. >> have you ever had any experience with alcohol? >> well, yes, on new year's last year we had a party at my grandmother's house. and of course the people who drinking were under the age. but my cousin thought it was okay for them to drink because they think that can get experience with alcohol so they don't abuse it. >> parents tend to see drinking and occasional binging as a right of passage, rather than a deadly round of russian roulette. >> in the future, how prevalent

will alcohol abuse with? >> i think if america is not listening to anything that people will told them and parents don't care about what their children do, we will be on the forward track and it will end not prettiy. >> i think that it would be worse because the future, it doesn't look too brought for us. but some people say it can get better. for the teenagers using alcohol now, i think for them, it will be harder for them a get a job and for their children. >> many have died and many will continue to die if we don't stop this abuse. the police are doing everything they can in their power to stop them. >> to see all of the winning entries in this year's studentcam competition visit studentcam.org. >> let's meet another winner from c-span's studentcam video dock men tear.

today we speak with third prize winner e.g. door -- edgar sanchez. edgar, welcome to c-span. congratulations on your win. edgar, why do you see underage drinking as an illness? >> well, i have seen what alcohol does to an adult body. so i thought it would be worse to a growing teenager body. >> how prevalent is underage drinking in your community? >> well, not as much in other communities. well, there isn't a lot of children. but when there are parties, there is a little bit of underage drinking. >> is it prevalent in your middle school? >> well, in my grade i -- not as much. i really don't know about the other grades. >> tell us a little bit about the individuals that you interviewed, why you selected them? >> well, i wanted to see the different point of views from each, the liquor store owner,

police officer, and typical middle school student on their taughts and their experiences. >> out of those interviews, did anything surprise you? >> the actual -- the liquor store owner interview with the kids coming in and trying to sneak away. >> in addition to the interviews, what other resource it is you use? >> i used the internet and our school science book. >> what did you find on the internet? what did you look for? >> we looked for the differentesques it does on your body, pictures on the effects on where they take place, and death toll and the amount of deaths per year that are out there. >> kevin was your partner; correct? >> right. >> how did you guys share the duties of the documentary, did

you focus on one task and he the other? >> well, yeah, but we both came up and helped each other out. >> what was your main responsibility? >> looking up information and the internet. >> what was his? >> looking up information and pictures and camerawork. >> how long did it take you to complete the documentary start to finish? >> about roughly two months. >> finally, as the third prize winner, you received $750 which you are going to split with kevin. what are you going to do with earnings? >> half of the money is going to go to savings account for the future, in case anything happens or if i decide to go to college, the other half is going to buy an ipod touch. >> edgar, thank you for talking with us today. congratulations again on your win. >> thank you.

>> here's a short clip. >> there are many challenges, some would be the h1n1 virus, drug abuse, the war in iraq and our economy. however, the greatest abuse challenges is the abuse of alcohol by minors. >> the united states has many strengths. however with each strength, there is a countering weakness. >> how bad is it? are american's teens really being consumed by alcohol? >> alcohol is far and away the top abused drug by toons. >> you can see all of the winners any time go to studentcam.org. >> backow live as we continue coverage of day one of free days of hearings by the financial crisis inquiry commission. coming up here, a panel of former citigroup risk managers discussing their companies subprime products. we'll have live coverage the rest of the afternoon. then also thursday and friday.

on thursday we'll hear from former citigroup executives, friday it's former fannie mae executives appears before the commission. both of those days starting at 9 a.m. eastern live coverage on c-span2. >> we will commence momentarily. thank you, everyone. [silence]

[gavel] >> the meeting of the financial crisis inquiry commission will come back into order. we are now in our final session of the day. we will be hearing from our panelist in our third session. which is called citigroup cdos , collateralized debt and management. let me ask all of you to stand and be sworn in. let me say as i say to everyone, this is a customary swearing in we have done for all witnesses and will in the future. do you solemnly swear or affirm under the penalty of perjury that the testimony you are about to provide the commission will be the truth, the whole truth,

and nothing but the truth to the best of your knowledge. thank you very much. >> prior to your moving forward, could i ask all of you would be you be willing to respond in questions sent to you in writing as we move forward in this investigation? each one of you needs to say yes to the microphone. >> yes. >> thank you very much. thank you, mr. chairman. >> so gentleman, thank you very much. you've all submitted written testimony. and we are going to ask each of you to provide up to five minutes. you can be briefer if you choose, but no more than five minutes of oral testimony to commence this session. we are going to start with you mr. dominguez and move from left to right. i would appreciate when you first introduce yourself, while

we know who you are, for the folks watching, if you could also briefly describe your position in the institution, it would be very helpful. so mr. domingues, if you would start off. at one thing, you'll see the timer in front of you. the light will go from green to yellow and then to red when the five minutes is up. all right. thank you very much, mr. do dominguez. >> thank you very much for inviting me to appear before you. i am nestor dominguez, i hope we can shed light before the commission. i understand the commission is interested in citi's business activity with clot realized debt obligations or cdos. i was involved with citi until i

left in november 1, 2007. of 2006 to 2007, i served as cohead of the citi's global cdo business that focused on cash cdo. i was responsible for seeing the structuring, and trading units of that business. i believe then and still believe now that citi's cdo business was informing an important function in creating products to meet investor demand for exposures to specific assets and specific profiles. citi completed many successful and productive transactions in numerous asset classes during the time of dramatic global expansion of the cdo industry as a whole. citi expanded its involvement in the structuring of cdos from 2001 to 2007. over a number of years, up to the fall of 2007, citi rose to become one of the leading global originators and traders of all types of cdos, including those

backed by securities, corporate credits, and several ore categories of collateral. the cash cdo business that i coheaded generated approximately $400 million in total annual revenue in 2005 and 2006. this revenue came from one-time structuring fee was between half a% to 2% in the assets in the cdo deal we structured and trading. the cdo business model considered all of the activities in our structuring activities expect the most senior tranches of specific transactions that were to be held on citi's balance sheet. these retained positions we refer to in the market as super mean your, because they were senior to tranches that themselves had virtually zero expected law based on analytical model.

this tranche -- this other tranche which was subboard than was rated aaa. the view of the senior tranche carried no risk was widely held at the citi, based on the level of coordination beneath the securities and our modeling. we at citi believe that the retained super senior tranches were on citi's balance sheet with remote risk of impairment or interest or principal repayment. citi retained certain tranches in two forms. first in a product referred to as liquidity for certain cash, cdo transactions between 2003 and 2006, the senior most level of the capital structure was funded by short-term asset-backed paper. which at that time was a large and deep market with a long

history of stability during time of stress. citi issued a renewable 364 day liquidity facility to the cdo as a backstop source of funding in case of either a significant widening in credit spread or temporary inability to issue commercial paper. second, citi also retained portions in both cash and synthetic form of certain cdos in 2006 to 2007 by both the cdo desk based in new york and as a result of synthetic cdo structured activities. in both senior senior programs, the risk of loss on the super senior exposure was examined extensively, based on those stress tests and models, the likelihood of losses was considered extremely remote. ultimately, citi recognized the market-to market losses on the cdo. these losses occurred as a result of the unprecedent market

events, housing price decline, and mortgage defaults not seen since the great depression. and anticipated by virtually no one, including those of us who dedicate ourself to building a business we believe was good for our clients and for the shareholders of our company. i hope i can be of some help to the commission of putting into perspective the nature of citi's cdo business. i look forward to answering your questions. >> impeccable timing. thank you. mr. barnes. >> chairman, vice chairman, and members of the commission, thank you for the opportunity to appear today. my name is murray barnes, i served as the manager director in the independent market risk management group in the citi investment bank with the responsibility of overseeing the trading businesses from 2005 until early this year. the commission has asked me to address risk management issues related to cdos backed

primarily by subprime, including the setting of risk limits and evaluation and pricing issues. generally speaking, the role of independent market risk is to work with the business to limit managed market risk for trading businesses are exposed to in a manner that was consistent with the company's risk appetite. in my role, my reported directly to the head of market risk management for the investment bank. who in return reported directly and exclusively citi's chief risk officer. this reporting line was fully independent for the business. this meant that among other things, compensation for independent risk managers was not determined by the business, nor was it tied to the province of the business that is we covered. one the primary risk management tools that we employed with respect to the cdo and other trade functions involved setting of risk limits. market risk that risk limits on overall trading activity.

in the case of the cdo business, there were several limits, including limits that apply to assets that were warehoused for future securitizations and limits that apply to any physicians from past securitizations, including the super seniors. market risk independently compliance with risk limits and reviewed risk limits in light of market developments. during my tenure, market risk expotures in a variety of ways, including stress test, using historical data to stretch the potential loss. stress test were performed at the division level, desk level, and individual market factors in an effort to mention risk in as many ways as possible. as part of the process, we routinely engage in the dialogue concerning the proper stress levels to employ. with other levels ultimately applied with the responsibility of market risk management.

in accordance with citigroup pricing policy, responsibility for trading positions resided with each business, including the cdo debt. prior to the market events in late 2007, citigroup relied on using comparable analysis to value its cdo senior exposures. it did this by comparing the sheds on triple aa tranches that it recently priced. this results in such exposure of being carried at par through june 30, 2007. these marks reflected the widely held belief both within the company and throughout the market that the super senior positions for almost no risk. as the unprecedented market events unfolded in 2007, a new issuance of cdos froze, the business top developed a model to price its super senior based on the cash flow of the cdos

underlying clot real. -- collateral. i understand why one might conclude the market risk management function failed to set the appropriate limits. the issues, however, are significantly more complex. indeed, given the widely held view that senior positions pose only an extremely remote risk of loss prior to the event of 2007, it is still difficult to imagine how the severity of the decline in house prices and its effect on the cdo market would have been predicted, let alone modeled. throughout the challenging market of late 2007 and beyond, the citi independent risk management function was fully engaged with the business and had access to and utilized the risk management tools that were then available. downsize then included what we understand to be extreme loss scenarios. and management risk that set limits on the business on the basis of that analysis. with the benefit of hindsight,

we realized certain stress assumptions were not adequate. ultimately, i believe the rapid growth of complex structure credit products presented unique challenges. but with some respects, it outpaced the market's ability to develop the necessarily tools to fully evaluate the risk. the impact was exacerbated by the commonly held belief that house prices could not fall by anything like the 30% plus decline that we have seen. i appreciate the difficulty of the task and look forward to answering your questions. >> another piece of timing. thank you very much. mr. maheras. >> i also thank you for the opportunity to appear here today. my name is tom maheras, i left

in early 2007. let me begin by placing cdo business in context. when i was cohead of the investment bank we provided a range of products and services in 80 countries around the global and employed more than 40,000 people. the cdo business was at all times a small part of the business. to give you some perspective, in the fiscal year 2006, the investment bank had a balance sheet of about or over $1.3 trillion and revenues in $27 billion. the entire cdo business in that year, its best year ever comprised one and change to under 2% of those revenues. i believe that the business was appropriately supervised by experienced and highly competent managers and independent risk group. i was properly apprised the nature and its risk. i also strongly believe that our board of directors and our most

senior management were provided with the appropriate information and guidance about citi's investment banking and activities. when issues arose in early 2007 regarding the more junior cd tranches and issues arose about the senior cdos later that year, senior management and the board took steps to evaluate the event that rapidly unfolded. how then did our investment bank end up incurring such large losses? what went wrong? the losses that citi incurred that relates to the cdo business arose from the extremely high rated cdo tranches, the super seniors that everyone at the bank and most in the industry believed were among the safest instruments. these super senior were above aaa. which meant their chances of

default were deemed to be extremely low. it is difficult now to put ourself back before the time of the financial crisis. but it is important to understand the following critical point: citi's losses from its cdo business did not result from a fixed-income group places high-risk bets in the proprietary trading business and reach for outside profit. to the contrary, our mwai primary losses stemmed by client-driven activities resulting in the holding by citi of low-interest yielding, very low interest yielding and were understood to be later de depreciated in value. this is when the lower rated cdo security started to decline in value. when we took significant steps

to produce our exposure to these riskier cdo positions, but even in the summer and fall of 2007, i continued to believe, based on what i understand and gathered from the experts in the business that the bank super senior cdo holders were safe. it was only later in the fall of '07, it started to see market-to market losses on these positions. it was only after i left the bank and thereafter when the rating agency downgraded them in a sweeping unprecedented series of moves that they were marked down. what could have been done to prevent these losses? i have asked myself these questions so many times. given the extraordinary losses that were eventually imposed on the company's chair holders, i understand that it would be somehow more reassuring to conclude we made a ill conceived trading bet or risking business or even that we lacked proper

controls. i do not believe any of those to be the case. knowing what we knew at the time and looking back on this part of our business, i cannot fault the fact that the business and almost everyone in the industry, including our regulators, regarded them to be safe. what i can tell you with the benefit of hindsight, we like many other experiences members of the industry failed to recognize that there was a real possibility of the kind of catastrophic real estate crash that the country has experienced. we were not alone in failing to predict that real estate prices would plunge with homeowners walking away from their homes in mass for the first time ever. i regret that i and my colleagues did not see that coming. but we did not. going forward, we must recognize the everpresent vulnerability of our financial system to serious and unanticipated widespread shocks and continue to evolve risk management and risk

management practices accordingly. i thank you and would be pleased to answer the questions you might have. >> thank you very much. mr. bushnell. >> chairman -- >> microphone phone. >> chairman, vice chairman, and members i am pleaseed to participate today. my name is david bushnell. i've submitted a longer statement for the record. i would like to begin my testimony beaddressing what is the single most attributing factor in the writedowns and loss. as you know beginning in 2007 an unprecedented collapse in the united states residential real estate market was the primary

instigator in the global financial system. citi was severely impacted by this sudden downturn. in particular, citi started the massive, unanticipated losses in connection with the $43 billion position in a specific asset class exposed to the subprime residential real estate. these were the super senior tranches of collateralized debt. in the fourth quarter, citi took the $14.3 billion writedown. these tranches have come under tremendous scrutiny and rightfully so. it's important to understand how the investments were received at the time. first, the billion-dollar position represented less than 2% of the citi $2.3 trillion balance sheet. second, these securities were

rated above aaa. citi and rest of the market shared the view that super seniors were safe. thirdly, the views of the credit rating agencies were reinforced by risk models employed by citi. these risk models, like those, tested for what were believed to be extreme loss scenarios for residential real estate. we know that even the most pessimistic assumptions did not foresee the severity of thedown. as the chief risk officer during this period, i've given a great deal of thoughts from the lessons to be learned from these events. first, the writedowns associated with our cdo positions for exceeded anything in the our stress test and were materially greater than was anticipated using a statistical approach. second, the complexity and sophistication of these

producted of understanding the products of the ultimate underlying collateral. :

citi's independent risk organization was organized across business lines with a geographic overlay. all of these reported up through me through a chain of increasingly senior risk managers in order to assure their independence. in all, i oversaw a risk organization of approximately 2,700 highly qualified risk professionals. citi's risk discipline framework included risk policies, limits, value at risk, and stress testing, for what we then considered extreme loss scenarios. all of these procedures were well known to our regulators, and were conducted in accordance with the then global capital regulatory standards. all extensions of credit required the approval of risk manage minneapolis-st. paul. if there was a disagreement between our risk group and the business as to an appropriate limit, independent risk had the

final say. i'd like to conclude by noting that citi's risk managers were dedicated, well-trained professionals, with independent authority, tools and technology to deliver best in class risk oversight. that does not change the fact that in this case our method of analysis was not good enough. i hope that my participation in this hearing will help contribute in some small way to the important work of the commission to better protect the financial system in the future and i'll be happy to answer any questions that you have. >> thank you very much, mr. bushnell. i will do what i did in the last session, members, which is reserve my questioning until the end. we will start with the vice chairman. >> thank you, mr. chairman. i'll ask some questions and in the end reserve time as we did previously. mr. bushnell, i didn't come back out of retirement to sit back on a thing i've done for 28 years

to try to protect the financial system. a consequence of what we try to do in our job of trying to explain to americans what happened i can assure you probably won't contain one word of what you folks just told us. did any you, and i'll just ask a show of hands and i assume you'll be honest in your response, lose one night of sleep over what happened? no. no hands. oh no, i didn't prompt you. i said did you lose one night of sleep. >> >> i lost a lot of sleep. >> the answer is supposed to be yes, once you got it, you raised your hand.

you lost a lot of sleep. >> yes. >> well, for someone who earned as much money as the most lyle played player on the new york yankees, at least he can show a world series win for what he got, and if they do various things that are against the rules, they've got to pay fines and do other stuff. i'm not going to dwell on the money. i can't comprehend it. obviously, you weren't supervised by competent people or what happened wouldn't have happened, and the argument is what happened to everybody else, then no one is competent. the argument that none of you ever heard the phrase, what goes up must come down? you thought somehow housing was unique or are you familiar with other areas that never go down? or why in the world would you pay anybody for risk management in the area of dealing with

these securities when housing never goes down? i mean, you would think that's not an area where you would invest money. you would stick more into the products that don't go down. i just have to tell you, that i'm frankly more concerned about you than some of the guys at the top, because i'm always familiar with guys at the top and they make a lot of money and i don't -- this has nothing to do with you, mr. thompson. because i now know you as a person. you guys were at a level paid handsomely, and what i heard was we took somebody's word who

rates them and we pay them to get the rating, but we took their word for it. we had models and nobody could model what happened. it did. so you didn't know what you were doing. or yes, you did, you knew what you were doing, until you didn't. mr. dominguez, at what point did you know that you didn't know? >> well, we became concerned late -- mid to late summer of 2007, as the markets froze, the cvo markets froze. >> that was across the board in terms of your company or were some other folks not getting it? were they still conducting themselves in a way that they thought this was going to continue, that their models were right, rating agencies were correct, or did you all pretty

much realize it at the same time throughout the silos of your company? >> well, if august of 2007, we began extensive discussions about the implications of the decline, the dramatic decline in the underlying subprime markets and how that would feed into the super senior positions. we had already seen it feed through into the lower rated trenches, earlier that summer and late that spring. so that's with the dialogue began in earnest. >> when no one wanted to purchase, i use that in a general sense, the low interest yielding super senior trenches, they were low interest, why, because they're as good as gold, like treasury notes? how come no one wanted to purchase something as secure as

that? >> well, the -- there was several types of super seniors. by and large -- >> i'm trying to stay of above the details, you want to go down to make a point, i'm more than willing to descend with you. >> by and large, we distributed the most senior tronchs on almost all of our cdo's, except for a program which was specifically intended to be held on balance sheets, so there was a market, it was -- it was all institutional, it traded between banks with commercial paper conduits, with protections from the mono line. so there was a market, and by and large -- >> on the whole, did you keep them because you thought they were really good and you wanted to keep them or that you couldn't really move them or

figure out a way to package them to move them? i mean, is there -- >> the only program specifically designed to be kept on the balance sheet was the liquidity put program. the rest of the super seniors that we got caught with in the fall, you know, late summer, fall of 2007, was really as a result of the freezing up of the markets. >> and the market had been through -- i've been involved in the market since 1999, as i mentioned. the market had been through a number of very stressful situations, september, september 11, the iraqi war, and spreads widened and narrow, participants' capital comes in, and goes out of the market, so we had been through some stressful times of about and being, these senior -- of course, those senior most tronchs are designed to take a a

lot of stress and so people viewed them as very robust, so we expected the market to come back, but of course what happened in october-november is the market -- the underlying market for rnbs as represented by the abx index for example, declined even more dramatically. >> things go down. but not according to somebody's model, not according to somebody's rating agency, so it's someone else. mr. maheras, you made a lot of money. do you believe now, looking back on that situation, that you earned all of it? >> i appreciate the topic of wall street compensation. it is very -- >> it's not the topic of wall street compensation.

i've got a group of people in front of me, i'm looking at these numbers. i'm no longer in congress, i don't have a constituency, but i moved back to my home. and they asked me questions and i'm basically conveying to you the questions they're asking me. do you think you earned that money? >> i was paid very handsomely. i was paid in a manner consistent with the market at the time. >> kind of like the rating agencies and the models? it wasn't associated with what you did before or of after. it was some model that you put yourselves up against. my question was a bit more personal than that. do you personally believe you earned that money, in terms of what happened? >> well, in the year of 2007, when things came to pass that

ended up costing the firm, i didn't get paid any money. >> no pony whatsoever? you worked for nothing. >> i'm sorry, i did not get paid a bonus. i got paid a zero bonus. >> you got paid something. >> i was paid a salary that year. in the prior years, when i was very handsomely paid, it was at a time when citigroup was paid -- at a time with citigroup did very well, performed very well economically, and my pay was part cash a -- >> i understand that. >> and shares of the company, which aligned our interest -- >> why 2007, you only got your base salary. >> yes. >> in 2008 -- with -- when did you leave the company? >> i left in early 2007. >> did you get anything in 2008? >> no. >> so you left when in fact you only had your salary? >> i left at a time when i had only earned a salary to that point and i was not given a bow fuss for that year. >> -- bonus for that year.

>> and you had renown ration that would continue to go on, it wasn't just cash that you got? >> i had shares in the company, granted in prior years, which had three ar four years of vesting requirement, and it had -- it was a number of shares, so at the time when i received the stock, it was at much, much lower levels. >> you lost at least one night's sleep. at any time during that night or however many nights it was, did you ever consider perhaps voluntarily not taking the total package that you knew you were walking away from, based upon what was left of a company that paid you handsomely? did you owe them anything, did you owe somebody anything about the decisions that you were responsible for? >> well, per the standards of the compensation system, i would

have happily played by those rules, if that was the wave the packages worked, but no, sir, i didn't. >> i'm asking about an internal rule that would make you feel better based upon what happened, not some company model, because i know full well of the changes that were made. i'm just trying to talk to you as a person. i don't know you. >> well, as i said of about, i did lose a lot of sleep. it was about the fact that a company i cared a lot about and had worked at for 23 plus years and many, many people i cared a lot were going through a very difficult period. after i left the firm. the losses that have been well detailed occurred well after i left the firm and i felt terrible that i was not there to be part of the solution. had i -- had i known it was going to come, i would not have left the firm. >> but you were there as part of the problem. >> i was.

i was there when those securities were put on the balance sheet. >> and you didn't know it then of course because you were relying on rating services and all the other things that let you sleep at night and so you walked away it hadn't fallen, so if someone builds a building and it didn't fall down when they walked away, but it did after they left, with more than two decades of dedication to that structure, i don't -- i mean, obviously, i'll better appreciate it as we go along and i have a lot of specific questions, mr. chairman, but at this point, i'll reserve my time. >> all right. thank you, mr. vice chairman. ms. murren. >> thank you. i have maybe two observations and then some questions. number one is, citigroup has a very large and a number of extremely talented fundamental analysts, both in the equity research department and in fixed

income. so the notion that the four of you were unable to determine the value of underlying securities because you relied completely on a financial model is somewhat disingenuous. the bottom line is there is fundamental ability to determine whether assets are risky or not, so i think that, you know, the notion that somehow it's all about the model is a little bit disingenuous and then to follow on to that, the other thing that's a little disingenuous is the notion that you didn't get paid if 2007. let's face it, those decisions that were made in the earlier years are ultimately what led to what happened, so to some degree, you do bear responsibility for that. the line of questioning that i will like to pursue though is one that i am very focused on and that is regulation and then secondarily, compensation, but not so much the amount of compensation, that's really secondary, it's the amount of compensation you were paid and the amount of risk you were able to take and the way you approach

it. and the time tables. my guess is they were annual. i'm interested in each of you interacting with the regulators, could you please talk about number one, your understanding of risk focused regular lags and what that meant to you personally in managing your areas. mr. maheras, if you could start. >> sure. my interaction with the regula regulators was most frequently with the o.c.c. and then i would say the fed would follow that. other regulators, the frequency was much, much lower. the interaction with the regulators was around business conditions, business strategies, planning, risk management type topics. they were focused consistent with the independent risk management group of the firm and the management of the firm, appropriately focused on ensuring alignment of independent risk with business

products, they were particularly focused on these meetings, particularly focused on new products, ensuring that new products enjoyed internally an infrastructure, systems technology, risk management, financial accounting, and all of that was on par with, that can keep up with fast business growth, again, particularly in the new areas. that's my recollection of interaction with the regulators. >> how often did you interact with them and what part of your responsibility the regulatory division that supervised the investment bank also had a responsibility to convey information to the federal reserve that related to the safety and soundness of the bank holding company. how keenly did you think p that on a regular basis, and to what extent was it factored into your business decisions, either in terms of those things you chose to approach, or when we get to

the next question, how did that factor in to your compensation? >> i can answer part of that. i would say that i can defer also to members of the panel here who would have had much more interaction with the regulars. to my eyes, there was -- i'm sorry, can you repeat the first part of the question, commissioner? >> if you look back at your interactions with the regulators, to what extent were you personally aware of the fact that your division needed to represent information to the holding company regulators that would affirm or not the safety and soundness of the overall enterprise? we were keenly aware of that, as a topic. the framework was built around the safety and soundness of the institution. capital measures were build around ensuring that we met safety and soundness standards, and certainly rating standards as well, so we were keenly aware

of that imperative. >> and did you feel that the regulators did an adequate job of supervising your activities and evaluating the risks that you were exposed to? >> oh, i think we in the industry and the regulators missed this particular aspect of risk management. we were negative on subprime as a matter. we were from the very earliest part of 2007 and 2006, we were reducing our risk around subprime. what we're trying to convey here is that we were not foe campused on those areas logically not focused on those areas where we all believed the systemwide that these securities were safe enough to withstand very significant pressure. we weren't sitting there widling our thumbs and assuming house would never go. we had our base case that housing was going down in 2007 and would likely continue, but what it took to lose money in these securities where we took the most pain, what it took was

a very significant step function down in housing prices, which was unfortunately well outside our sights and our frame of reference. i'm sorry. >> do you think that you would have been more focused on that aspect of it if the formula or at least the basis for how everyone gets compensated at your firm were less related to revenue growth, return on equity, which by definition means you would want to be levered and earns per share growth, which is what will likely drive the stock price? if there were more of an orientation in terribly, evaluating risk and being able to handicap that as opposed to growth? >> i can't accept the premise of the question, that there was not more. there was a very, very significant internal focus on risk. you correctly point out that compensation constructs were generally, you know, significantly correlated to the performance, the bottom line

performance of the business, but i don't believe that there was a lack focus on risk. to the contrary, i think citigroup probably had the largest risk management infrastructure in the business. >> bigger is better. >> we missed something. we milled something and the senior most securities, after having appropriately recognized that the housing was coming down some, appropriately recognized and acted accordingly by reducing our risk in the junior areas, the risky areas, the areas that were perceived to be risky or that could have some risk, we were actively engaged and successful at reparations duesing risk all over the firm. there was one place and it was that place that was furtherrest from our focus, unfortunately with the benefit of hindsight where we took a loss, but risk management was at all times incredibly prioritized and consumed a lot of our time and focus. >> you each actually observed in your testimony that you thought your risk management practices were excellent.

that has not been the opinion of outside observers. perhaps if you could comment on that, mr. bushnell. >> i'd be happen to and i might also follow on with the question that you asked about the regulatory interface, because they're sort of combined. i'm confident that amongst the panel member, i had the most interaction with regulators around the world. my interactions with them were daily. and that was a combination of regularly scheduled briefings on a periodic basis, weekly, monthly, quarterly, to ad hoc calls, and they were worth, if you will, the alphabet soup, everywhere from the o.c.c. to the fed to the f.s.a. in london, to the f.s.a. in japan, all of the regulatory authorities that we dealt with. so i'd be happy to follow up on that. the linkage in the question is

we had feedback from the regulators themselves, that didn't have any indication during my tenure in 2003-2004 at these periodic immediatings or in their annual reports to the board of directors about risk management, that there were an adequacies and that we were second rate in hour risk management in comparison to their peers. indeed, we had other instances in certain areas that felt that we were ahead of our peers. >> could you talk a little bit about those meetings and their way of expressing it is risk focused regulation, which really is an evaluation of your internal controls, and internal communication with regard to risk. in your opinion, was that an effective way to measure the risk at your firm? >> i think that based upon the mental and i know we don't like to keep going back to this model, i think the framework of

risk, everything from its independence, its structure, the usage of limits on policies, is the right way to go. the fundamental area that we missed and i think the regulators missed, etc., times that we've stressed real estate losses, we stressed them to what had been not seen, you know, in history, but we still didn't stress them enough. and that was at the baseline of all of this. so i think that that's why, in my testimony, i tried to indicate that our method of analysis was wanting. and indeed if i could get one thing across to the commission, the usage of statistical models, without stress tests and thinking of things that have never happened before as part of those stress tests is important. >> and in that -- those

conversations with the regulat regulators, were they asking questions about the underlying asset classes or simply asking questions about the methodology of your modeling? >> both. >> and did they look at the cdo business? >> they did. they looked at the structured finance business of which the cdo business was a part. >> and at any point, were the underlying assets tested as part of that or again was it really just an evaluation of your risk modeling? >> i don't know what their -- we saw internal reports off that, but i don't know if they did any of their own stress testing, if you will, of those positions. >> but that wouldn't be stress testing, it would be going into the portfolio and looking at assets and seeing if there's an event that was cataclasmic that would affect the whole asset class, correct? >> yes. >> so there was none of that? >> i don't know what in their work papers and in their

examinations, what they looked at specifically. i saw the -- a final report, if you will, of these areas, but i don't know what detail they wept into in coming up with the summarizing reports. >> and in those details, what wag the conclusion? >> my recollection was that there were no major findings in the credit structuring business. there may have been certain instances of what i would call minor issues. but nothing major off the top. >> thank you. >> thank you, mr. chairman. >> let me make a couple of prepatory remarks, everyone knew that the bubble was going to deflate. many bubbles had occurred in the past and then they deflated, but no bubble deflation ever caused a worldwide financial crisis.

even assuming the great depression, wasn't a deflation of a bubble, so i'm not going to cast blame when something completely unprecedented happens that is not only -- not only not within the experience of the people who confronted it, and were involved in it, but was not within the experience of anyone alive today. so i want to just, with that prepatory remark, i'd like to just talk about what was known at the time. i'll start with you, mr. dominguez, and then move across. you referred to what happened as a cataclasmic and unprecedented event. and i don't think anyone can doubt that. did you know how many subprime and alt-a mortgages were outstanding at the time, in 2007, when you were creating

cdo's and marketing them? >> were outstanding in the market? >> outstanding in the market, exactly. >> no. >> do you have a guess how many were outstanding? >> 200 billion subprime and another -- >> ok. would it have made any difference to you in terms of knowing what the risks were if if you knew that of half of all mortgages outstanding in 2007 were subprime and all day, with i say half of all mortgages outstanding, we're talking about over $4 trillion in mortgages, almost $5 trillion in mortgages, would that have made a difference in terms of what you could imagine would happen? now, it might not have been your business to understand that, but i think what it does is suggest that a cataclasmic and

unprecedented event is is not so far off the radar screen in a situation like that. i'll address this question to all of you, but i just want to go back to mr. dominguez, with a couple of other questions, details about cdo's, if you don't mind. why was it necessary to have a super senior tronch in a cdo? >> he will with, the super senior tronch is the most senior tronch. it's called super senior simply because there's another tronch below it. and it is senior to that tronch and that happens to be rated aasa a. >> -- to be rated aaa. >> let me rephrase it then. there are a whole series of tronchs and the ones that were generally sold to the public were aaa and bb and so on down and then there was an equity piece at the very bottom, which

in fact, riskiest piece of all and some even bought that, because there was a lot of profit associated with it if everything worked out. i don't understand the economics, the financial economics yet of why it was necessary hand it seems of to been necessary, to have created a piece at the top that was super senior that was superior to the ones that were actually marketed to investors. i'm talking about the economics of the business. why was that necessary? >> it wasn't necessary. some transactions had senior pieces, super senior pieces that were marketed to conduits and other investor categories. as i mentioned of about, there's a specific program called liquidity program, that was specifically designed -- >> ok. let me stop you there. my time of course is limited. so it was done because this was

something from see's business that it wanted -- citi's business, that it wanted to do, it wanted to hold those super seniors, correct? >> on that program, yes. >> as you describe it, the cdo consisted of more than just mortgages, am i correct about that? other assets were included in some of these cdo's and what were those assets and why were they included and were those the sorts of things that were demanded by investors? >> well, in my statement, what i said was, there are several kinds of cdo's. rnbs pools, securitized rnb pools are but one type, so there's collateralized loan obligations, there's cdo's made up of tier one capital securities from middle market banks, there's middle market loans, and so there are -- there are various investor types that

tend to gravitate towards specific types of cdo's. there are those investors who only by rnbscdo's and there are investors who only buy collateralized -- >> were there mixed cdo, consisting of mortgage backed securities, plus other kind of assets backed securities, were they mixed in any way? >> the percentage limitations, which defined -- in the transactions, which defined the eligible collateral securities, allowed for several asset classes, and the asset classes that were allowed was determined in negotiations with the investors, who indicated to us -- >> i understand. so this was marketing, marketing and the investors wanted certain kinds of assets on their balance sheets and you accommodated them by creating those pools that

they wanted? >> that's right. >> did your potential customers care whether a cdo purchases was synthetic or not? >> some investors didn't. what happened in the marketplace the synthetic abs cdo and the cash abs cdo developed somewhat independently, but by 2005-2006, those markets were converging as investors -- many investors were reasonably agnostic to how they got that exposure. what they were interested in, and the investors we dealt with, the institutional investors we dealt with, wanted to take certain exposures to the asset class and many of them, whether it was synthetic or cash form,

were agnostic to that. some weren't. >> ok. mr. barnes, questions for you. homany subprime and alt-a mortgages did you think were outstanding before what you called the unprecedented events in 2007? did you know? >> on the relative basis; i thought it represented around 15% of the total residential real estate market. >> there was obviously a widely held view that there could not be a disasterrous fall in house prices, such as occurred in 2007 our view, if people had known that almost a of all mortgages in the industry were subprime and alt-a? >> i think clearly the fact that

an increasing amount of mortgages were subprime related. and what became clear in retrospect was the underwriting standards associated with those was definitely substandard, but at the same time given a decline in h various levels of subordination provided by the underlying mortgages, the rnbs that were actually backed by those mortgages, and the cdo's that were backed by the rnbs, certainly the consensus within the firm, as well as across the industry of the market participants was that the likelihood of losses hitting the super senior was extremely remote. >> ok. you said that after the events of 2007, it was necessary to

change the methodology for evaluating super senior cdo's and you used something you called an intrinsic cash flow method, evaluating cdo's and the underlying collateral. please explain how this was done as concisely as you can. >> basically, the methodology was to look at the underlying residential mortgage-backed securities that backed the cdo, and look at common loan characteristics, within each of those rnbs, and effectively used some kind of historical regression model, that based on certain input assumptions, which were judgmental, tried to predict what the timing and level of defaults were as well as the severity of losses. ration to the iterative process

and fact that 2007 was still extremely out of sample with what we had experienced historically, and so even developing this much more sophisticated adeemed he will that looked through the cdo's, through to the underlying collateral and even through the rnbs to the various loan pools, and allocating them into buckets that had similar features, it still was not a very good predictor of usually defaults in -- >> right, i understand that part. what is an intrinsic cash flow system of methodology for -- >> well, what it really did was by looking through to the loans, and looking at the rnbs, and the priority of payments that exist within the rnbs structure, according to the performance of the underlying loans, the

forecasted performance, the model then looks at how those cash flows, whether they were 100% of the -- >> and then you discounted -- you knew what the cash flows were and then you discounted them in some way? >> well, first, we had to actually wash them through the rnbs waterfall in terms of the various tronchs and then to the extent there was a cdo, we then went through that process again and then that effectively came up with what in the firm's opinion was a sort of an expected future value of those cash flows and then we had to discount them, using some discount. >> and did your auditors approve that? >> we went through a rigorous process, including a review of the assumptions, a review of the model itself, and that process

was frankly a challenge, because of our being so out of sample and relying on inputs which couldn't really be properly validated in the marketplace. but the decision was made that in the absence of an observable market to actually assess the fair value of these securities, that was a decision that was made by senior management. >> with the auditors? >> i'm sure -- i wasn't involved in the discussions with the external auditors, but certainly that model, or an early version of it, was included in the initial substantial losses that were taken and that were included in the fourth quarter. >> ok. thank you very much. mr. maheras. >> the losses on the cdo's were large, as we know, but as you point out, the whole cdo business was only 2% of the revenue of the investment bank that you were running. incidentally, investment bank was a mythical idea, was it not? there wasn't an actual entity,

all of citi's operations were divided among a commercial bank, an investment bank, and a consume are bank, as i recall. so you had a whole lot of different entities under the investment bank, no matter where they were in the unit. correct me if i'm wrong about that, but then the question i want to ask is, the investment bank, did it have a profit, and although there was severe losses in case -- in the case of the cdo's, if you include over trillion dollars if assets that were in the investment bank, was that a profitable investment for the bank? >> gentleman i'm sorry. are you asking if the cdo's -- >> the entire operation under your control, one point x trillion dollars in citigroup assets, was that ultimately profitable, despite the losses on the 2% of revenue that the

super senior cdo's represented? >> let me clarify. the under 2% number is the number that would represent revenues from the cdo business in 2006. it was an under 2% number. in 2006, investment bank for which i was co-head of had a little over $7 billion of after-tax net in come performance, so it was very profitable. by 2007, by the end of the year, i don't know exactly what the performance was. at the time i left, we were profitable on a year to date basis through the end of the third quarter add around $5 billion after-tax net income. the losses which we suffered, which were substantial, were in the fourth quarter. >> mr. chairman, i'll give mr. wall wallison another five minutes. >> thank you very much. i actually don't think i need

all of that, but i appreciate it. >> we'll pick up what you leave on the table. >> mr. bushnell, what would have been included in the stress tests that you said should probably have been done? do you think it would have been reasonable to include in the stress test, a decline in housing values of 30% or 40%? was that within anyone's idea of what would have been a reasonable stress test? >> i don't think so. i think that that, again, based on what we had seen in history, an even taking the worst case that we ever seen in history and doubling it, if we had come up -- we could have run the models using that and come up with a number, the credence that one would have put into the results of that would have been questioned, i'm sure. >> i'm going to ask you the same

question that i've asked to your colleagues and that is, if you had known, as the risk -- the chief risk manager in the bank, if you had known, that in 2007, half of all the mortgages in the u.s. financial system were subprime or all day, would that have caused you to think that the dangers of a deflating bubble would be greater than they have ever been? this is, i might say, an unprecedentedly large number, that we've never had anything remotely like that. >> i think that we knew in our research areas, and in outside service, such as kay windchiller that we employed in risk management that the proportion mortgages that were both being originated and in the totality of the mortgage market was favoring subprime, you know, was increasing in that. what we still didn't appreciate, and none of those outside experts appreciated, was the

risk that that provided. again, how much of a -- back to the loss that would have said, that means you should not double historical losses, but triple historical losses, i don't think that that pitch was made, commissioner. >> thank you very much and thank you all of you. >> thank you very much, mr. wall wallison. mr. georgeo. >> so many questions, so little time. let me start if i can, just about the cdo's. mr. maheras, i think that maybe there was a misunderstanding with regard to this 2% number. the way i you saw it, at one point you said the $43 billion was only 2% of citi's $2 trillion balance sheet. did you mention that hordid somebody? -- or did somebody? that was mr. bushnell. right. pock. but of course, that would be just the balance sheet that was reported on the balance sheet,

that wouldn't be taking in any of the other assets that were off. >> right. it would have been less, even a smaller component, what we would have thought of as our risk balance sheet, our exposure balance sheet, not just our g aasa p balance sheet. >> we're not experts in this area, we're learning, i try to understand it. you've got basically -- as i understand it, basically you take in an rnbs cdo, you take a whole bunch of triple b rated tronchs from rnbs bonds and then you slice up the cash flow streams to create the cdo and in the model that we have here, you end up 60% of the resultant cdo tronchs being rated aaa plus,

super senior, 20% aaa, 6% aasa, 5% a, 2% bb, 2% bbb and 5% quick. so fine 1% of the result is rated at a or above, and 80% of it is rated aaa or aaa plus. now, i guess i would just ask, i know that all of you have said that the financial crisis -- the occurrence of the drop in all the housing prices, which ended up impacting mortgages, which under lie the rnbs and then effectively also the cdo's wasn't really contemplateble at the time or wasn't within your risk models, but doesn't anyone question whether you can effectively do what i would liken to sort of the medieval

alchemy, where you're taking base lead metals, taking base level tronchs of rnbs and slicing and dicing them and ending up with products that are essentially senior and super senior, aaa and aaa plus, turning them into gold. does anyone wonder whether that's possible and whether there ought to be some question as to the legitimacy of the ratings that resulted in those tronchs? did that ever occur to you, mr. barnes, for example? >> i mean certainly looking at the level of subordination, you know, the way you described it, you know, intuitively, if it's new to you, it does seem quite extreme. having said that, you know, our assumption that these securities were being packaged by loans

which were diversified across the -- across the country, not all of the country had the degree of price appreciation and the subsequent correction that the likes of california and las vegas and some of the other parts of the states have -- has been well publicized and we look to the -- the credit enhancement provided on the actual mortgage itself, the 5% first loss protection, which is provided by the residual piece on the rnbs, and then the additional 30% to 50%, let's say 40%, that was effectively provided a further degree of credit enhancement from the tronchs beneath the super senior. now in retrospect, you know, --

>> but wait a second. the super senior was 60%. the aaa was 20%. i mean, the resultant security had 93% that was rated either bbb or would have. that is, the constituent securities, you were working with bbb tronchs of mezzanine securities, as i understand it, and then you were changing -- taking the cash flows and assigning them to other tronchs that were rated differently in the resultant cdo. >> not -- setting aside for a moment, the synthetic cdo's, but i guess all i'm trying to say and again, i don't want to spend all our time analyzing how it is that the cdo's were constructed, but it's not so implausible, is it, that a structure like, this which becomes ever por complex, which is a security structured from a pool of other securities that have already been

structured and which being, you're making a structuring fee, presumably, 250 basis points, depending on the deal, so you're taking that off the top, that the resultant product, might not perform as well as characterized. that is 60% of it being aaa plus, so essentially risk free, and i want to focus on the capital behind it, because one of the questions that i asked dr. greenspan this morning, and which i would -- which i would also reiterate to you, is that -- and i'm not trying to pick just on citi, because a people did this, it just happens that you're here today talking about citi, but this happened throughout the industry. part of the reason why this was done, as we understand it, is that the liquidity put for the super senior tronchs, you essentially had to hold no capital >> it's a very rare bone cancer.

it's also found in soft tissue. it starts in the center of the bone and leaks out into the soft tissue. the -- if these were held in trading assets, as i understand some of them were, that you've if he cannively had to -- you effectively had to hold almost no capital and the liquidity puts, as opposed, for example, to an actual direct letter of a line of credit that would stand behind commercial paper customarily, you'd have to have capital for on your balance sheet of the bank, whereas if you did it with the liquidity puts, there was essentially no capital required. can anybody speak to that or was that a factor in your decision making in moving into the cdo market so aggressively? >> no. that was not a factor. the amount of capital that the

liquidity put program or other programs used within kind of broad ranges was not a determining factor. we weren't out to minimum highs the number of -- the amount of capital or anything of that nature. >> well, of course, the capital really wasn't the capital of the investment bank, right, because the liquidity puts were provided by the bank. so the losses that were suffered were suffered on the bank's p & l, when they had to honor the liquidity puts, isn't that correct? >> no, i don't believe that's the case. when the program went commercial paper, stopped rolling, when the ab commercial paper market essentially disappeared, the features of that program were that you would automatically create a -- i believe it was a

10-year note at libor plus 40 and that went into the broke are dealer. >> so you had to take losses in the broker dealer? >> yes. >> on that note. and i guess that goes back to a question that was raised earlier, i mean, i don't know where within the bank, i haven't been able to -- the bank and the broker dealer, where the losses ultimately from all of this write-down went, but of course, your compensation was based on the production of these, among other securities that produced during those years and of course when we were written down, there were no claw-backs that were enforced against anyone, taking back any of the money that was made based on the revenues that came from the cdo's that were written down, isn't that correct? >> that's correct. >> ok. and -- do you think that there

might have been -- i guess i'm trying -- you know, alan greenspan told us today that he felt that one of the major problems was that there was inadequate capital and inadequate liquidity in the system, at eacceptsly all of the bank holding companies and financial holding companies throughout the system, all of which -- most of which either failed or would have failed, but for the infusion of extraordinary taxpayer capital, which is of a all our charge here is supposed to be to investigate all of those institutions, so could you -- do you think that an increased capital requirement at the investment bank would be a significant deterrent to doing any of these activity that got you in to trouble? maybe mr. maheras, maybe you could address that. >> there's certainly a connection between capital requirements and the amount of

business -- business entities going to conduct, but with or without a specified amount of capital required at the actual underlying security level, the bank is still operating within constraints, overall leverage ratios, tier one ratios or whole mix, a myriad of different capital ratios, but to be fair to your point, if you had higher capital requirements across the board, across all the activities, you would have had a lesser overall balance sheet in the industry and you would have probably seen less o of what but up over several years. one thing that probably hasn't come across, people weren't creating the securities and just trying to find a way to sell them. this wasn't the -- the perception of wall street of old. you'd create probability and find a way to sell them. the business has evolved over the last five or 10 years to the one where investor classes have grown so large and their demand

for yield and securities with specific yield characteristics drove a lot of this activity. they drove necessary nestor's business to create products, because they had a bid for underlying tronchs, leaving nestor with a piece or two to sell. but the ability to purchase those things with investors, coupled with the fact that regulatory capital requirements in some asset classes with the benefit of hindsight were a lillo, you know, conspired to probably exacerbate the problem. >> weren't the investors buying, principally the ones that had nice yields, the lower rated tronchs really within the cdo's? >> you had all different types investors. insurers were focused on and -- were focused on the super seniors and aaa. you had asset managers focused on the aasa, you had hedge funds

focused on bb and equities, so you had the full array of investor types across the rating spectrum of these various structures. right. when you talk about the $25 million liquidity put program, you didn't sell to anybody that you effectively moved off your balance sheet, because they were off in a special investment vehicle, a special purpose vehicle off-balance sheet, right, and basically no risk was attributed to them, because the liquidity put risk, the $25 billion that was ultimately paid was paid by the bank itself. :

you did evaluate the rest. how did you quantify the risk? >> we quantify them in a similar way as. >> do know the amount by chance? >> those were generally held at par and it was until late 2007 about. there was a lot of analysis done on those and both with respect to look through the underlying assets and with

respect to comparable such as they existed in market and they were marked i believe 10 basis points running. >> 10 basis points? >> per anova. >> okay, well, i mean the other plane there is an issue about capital regulatory arbitrage of because as i understand it's -- i'm sorry, can i have a minute? >> you can have two minutes. >> with the securitization and burroughs was changed in 2001 which addressed some portions of the capital our bashar system. the rules established risk ratings, of risk weightings based on the ratings of each raunch of securitization and they allowed liquidity puts on the commercial paper had to get a 10% bracing resulting in a

tense of a percent on liquidity puts and one of the city executives to whom we spoke said that citi made a decision to support the cdl business because the one regulatory super senior aaa to launch was close to zero and i guess i am trying to get to what we can do on a go forward basis in the future to avoid another meltdown. obviously the six remained in. you now, all of you agree that you wouldn't have done, you wouldn't have invested or grated those securities have you known what was going to happen and we all recognize that. the question is on i go forward basis to avoid future catastrophe similar we probably have to change something so what is it we're going to change? again dr. greenspan suggested greater significance capital and

significantly greater liquidity requirements and then into this capital arbitraged where by simply moving assets from one legal structure within your organization to another for one unit to another or moving off balance sheet that you could essentially create an opportunity to create a product that doesn't require to hold capital against it. so some people suggested there should be principle that the total capital a record for a pool of assets should be the same after securitization as before and reduces from the point of view of mortgage down 2rmbs to eight cdo's. you have any thoughts, mr. bushnell if you could respond? >> i will yield to additional of my minutes so therefore try to keep a then his time or he will be in the penalty box.

>> i do have some thoughts on that, i overheard your questioning of mr. greenspan and i think the problem is really twofold. there needs to be more capital and the system and you need to end of the opportunities for regulatory arbitrage. i would make it, that says as opposed to the reason and there is an arbor josh that exists is because there are multiple regulators. if ever not multiple regulators to could not arbitraged regulatory capital requirements. >> right. >> more emphasis needs to be placed on if not having a single purveyor of regulatory capital of at least complete agreement amongst the various agencies both in the u.s. and worldwide. >> because you said you dealt

with the occ and referred from one of them that send to our staff, the cdo's staff was matters outside the bank and change from agency business to principal business, we didn't of fact, that's outside of our jurisdiction, yet the bank had these liquidity puts that are not recorded in a risk system. that's the occ examiner talking about this circumstance so obviously they regarded themselves as constrained by the law from asking you about anything other than the mother asking in the banking people a bunch of business really and so forth and which is obviously a major problem. i suspect that really the only issue regarding compensation which i would toss out justice something to reflect upon is that if you all have a longer timetable for you to earn your bonuses so that you could track through the process, the creations you had to assure they

didn't crater and ultimately have a drawback that resulted from that, wouldn't that it needs your diligence and the timing and the effectiveness of your issuance of the securities? >> to final minutes for mr. giorgio. >> mr. maheras, could you fcic back? >> i don't know that anything would have been different if there were a drawback. i don't think that people put these positions on the arbitraging some compensation scheme. i don't think there's an issue and i think it could be a healthy. of the compensation construct to possibly use it callbacks more but i don't know that there would be any differences related to the events of the last couple years. >> writes one of the great frustrations of the public i think is that he made significant compensation, nobody begrudges you that compensation if it ultimately produces value

for your organization or anybody else about what ended up happening is significant losses were suffered and the taxpayers got stuck holding the bag and having to backstop all these institutions and nobody really at you're level, above their level, below your level ever had to come out of pocket with any money of their own to backstops institution for the failures that resulted and this is if there's one thing that i hear about all the time that inverse of the taxpayer more than anything else it's that there was no consequence to people at you're level and in your position for the failures that results of on your watch and i just leave you without reflection and yield the balance of my time. thank you mr. chairman. >> thank you so much. let's move on now to mr. thompson and. >> thank you mr. chairman.

i guess if i were to think about this industry much has been said about rate and pace of innovation and the inability in many respects really characterize the risks associated with some of that nation. one might also argue however, that innovation in this industry is much about regulatory arbitrage as it is some unique new products because it's still one all said and done a dead instrument that underpins what you're doing in the marketplace. the and so my question is in light of dr. greenspan's comments this morning and the current state of the industry, should we be doing more to test new products in some controlled way in this industry given the systematic and societal risks that are associated just like in

other industries where there's huge societal risk with new-product introduction? ,, airlines, you pick it so i will start with,. >> me? >> yes. >> welcome to my eye there was a lot of testing of new products from other regulators and certain things went wrong. and not sure what form it would take. i would point out though that a lot of things happened. think about the impact of 166 and 167 back forces consolidation on the balance shoes for financial intermediaries who may have taken advantage of balance sheet arbitrage or regulatory arbitrage cited. they recently instituted to go along way to the help that situation, increase capital requirements. i can't think as i sit here, i'd

be happy if i had other thoughts to share in writing at a later point but certain things are in motion that are substance. >> mr. bushnell, which you comments? >> i think if one wanted to have some sort of a further control a round of new products, there are several ways to accomplish statins. most of its institutions and we can argue again on our not seem to work but in their own and boundaries having a capital product screening committee and as tom mentioned that would address a bunch of issues in terms of everything from internal and, can we settle it, can we account for its, what's of the customer reaction going to be, what are the taxation concerns our customers might have -- all sorts of things. suitability for customers. you could conceptually expand that and have in essence an

agency of a government that would look with those types of disciplines as part of its. another methodology would simply be to put the tax of capital on any product, you don't necessarily have to have those who says until this would decision with until this product is tried and tested in a time of stress we are going to have to require an extra -- excess amount, however, you want to define, capital of all those who originated. i did my comment is i think there are several different ways that if that's brought to be in a necessary adjunct of the framework there are several ways to accomplish that. >> well, you have a pretty unique you because you're not just chief riss officer but you were the chief administrator of officer. and that was suggests that your

purview looked across not just the risk of how the recession itself functions with, how this information flow, how does the i.t. systems and for social work, on and on that might suggest puerto that given that citi is an amalgamation of a company's brought together over the course of the less 15 years or so that perhaps what we didn't anticipate this ability of the organization, its ability to observe accommodation of market risk and all of the turmoil and stressed that might have been going on as you try to integrate many many into to use the chabad over the last 15 or 20 years. in your judgment at this point on, should the company have looked for greater organizational stability before it pressed into some of these new markets where their risk was really unknown?

>> i don't think so, one of the first things to work for in the citigroup family required to emerge with came to that was integrations of risk systems and his policies that said whether it was and overseas institutions are domestic institution i don't care how you are dealing with risk policies, here's how you will do on a going forward basis. so at least from a risk oppressive it was one of our primary areas of focus to get integrated as fast as we couldn't. clearly other areas of chief administrative officers in areas like technology is a tough one. it takes i'm sure you are aware in the business a long time to get legacy systems and get to a consistent methodology for that,

but i think we try to pry richer is there for our integration process with special attention to compliance issues, policy issues, risk issues as being ones that are most important to get consolidated first. >> so let me turn my attention to it mr. dominguez and mr. barnes for a moment. if you think about risk and you have a very scientific models that give you a sense of whether or not to a given market our product is, in fact, risky to a certain level, i guess the question is at what point my to have talked to people who were really on the ground? the traders, the analysts, the people who really had a sense of what was going on in the market around these products as you read making your call as toç whether or not the business flows out or not.

oftentimes traders have a much closer insight into what's going on then perhaps someone who's sitting in your role. so were they part of your process or not and how was that inc. in a model that you yourself have said in laws or sadistically driven as opposed to human judgment or units? >> so in the process of it warehousing and creating and a b.s. cdl transaction, for each piece of collateral, that is a huge security that ultimately went into the pool and there may be 5275 different pieces of collateral or security in there, we conferred with the secondary trading desk and because they not only were in the market, they were hearing anything about that underwriter or even that

particular shan's vashon, but they could make a judgment on where that piece of collateral was treated relative to the market. clearly if it was trading much wider than the rest of the market are much tighter than zero isñr re is bells and whistles. the second part to which we haven't talked about here yet is before each of the cdl transactions there is a third-party collateral manager, there's two types, static ceos and the so-called arbitrageç cdo's which is largely city's business. and a third-party collateral manager was hired for every transaction, i should say it most, we did some static transactions, and that manager

typically a have an expertise and track record in the particular asset class of the cdl we were creating so it was a small side -- we did talk to other people. we talk to the markets. >> how about the guys were actually writing the mortgages? citi is a conglomerate in does a little of everything so you'd have a sense of the quality of what's coming into the hopper if you talk to the guys i to the originating the paper. >> well, that's true but our belief was that would be reflected in market prices and so that's why that fact that was important and also the diligence done by the third-party asset managers and i really need to emphasize that these were in very well known in many cases have a longstanding reputation in that particular asset class

and managed otherç portfolios n that asset class. so that was the process. >> mr. thompson, would you like additional? >> just a couple minutes. >> i'm struck by the fact that for lack of a pennant chairman can hide behind statistical models and leadership by and large about intuitive sense and judgment and in some point somebody had to make a call independent of what the model produced. so it just seems odd to me that we would say our models told us this and therefore this is the way behavior. where was the intuitive leadership judgment that said something may not be right in this market? >> if i could comment, and i think on the risk management's side working closely with the business and may view ourselves as partners of the business and a lever on the desk and try to

do with the two-way dialogue on a daily basis, i interacted with my counterpart who covered the global securitized markets, the market making in subprime are mda's, a major river consistent in terms of the methodology used mr. dominguez mentioned a while assets were in the warehouse as they repay ramp up ahead of plan it cdo's they were being marked daily even though it is a securitization went ahead by to lee citi would recover its cost and reflected that the volatility through p and l on a daily basis. we relied on markets surveillance. everything from our own internal rmbsç mortgage research department, clon cdo's research groups, then we also looked at other market indicators, the fact that cdo's were pricing,

recently priced deals are still something extremely tight spreads whether it was from major insurers, the bond insurers model line are other banks not only in the u.s. but also in europe who continue to view it as extremely safe risk. and then the final thing is that the other thing is what we saw the market deteriorated the business was actually proactive and reducing some of the low order risks, some of the first order risks so in terms of getting rid of more genial tranches, a seller in the warehouse and process that the summer of 2007. in retrospect the error and end of this is starting to become a bit of a broken record but it was the focus was on on the super senior position.

even this super senior positions of the then acquitted a puts really only the intended to be held temporarily. the assumption was the market would always be there for them so that was why some of assessment of how we were looking at risk in what was admittedly a fluid situation with a lot of significant market volatility, but that was part of our job to rely on that type of market surveillance. >> mr. maheras, can you answer from the business perspective as opposed to risk-management? >> if we can take a minute and a half, there's a time have to get out of here by john i want you to get that. mr. maheras, please respond at. >> is a good question, you started with a point about intuitive leadership and again it's hard to imagine that that existed here given the storytelling but i assure you that managers of the structured private business to whom mr.

dominguez reported that are actively focus on subprime risk and actively focused on riss production and were fluctuating back. again where they saw the risk and those have been actively. the mortgage people within fixed-income you heard from ms. mills the machine is in that unit, their supervisors were actively managing down exposures within -- quite concerned do, these units were getting intuitive leadership. we were focused on that. i think as a general matter and companies like ours is very of foreign to make sure that silos of expertise are communicating with each other to the maximum extent possible that was in first and best practice to varying degrees dennis jim will allow in certain places where communication should be had and other suboptimal but it was an important one and i think he made that point. >> thank you very much gentleman. >> thank you mr. thompson.

mrs. bourne. >> thank-you. i would like to understand a little bit better what the synthetic collateralized debt obligations are who. at the can beginning to understand cash, cdo's, but i would appreciate mr. dominguez, if you did indicate for us what the difference between a cash cdo's and synthetic cdo's is. my understanding right now is and that we in a synthetic cdo's mad the than the -- rather than containing actual rmbs, for example, it would include credit defaults swaps or other kinds of derivatives on asset backed securities. is that correct. >> that's the essential difference. there were other technical the

references that that's the key difference. >> and how much of the issuance of cd -- cdo's piatt citi -- i know what your schedule is next year. i know how impropable it was to do what we have just done. to think we can keep doing this for i don't know how long, i don't allow myself to think which did not report to maine was a new and growing market and i don't have the exact numbers. there is a portion but it's on the order of about a third to a quarter. >> perhaps we can ask citi to provide an exact statistics on that. why wasn't growing at that point of time? was it because it was more

difficult to get the assets for the cash cdo's? >> i think that's part of its. when you're warehousing collateral, your effectively limited to what's out there in the market and trading so that's part of it. the other part of it is that the managers, third-party managers who were often hired to select the collateral or, in fact, the investors like the ability to reference any assets of any vintage tie if there was a willing counterparty to be among the dealer kennedy read the other side of the contract. so if allowed more flexibility in. as i mentioned before, and number of investors -- an

increasing number of investors were agnostic to whether they got the exposure synthetically or in cash. >> so essentially by synthetically maine and that there aren't any actual assets down to adjust the derivatives obligation of. >> that is the pure synthetic cdo's. >> although i assume there were some hybrids with ito rmbs. >> that is, right. >> favor call higher risk. do you think and let me maybe ask mr. barnes this, understand that you suggested to the staff that the synthetic cdo's being built on credit defaults slops essentially allow dealers to be traded faster than if you have

to actually accumulate all of the of the assets. is that correct. >> that was my observation, yes. one of the challenges and actually building a portfolio of rmbs or other types of securities to go into cdo's typically in the market is a buy and hold the market so you have to wait for new issuance of the underlying securities such as the new ones as was described to earlier by mrs. mills were as to mr. dominguez point as long as you can find a willing buyer of a cds for protection on a particular rm ps you could effectively build of this portfolio significantly more quickly. >> so did the use of synthetic cdo's and allow in effect more securitization to occur then if you had to wait for the rmbs to

be actually issued and available? >> probably at the margin, but it's important to remember, it was really the investor is limiting factor. if there were no investors didn't matter how quickly you create the deal. so at the margin i would say that's, right. >> but you suggest that investors were, in fact, interested in. >> bay are the, so it's a question what i'm trying to suggest there was an infinite capacity to do this because our ultimate limitation would be the investors whether they wanted that risk at all. but as i said at the margin it allowed the horror and easier and cleaner execution of the