smaller, more narrowly focused firms suffered in similar ways. to the contrary, i continue to believe that city is a unique institution. the only truly national u.s.-based bank in gives it advantages in many of its businesses around the globe. too big to fail is a harder issue. my own view is that we are past the days of small localized banks and financial institutions. w450eu8 they certainly have a place in the financial landscape, the financial world we live in is complex, interconnected and global and i think this demands sophisticated, global and diversified financial institutions. that said, i certainly do not believe it is good for the united states to have a financial system with a failure or threatened failure of key financial institutions will imposed the kind of dramatic and

near catastrophic damage on the entire financial system and the and national world economy that we saw when lehman failed and numerous other financial institutions, including citi needed extraordinary government assistance. . assistance. we must find a solution to this problem, whether through resolution authority, greater regulation, increased capital requirements, or all of the other creative and innovative measures that your commission has been discussing. thank you for your time and i'm happy to answer your questions. >> thank you very much, mr. prince. mr. rubin. >> thank you, mr. chairman. mr. chairman, mr. vice chairman, distinguished members of the commission, i too along with chuck prince appreciate the opportunity to testify today. the financial crisis as we all know has taken a terrible toll know has taken a terrible toll on millions of americans who

jobs, their savings, and their confidence in the future of our economy. better understanding the causes of the crisis is essential to protecting our nation's economic future and to effective financial reform. i hope that my experience at goldman sachs, the national economic council, the treasury department, citigroup, and as chair of lisk, our nation's largest inner city development organization, can be helpful to this inquiry. let me make two observations that i believe are relevant to the commission's work. first, examining problems with the benefit of hindsight can be highly useful. during my time at treasury, we dealt with the mexican financial crisis and then later the asian financial crisis. and while in both cases, our approach is on balance were successful, we still learned an enormous amount from looking back at what happened. second, as policymakers address

financial reform, it is important to remember that our national economic policies have enormous effect on all of us. for example, president clinton undertook deficit reduction and made critical public investments and those policies in my view contributed greatly to the longest economic expansion in american history. simply put, policy matters. with those thoughts in mind, let me turn to the causes of the financial crisis. while i had thought for some time prior to the crisis that markets, including the market for credit, had gone to excess, and that those excesses would at some unpredictable point lead to a cyclical downturn, this is not what happened. instead, we experienced the most severe financial and economic crisis in 80 years.

in my view, that crisis was not the product of a single clause, but rather the product of an extraordinary combination of powerful factors operating at the same time, and feeding on each other. let me name just a few of those factors. market excesses, low interest rates, most notably, due to large capital inflows, which contributed to excessive helping by borrowers and excessive borrowing by consumers, to increased consumer leverage. a subsequent precipitous drop in housing prices. vast increases in the use and complexity of derivatives. misguided aaa ratings on subprime mortgage based instruments. lax and too often abusive mortgage lending practices. shortfalls in regulation. high levels of leverage in financial institutions, joined with deteriorating asset quality

in asset purchases and much else. there were a few market participants or analysts who saw the broad picture and the potential for a mega crisis. a larger number saw one or a few of these factors. but almost all of us, including me, who were involved in the financial system, that is to say, financial firms, regulators, rating agencies, analysts an commentators, missed the powerful combination of factors that led to this crisis and the serious possibility of a massive crisis. we all bear responsibility for not recognizing this, and i deeply regret that. let me now turn to citigroup more specifically. my role at citi defined at the outset was to engage with clients across the bank's businesses here and abroad, to meet with foreign public officials for a bank present if 102 countries and to serve as a

resource to the bank's senior management with respect to strategic and managerial matters. having spent my career in positions with significant operational responsibility, at treasury and prior to that at goldman sachs, i no longer wanted such a role at this stage of my life, and my agreement with citi provided that i ought to have no management of personnel or operations. i remained at citi until january 2009, and so was present when citi's problems occurred. in my view, there were two primary causes of these problems. first, citi, like other financial institutions, suffered large losses due to the financial crisis. i am told that citi has subsequently analyzed the data made available in connection with the 2009 stress tests, and has estimated that the losses in citi's businesses, other than cdo's, were roughly comparable to peer firms.

second, citi suffered distinctively high losses, as a result of its retention of super senior tranches of cdo's. i remember learning of these super senior positions in the fall of 2007, during discussions convened by chuck prince, with the most senior management of citi, to discuss by then what was considerable turmoil in the fixed income markets. in considerable discussion on the fixed income business, i learned that citi's exposure included $43 billion of super senior cdo tranches. the business and risk personnel advised that these cdo tranches were rated aaa plus and had de minimis risk. my view, which i expressed at the time, was that cdo was an arbitrage business and i believed, perhaps because of my arbitrable background, that

these cdo transactions were not completed until the full execution. it was developed at a time when aaa securities had always been considered money good. moreover, these losses occurred in the context of a massive decline in home sale prices, rather than home real estate market prices, that almost no financial models contemplated, including the rating agencies, citi's, or to the best of my knowledge, the regulators. the board required and received extensive financial and risk reporting. but i do not recall knowing before september 2007 that these super senior tranches were on our books. i feel confident that the -- confident that the relative personnel believed in good faith that more senior level participation of these instruments was unnecessary, because as i said a moment ago,

the positions were rated aaa, and appeared to bear de minimis risk. in october, the rating agencies substantially downgraded these securities and subsequently citi estimated that it would have a loss of 8 to $11 billion. when these losses were estimated losses were announced, chuck prince decided to step down, lynn bischoff became c.e.o., i stepped in as chairman of the board and i worked with employees, clients and others to stabilize the bank to assist if raising capital during a very difficult period and served on the c.e.o. search committee that led to the selection of -- ultimately, citi took $30 billion in losses. these losses were a substantial cause of the bank's financial problems and led to the assistance of the united states government. i believe that the overriding lesson of the financial crisis was that the financial system is

subject to far more severe downside risk than almost anyone had foreseen. i believe that that it is imperative in light of that lesson that private institutions and the government act. citi, first under chuck prince and then under pandit, restructured and improved -- the private solutions are only part of the answer. financial reform is imperative and should include, one, substantially increased leverage, constraints, with one tier based on risk models and a second tier based on simpler metrics, because models cannot capture all of reality. two, derivatives regulations, reflecting my strong views from my time at goldman sachs that derivatives can create serious systemic risk and appropriate regulation is needed. a subject i also discussed in my 2003 book. three, resolution authority to

avoid the moral hazard of too big to fail, and, four, consumer protection, primarily and very importantly, to protect american consumers, but also to protect the financial system. with that, i appreciate the opportunity to share my views, and would be happy to respond to your questions. thank you. >> thank you, mr. rubin and mr. prince, and let me just reiterate again, we appreciate you being here today. we appreciate your willingness to help us in our endeavor and mr. rubin, let me lynyrd skynyrd just say to you, thank you for your years of service to the country, so with that, we are going to now begin a period of questioning by commissioners, and as chairman, i will start off with some questions for both of you, and each of you. so i want to pick up on your comment, mr. prince, about whether or not this institution was too big to manage, too

complex to understand, perhaps too big to regulate. really, for the benefit of people watching today, it appears as though that there were about $51 billion in writeoffs related to subprime lending. the institution, as i understand it, is one that went from about $670 billion in assets in about 1998 to $2.2 trillion on balance sheet, another $1.2 trillion off-balance sheet by 2007. by 2008, the tangible common equities assets ratio, we estimate 61-1. with offbalance sheet, 97-1. i really want to ask both of you some very specific questions that get to the heart of the management, the risk of the organization, particularly around subprime lending. mr. rubin, i'm going to start with you. on november 17th of 2007, there was a meeting meet

executives at citigroup, including yourself, and you were there briefly i believe at the meeting, and then mr. bushnell was at the balance of the meeting. this was a meeting with the senior supervisors from the federal reserve bank of new york, the federal reserve board, the occ, the f.c.c., the ukfsa and at that meeting, there were notes as to mr. bushnell's assessment of what he thought had gone wrong and he mentioned, among other things and i might add, these are notes, not his exact words, poor communication across businesses, decentralized nature of term. senior management business line and risk management did not fully appreciate the market risk of the leveraged loan pipeline to the retained super senior c.e.o.'s. corporatewide stress testing scenario analysis was insufficient. the firm did not have consolidated understanding of its risk sensitivity factors. the nature, origin and size of the cdo exposure were surprising to many in senior management.

so as you look at some of those comments, do you think those are a fair reflection, do you believe that the organization did become too big to manage, the internal controls did break down, mr. rubin? >> i think, mr. chairman, that if you look at citi, prior to the crisis erupting, date bushnell ran -- david bushnell ran, at least in my opinion, a very effective, independent risk management capability. but what david did, as i understand it, and i do remember being a part of that meeting, i don't think i was there for the whole meeting, what david did, and rightly it seems to me, is of after the crisis emerged and when i ran goldman sachs, we did this every time we had trouble, he looked back on what he could learn from the circumstances that existed and although i don't remember the specific comments that up just bringing together read -- the

risk exposures and the assessor function would focus more on that. i guess my answer, mr. chairman, is that i don't believe that citi is too big to manage, but when you go through this kind of crisis like when i was running goldman sachs, we had very difficult development in the trading areas. we would look back and try to learn how to do things better. that is what david was reflecting in the comments that you just repeated. >> let me ask you a related question, mr. prince. for sick of the efficiency, i will move back and forth between the two of you. on october 30, mr. bushnell made a presentation due to the board -- i will verify that.

he had a time line in the key events of the subprime market for senior management. he noted that on february 27 of 2007, hsbc had announced major mortgage delinquencies in losses related to that. on june 12, my birthday, 2007, bear stearns asset management announced that their funds were insignificant problem. were in significant problems. i knew you would want to know my birthday, mr. vice chairman, so you could note it on your tickler. on july 10, s & p and moody's announced significant cdo changes and down grades. on august 10, pnbparibus noted significant down grades. both you and mr. rubin said you

became aware, mr. rubin did in september and i think you said the same thing, of problems in the cdo desk. when all these things happened, why didn't the potential of problems rise to the top in the wake of these major announcements? why didn't it bubble up? >> well, mr. chairman, i think you have to go back to the time in question. so much has happened since then, that it's a little hard to put yourself in the time frame of when this happened and i can only speak for what people must have been thinking, because i obviously didn't know about the cdo positions and the time frames you're talking about, but i believe in hindsight that people believed and they believed with a level of certainty, that is hard to appreciate today. that the super senior tranches would never be touched by these problems, so the various rating changes you talked about were for the lower level, the not

super senior tranches. now, again, sitting here today, that belief looks pretty unwise, but i think at the time, moody's was quoted as saying that these problems would never reach the super seniors. and i think people believed that the structuring process had gotten to a point where that top level would be immune from the problems that were being seen at the lower levels, and i'm not saying that's right. it obviously turned out to be wrong, but i believe that's what they believed at the time. >> well, let me probe that a little, because mr. gorgiou raised this yesterday. the cdo's were essentially a collection of the lower tranches of the mortgage-backed securities and i want to attribute this to mr. gorgiou, that there was element here of taking lead and turning it into gold. you had a number of lower rated

tranches, that if you had a pile of stuff and that's probably a charitable description, you take the lower stuff, you put it at the top undoomed that's highly rated. interestingly enough, by the fourth quarter of 2007, housing prices had only fallen 5%. and just for reflection, in 1990, 1991 in a cumulative basis, housing prices had fallen 3%, particularly driven by places where i live, california, florida, texas, but by that fourth quarter, you had already written down $18 billion, so clearly the super senior tranches were touched fairly quickly, because in essence, they weren't truly the aaa. they were elevated in that structure. so i guess the related question is, to what extent did you ever do any at the board level and i know you said at one point, which i think reflects on the scale of the institution, that putting on a $2 trillion balance sheet $40 billion of aaa rated, zero risk paper, that that would not have in any way excited my

attention. at any point did either of you gentlemen look at the nature of these instruments and say, i'm troubled about the nature of taking this subpar stuff and rating it at the top. did you ever do the analysis essentially, the hard analysis of the underlying collateral? mr. rubin? >> mr. chairman, and i'll reflect back if i may just in response to your question for a moment on the days when i ran goldman sachs, when you're running a large organization, or i'd say even a medium sized organization, what you can do is look at the people you have in place, look at the aggregations of risk, which the citi would have done very well by david bushnell, but there isn't a way in an institutions which has hundreds of thousands of transactions and trillions of dollars a day running through it that you're going to know what's in the position books and i wouldn't know it when i was running goldman sachs and you wouldn't know it sitting on the board of citi either. you depend on the people there to bring you problems when they

exist. in this case, you're talking about a little of granularity -- level of granularity, which is why a board has such a strong responsibility making sure they have the right people in the right places. >> >> not to interrupt, you had weekly business meetings that you had of the business heads. >> absolutely correct. >> and $40 billion may sound like chump change in this organization, but it seems like to me a fairly significant initiative to have $40 billion of exposure, and i might hadell, you know, in the rnbs arena, think you guys were doing $90 billion of securitization, you weren't light in this arena, so i'm just curious about the depth of strategic discussion around the positions and mortgage-backed security and the underlying collateral. >> if i may say so, mr. chairman, we had the strategic discussions about -- at the business heads meetings, about p & l and the separation of the business, one thing or another, but individual

positions only came to that meeting when either independent risk management or the people running the businesses felt that there were problems. in this case, they were dealing with, as we now discussed many times, aaa securities that were deemed to be did he minimus in risk and these simply were not brought to that meeting. if i had to make a guess and i do not know, my guess is the people who structured these did an analysis and determined, even though as you correctly say, the individual securities within them were not of the quality of the -- the totality, if you will, that with the structures they had, that the risk became de minimis. of course, they not only depend on the aaa as you know, they did their own independent work and i remember seeing someplace much more recently that they calculated the risk was something like 1 in 10,000. >> that's what their models showed. >> it's what their models showed. >> but i really question the models, if you only had a 5% price drop, you write off $18 billion. >> there's no question, mr. chairman, that once

developments became or started to become adverse, the -- these securities got -- incurred considerable difficulty and in hindsight, obviously, there were real problems, but i was trying to speak of them as of the time the positions were taken and as they were seen at that time. >> let me ask you a couple quick yes or no questions to move along here. mr. prince, you indicated you had about $11 billion worth of warehouse lines out to subprime originators. >> i'm sorry. >> you had about $11 billion -- you've acknowledged in your interview with us that you became aware fairly late in the game, you said i found out at the end of my tenure, warehouse lines that supported aggressive subprime lenders, about 26 of them and you said i did not know it before, i think getting that close to the origination function, being that involved in the origination of some of these product was something i wasn't comfortable with. mr. rubin, did you know that the bank had a very significant $11 billion extension of credit to very aggressive subprime lenders, of which you had

awareness? >> i certainly don't remember today whether i knew at the time or not. i truly don't, mr. chairman. >> let me ask you mr. rubin one more question specifically and then i want to go to one final issue before i at least at this point turn to the other members. yesterday we had before us mr. bowen, who was i believe, chief risk -- his title, he was in the business underwriting unit in the risk function. he had tried unsuccessfully to get his superiors to move on some concerns he had and then on november 3, 2007, sent you an e-mail. he was concerned about the inadequacy of the sampling size for loans that citi was buying and then selling to fannie and freddie. the sample size was consistently

less than 2% but he found that 60% of the sample files failed to meet the contractual underwriting of the originator or had information missing at a failure rate and found that that failure rate rose to 80%. that was sent to you, mr. bushnell and other individuals. did you ever -- it was sent to, yes, you, mr. bushnell, and ms. howard. did you ever act on that? >> mr. chairman, i do recollect this, and that -- either i or somebody else, i truly do not remember who, either i or somebody else sent it to the appropriate people, and i do know factually that that was acted on promptly and actions were taken in response to it. >> all right. could you please get us back to us, perhaps, you know, you and/or the people existing at the company today, back to the commission, exactly how citi responded, when it responded, what it did? >> i would be very happy to and i believe legal counsel at citi, in fact, i know they do have

that information. >> last set of questions for you before i go on to other members and i will come back at the very tailend but i will ask you a sequence events. both of you said you didn't become aware of the cdo exposures until september, i believe, and as i understand, by looking at documents, by looking at the interviews that you did with staff, that you learned in early september, at which point you started, mr. prince, a series of meetings and later nightly calls that became known as the death con calls, and i think the first meeting was on september 9, mr. rubin was in korea, but he was in touch by e-mail. and then mr. rubin, you joined these, i guess, very extensive calls that happened over time, and i think you said, mr. rubin, in september 12, when the cdo's really become a focus of your discussions, but here's -- i want to just ask you about a

sequence here. on october 1, citigroup preannounces its third quarter earnings and i believe indicates a $13 billion exposure to subprime, including a billion dollar writedown related to subprime related cdo's. on october 11, there's some rating agency down grades. >> what was that date? >> i believe october 11. the second date. but then, here's what i want to ask you about. apparently, you became aware mid september, october 1 you announced that you are announcing your exposure is $13 billion, but here's what happens at least according to records i've seen and i certainly will give an opportunity for you and your folks to review these to make sure we have the chronology right. and maybe i should ask in the question, it appears that on october 15th, two things happened. the first is that there is a call with analysts in which mr

mr. crittendon sells citigroup they have a $13 billion exposure. however, the same day a report is made to the corporate risk and management committee and to the board of directors and as parliament of that, there's a penguins -- part of that, there's a presentation on risk management and it says the total subprime exposure in markets and banking was an additional $16 billion in direct super senior and $27 billion in liquidity and par puts, so on the same day that the public is being informed, it's $13 billion, the board and the audit committee are being told that this adds up to, frankly, more than $50 billion, i believe 55 is the total math here, roughly, at which point, on november 3, you have an emergency board of directors and on november 4, you announce the $55 billion exposure and mr. prince, i believe, that's

the day in which you announce your resignation. i guess what i want to ask is, why is there an announcement made to the public that is $13 billion, at the same time that the board and the audit -- risk and audit committee are being told that it's substantially more? and i think mr. prince, i'll ask you and mr. rubin. >> well, mr. chairman, i think that you've asked a very detailed factual question, referring to documents and presentations and so forth. and i would have to look at those and compare them pretty carefully to answer it in the level of deat the same time in which you've asked it. but i think that at the time the financial people were working very intensely with the fixed income people, to try to determine exposures in this area. this was an unprecedented time in which markets were crashing, and rating i can't that their view of what the exposure was two subprime

changed in that bit of time as these events happened. he was quoted from a presentation, and it sounds to me, just listening to what we read, that it was structured in such a way that the subprime exposure was x, but don't forget we have these other things. i would have to look very carefully at the comparisons you're making to be able to into the question in detail the way as to ask. >> let me just say it is on page one, this is called "risk- management review." the total subprime exposure markets was $13 billion, threatening the executive summary is read at the very top. the total subprime exposure was $13 billion with an additional $16 billion and additional super senior.

super senior and $20 billion in direct puts and par puts. >> mr. chairman, i don't remember the presentation, but i could give you what i suspect was the case if i may, and you can confirm this yourself. as i say, i don't remember the presentation, but it strikes me has understandable in the context of how those positions were then being seen, which is to say the $13 billion i would guess was subprime exposure below the aaa super seniors that we've now discussed a number of times and that that was viewed as subprime exposure, that the $43 billion, which is exactly the number that would've referred to as the super senior number, wasn't viewed as a subprime exposure, it was viewed as a aaa security. >> i will just note, you can -- i don't want to surprise you. i will have you look at the do you want. it's right up top, it's under

subprime. >> it may have been listed under subprime and again, i don't remember the meeting and the discussion and you certainly was not part the formulation of these documents, i think you can find out other ways exactly what these people were thinking, but my guess would be that they were viewed as two different classes of exposure. one being subprime exposure, and the other being, because of all the structuring, aaa super seniors. >> all right. let me do this. i may have one or two other questions, but i want to stop now and move on to the vice chair. thank you very much for your answers to these questions. mr. thomas. >> thank you, mr. chairperson. thank both of you for corporalling. we appreciate it. as you know, given our charge of trying to understand what happened so that we can convey to the american people what happened, is an exceedingly difficult and complex job in which we have a very short period of time. i want to ask you, we obviously

know more today than we did yesterday in this very narrow area and we're going to know more tomorrow. these hearings are not designed to be exhaustive, and if i ask you, if we had questions, not only relating to the topic that we have before us, but other concerns based upon you were position and experiences, some very in-depth, others very broad, would you be willing to respond in a timely way to written questions that we might submit to you between now and the end of our statutory journey? is that an appropriate -- >> i'm not sure how we could say no, vice chairman. so yeah. >> well, i don't understand how you can explain what you did and how you did it. but it's really easy, because all you do is say yes. >> the answer, mr. chairman, is

yes, we'd be delighted to. and that is -- and i will interpret -- >> that -- as part of your responsibility at citi -- >> i was expressing my view and mr. prince's view. >> could i have your view, mr. prince. >> i would be greatly pleased to do that. >> thank you very much. yesterday's panel, and we spent some time with mr. murray barnes, former managing director, independent risk officer of citigroup, david bushnell, as you mentioned, chief financial officer, and thomas maheras, the former chairman and co-chief executive officer, citi markets and banking. i woke up this morning, my alarm was set at 5:00 a.m., and i have my radio on c-span, and i woke up to the voice of brooksley

borne, the commissioner who was inquiring about, as we began our journey yesterday into this garden of good and evil, about synthetic cdo's, and what were they, and of course, if you listen to that discussion, it led in to commissioner byron gorgiou's trying to determine if you take a bunch of cdo's and slice them and dice them and turn them into aaa and super senior tranches that never were supposed to go bad and then i listen to commissioner wall wallison's excellent questioning of the panel leading us to a better understanding of these products that were created to be sold, which generated millions

of dollars, in some years, tens of millions of dollars, to then citi management on the way up, but never resulted at any time even in a dollar of claw back on the way down, so that i finally woke up real identitiesing that if i had a chance to start my life over, i may very well choose a different path. because apparently, you get to the top without ever having experienced any of these things that people underneath you do, you don't have a comprehension, you're not informed, but you get to make hall this money on the upside and there's no downside. you folks had an opportunity to submit written testimony, which you did. i don't believe, correct me,

mr. chairman, there's no limit on the pages of written testimony. >> not that i'm aware of. >> tears a limit on the verbal, which you can express as you see fit. so what we have in front of us is your written testimony that started with the blank sheet of paper, and that you were willing to inform us more or less. now, mr. prince, i'm looking on page 2, and you say in the middle of page 2, the patch work nature of state regulation of the origination of subprime indeed of all mortgages led in hindsight to the origination of more and poorer quality subprime assets to be securitized. was there requirement that they be securitized? >> well, i'm not sure i understand your question, mr. vice chairman. >> well, there was a demand, as

you say, a sentence above it, in dealing with this growth of securitized products, that you obviously, given your business, wanted to produce securitized assets that had low risk, and high yield. who wouldn't. to the point that you create so-called synthetic products. but it sounds like you're saying the fault was the state regulation of the origination of subprime because they gave us poor quality subprime assets to be securitized. you didn't have to do that. but you did. and please, we heard enough yesterday about you starting a line of argument that others, third parties, gave you assurance that they were ok, rating agencies, others. again, how do you get to the top

if you don't have any experience whatsoever or is your argument at that point you don't pay any attention to it? what do you get paid for if it isn't having some intuition, understanding, knowledge, or do you just do what everybody else is doing because everybody else is doing it and if you don't do it, then you won't make money? because i do think it's all about money. and it was big money. on the way up. but never at any point is it on the way back down. what i'm saying is that when we get this -- when i get and i'll speak for myself, this kind of an argument as to what happened in hindsight, it's listening to someone blame the inferior quality of lee they are in a pair of -- leather in a pair of shoes based on the feed that some person supplied, feeding the cattle that produced the leather.

i have to tell you, listening to the radio this morning, explain what it was that you did with products, makes it very, very difficult, not withstanding a beginning paragraph or two in which i do believe was sincere, in terms of your concern about what happened, but in this entire process, not one dollar of clawback. >> mr. rubin? >> well, there are a lot of pieces -- >> i have a question. >> i'm sorry. i apologize. >> that was a statement, but if anybody wants to turn it into a question, you can. you started with the blank sheet of paper as well. i do like the latter pages, where you go in to that analysis of some things that we need to work on. i think you've got some core stuff that i think we're all

talking about, and you know as well as i do, that when you talk about financial services legislation moving through the congress that committee jurisdictions limit what they can look at and it's going to be a long and difficult process. what i want to focus on is that for the first time in these hearings, someone has introduced of their own volition in the comments that they offered to commission some partisan comments. in one, two -- in the fourth paragraph, you state, it's important to remember that our national economic policies enormously affect all of us. for example, president clinton undertook deficit reduction and made critical public investments and those policies contributed to the longest economic expansion in american history. simply put, policy matters.

well, so does the truth. you came in at the beginning of the clinton administration, actually, before the president was sworn in in december of 1992 and the president was sworn in in january of 1993, and he became president with a democratic congress, and a democratic majority in the house of representatives. the house of representatives is that branch of the legislature, the national legislature, which in article i, section 8, has sole responsibility for the generation of revenue legislation. it is the place that controls the nation's purse strings. just before you were sworn in as secretary of the treasury,

january 11th, 1995, for your three years of experience as treasurer, on january 3, i was sworn in for the ninth time into the house of representatives and for the first time, in four decades, as part of a republican majority in the house of representatives. and so i guess, i'm a little personally concerned that if anybody looks at the election of november of 1944, it was over the tax and spend policies of the democratic administration and the democratic majority, principally those who controlled the purse strings in the house of representatives. and the american voters in that election just prior to your becoming treasurer rejected those policies, and developmented out as a majority those members of the democratic party. so if there was deficit reduction as a policy, and critical public investments for

six of the eight years of the clinton administration, three quarters of that administration's policy making, it was with a republican majority in the house of representatives that controls the purse strings, and you know the punch line, i was on the committee that controls the purse strings, and so i guess i'm a little concerned that the continued representation of what i would call a half truth, doesn't serve our needs today, and i know, this is a partisan statement surprisingly, that the fact that it became bipartisan to have to make public policy, i believe, worked to the benefit of the american people. there has been criticism by the

majority in the administration and the congress about the unilateral control of the presidency for a period of time by the republicans. i am concerned about the current return of structure of the current non-bipartisan arrangement. just as you are writing their and characteristically, given a little bit of credit, to the fact that prior to your signing in, union you were going to have to work with the house of representatives controlled by another party -- you knew that you were going to have to work with the house of representatives controlled by another party. and yes, the president signed it. but he would have nothing to sign if it had not been advanced by congress. it, but he would have had nothing to sign if it hadn't been advanced by a congress with

the house of representatives controlling the purse strings, republican by a republican majority. : >> in 1997 the republicans and democrats worked together in a bipartisan fashion. and the house of representatives for the reasons you described to arrive at a balanced budget

agreement, which carried forward the work that at least in my judgment began in 1993. so that would be my summary of that period. >> i appreciate it. mr. prince, i want you to comment, if you want, because i don't know you personally and i only knew you from, to a certain extent, a comet that has gotten far more coverage than it should have, if, in fact, you made it, and i assumed knowing the press on the reports of those things that occur. that you made it at some point about the business of, if they are playing the music, you have to dance. know you don't. now i understand they're probably would have been consequences, maybe somebody would have not continue to make tens of millions. that when you listen, i just have to commend everyone that the ideal, not the video, the

ideal of the title between the question of the commissioners and the answer from those people in citibank who are in a position to make up all these things and have knowledge, i understand you are at the top, but these were the people who were not. and the creations that you made arguably driven by the desire of markets and your job is to make markets, and your argument is, we didn't know, you didn't understand, had we known then. at some point, is it necessary, in your opinion, to create a structure which stops you from doing things? because i don't think any of us want to create that kind of a structure. requires you to what you are doing, i believe sunshine is a great disinfectant, that there is complained transparency, that you need third parties do have

an understanding of whether not they would buy it. more importantly, should you have to have money notwithstanding that you are capitalized under some regulations that were created prior to the environment that we were in. what probably, looking back, because you now have hindsight, would you have preferred that was comfortable to allow you to carry on your business, but nevertheless, i don't believe in simple imposing structure for the sake of controlling. i don't want to kill the goose that mostly laid golden eggs. he laid other eggs, but some of them were golden. and i think it's absolutely necessary. your point about national and international -- we can't go back. i'm very concerned that we address problems in the united states and we don't get a successful negotiated agreement internationally, which doesn't advance our need to control,

given the nature of your company in terms of its significant international involvement. what could have been done that would have made it possible for you to carry on aspects of business that makes sense, but would have limited, controlled, mitigated, what you want of doing? >> there's a lot there, if i may. let me just respond to the quote that you mentioned. >> the alleged quote that i read in the media because i never heard it. >> well, you were in japan that's what you didn't hear it directly. and i would appreciate the courtesy of quoting the entire quote. the entire quote started with a statement that when liquidity dried up the financial environment would become very complicated. but that as long as the music was playing you have to get up and dance. now, i think that reflects biggest just let me say i'm not

surprised that the entire quote was not printed, given my background and experience the. >> it actually was printed in many places. if i can just finish my answer. i think i've been quoted in secretary paulson's book. at about the same time as asking the regulators to impose limitations on the companies so they would not be engaging in some of these activities. i want to emphasize that this was about leveraged lending. it had nothing to do with the mortgage business. it had nothing to do with the ceo business. it had nothing to do with with the issues that we've been talking about here. but in terms of the quote itself, the quote itself related to the leveraged lending business. and i specifically asked the regulars if they would take action in regard to that. >> you started off your statement using the term you

wanted the regulars to impose? so you want them to stop you from dancing your can't you set up structures inside? or is it that you would fill than -- if you limited yourself, others would not and that's the origination of that was imposed on everyone because none of you can regulate herself in terms of creating these triple synthetic, bbb, aaa senior tranches that are never, ever going to go down to? >> for, you must have misunderstood the. i apologize. as i said this has nothing to do with the mortgage business. this have to do with the leveraged lending business. in the summer of 2007, the leveraged lending business, banks lending to private equity firms, was a matter of great topic, a matter of great discussion. and at that point in time, because interest rates had been so low for so long, the private equity firms were driving very hard bargains with the banks.

and at that point in time, the banks individually had no credibility to stop participating in this lending business. it was not credible for one institution to unilaterally to back away from this leveraged lending business. it was in that context that i suggested that all of us, we were all regulated entities, that the regulars had an interest in tightening up lending standards in the leveraged lending area. but again, i want to say for the third or fourth time, it had nothing at all to do with the mortgage business. >> thanks. in other words, you were going to be the limit that stopped and said i don't know if i want to keep walking. thanks. all right. ms. murren? >> thank you. thank you both for being here today. i want to follow on the threat

of that conversation, because you in many of the people who were here to testify yesterday have looted to the fact that they would not reward for growth, that they weren't rewarded for revenue growth or for earnings growth. that that was secondary in the way they were compensated. am i wrong? did i misunderstand that? >> i'm not sure who you are quoting from. >> did you not see earlier in your testimony that part of your major driving force in your compensation was not revenue growth? >> in my statement, commissioner, what i said was the risk function, the risk function was not compensated on revenue growth or profit growth. the risk function as an independent control function was not compensated based on business volumes. >> okay, thank you for that certification. that is logical. the follow-on to that would be, how do you then try to factor in risk into the way that you compensate all of your executives? and because what i hear and a little bit of this, you know, notion of if people are dancing

you need to dance too. is when you think about compensation, oftentimes people are rewarded because of the way they are compared to their industry. so then, it's very difficult for any manager in any position to be able to say no, we don't want to go in this business. because at the end of the year you'll be compared to entities perhaps that are growing, perhaps and. and i would like your comments perhaps on if there is a way that things might of been structured differently so those decisions would have been easier for people to make. >> that's a very thoughtful question. the compensation structure on wall street is one that many people criticized over the years. it is for traders, for bankers and so forth. compensation model that is based on revenue growth, not even profit growth. and a number of people over the years, warren buffett among them, has tried to change that,

compensation model on wall street. let me tell you, if i may, how compensation worked for me. i spent nearly 30 years with the citi and its predecessors, and over that period of time, certainly when i was an executive with the company, we were paid in fair amount in stock with the company. more than half of our pay was in common stock of the company. and for a period of time, we were required to hold 75% of the stocks we received. in other words, we couldn't cash it out. in my case, i held 100% of the stock, not the 75%. our rules also provided that you have to hold the stock as long as you were with the company. you could sell it when you left. in my case, i held the stock the entire time. as i sit here today, i hold virtually every share of stock i

acquired over a nearly 30 year career. and i have watched it go from $50 a share to $30 a share, to less than 1 dollar a share. so in my case, i think my interest were a line 100% with stockholders. i watched the great majority of my personal net worth, built up over 30 years, disappeared. because my company suffered from these problems. now, i can't speak for others. i can't speak for whether other people cashed out. but i think a model that requires you to have that kind of alignment with the stockholders is a good one. >> it is good in certain respects, but i would guess that you would agree there are certain elements about that would also themselves in courage risk-taking. for example, when you look at the expectations and that wall street expectations play out in the crisis of equity in particular, they typically are related very directly to revenue

and profit growth, returns on equity which by definition mean you'll want to lever up. so then, is there -- perhaps this isn't the time to discuss it, but my point simply is the risk itself and the assumption of liability was not necessarily the norm and how people's compensation was determined that there were people that cashed out that there were people who actually cashed pay was substantial enough to accommodate any declines in the stock price, should they occur. so i think it would be fair to say that there is, in my view perhaps, some greater emphasis on growth than perhaps is healthy at the corporate level. we do not agree? >> well, clearly you can't overstate the need for risk assessments in running a business. but i want to emphasize, if i may, the cdo positions that we are talking about were not put

on the books by people who were trying to take on more risk. they thought you were mistaken, but they thought they were taking on little or no risk. so very clearly from the commission's standpoint, the notion of making sure that risk considerations are embedded in the operation of a business is absolutely a high criteria. i grant you that. but i think it is a more complicated issue in this case, because of the folks involved did not think they were reaching a risk and point. so risk parameters were not violated. now in hindsight, it's been or will. i accept that. but at the time on a prescriptive basis going forward as the commission needs to struggle with, the notion of having

>> financial services sector is uniquely complex, and has a regulatory structure that is designed to help companies in this instance because of focused regulation, the minister of systems of risk. i am interested in your comment, the notion that you were in a position, both of you i guess, to have people service problems to you as they occurred. is it fair to say that you and the regulators that oversee your business to ensure safety and soundness should have been asking direct questions? i would be interested in your descriptions of your interaction with the various regulatory agencies, and to what extent you felt they were asking the right questions at the right time? >> i may have slightly

misspoken. . . have slightly missed david -- i made slightly misspoken or there may have been a misunderstanding. i didn't say i was in a particular position. what i said was a board cannot know what's in a position books of a financial service firm. i've been on three public boards, two or nonfinancial sector and that was true there too. you're not going to know on a granular level what's happening in the business. so what you need to do, what the board needs to and i believe citigroup did come put strong people in about position. then what you are depending on as those people and a whole set of checks and balances, auditor, legal counsel and the rest. that was what i had alluded to. spirit in any instance of citigroup, observers would say that that was not present, that the intercommunication's necessary for that to work effectively worked there. the infrastructure wasn't there properly allocated and properly executed for risk management.

but you have said that this isn't true, given the outcome, do you think there was a way for you to have done that better and do you think the regulators should have noted that more strongly in what they didn't? >> i don't agree with -- i don't think that's right, commissioner, in terms of the process is not being there. we have board meetings i guess roughly speaking once every month or thereabouts. and independent risk management people reported both to the audit committee and to the board, certainly in writing and very often verbally. and i think we had very robust processes around reporting this, as mr. prince said. in the instant that we're talking to a particular set of estimates, these aaa instruments that simply weren't used and i think given the way aaa had been viewed the entire time, the many decades i was in the industry. >> we are not talking about processes. >> i think the processes were very strong.

you had a very well regarded head of risk management. you had i think something like 2500 people or thereabouts who work in this area. and they represent the audit committee and to the board at every meeting. >> so let's talk about the regulars for a second that your interactions with them. do you feel that they asked the right questions at the right times? do you feel your interactions with him were the kinds of things that would support every agency feeding back to the federal reserve without the safety and soundness of your enterprise? do you think that work effectively? >> commissioner, i was not personally involved given my role in institution which i described in my statement, i was not involved in the interaction between the company and the regulators so i can't answer that. >> mr. prince? >> i was, and commissioner, i would describe it as follows. the regulators were embedded in the organization. that is to say, they were representatives of the regulators, the various regulators, who had offices in our building and who worked there on a daily basis.

in addition to that, our various staff functions, the risk function, the audit function, the legal function, would meet with irregulars on a periodic basis. and without knowing every meeting, my guess is it was at least once a month. i would personally meet with regulators on a frequent basis, at least once a quarter. sometimes on a private basis. i think that what happened here is that the regulators also a ms. took the ultimate safety of these cdo positions. i don't think it was a situation where the regulators were not active. it certainly felt active from the company's standpoint. i don't think he was a situation where the regulators didn't know what was going on. as i said, they lead with is a day by day by day. i think that the mistake that was made by everyone about the

value of these instruments was fundamentally also made by the regulators. and i think that's basically what happened. i don't think it was a failure of regulatory involvement with the company. >> thank you. that's it. >> thank you very much, ms. murren. mr. wallison. >> thank you, mr. chairman. let me start with you, mr. prince. i want to thank both of you for coming to this, and answering our questions. let me start with you though, mr. prince. you talked about -- >> mr. wallison, paul the mic a little closer to you i think for everyone so we can hear your voice. easy for me to say. >> sorry about that. mr. prince, you talk about a 30% decline in housing prices completely unprecedented.

and you talked about it as though it was kind of the common talk today like a black swan, it just sort of happened. had you considered why it happened? have you given any thought to that? and if you have, would you describe to us what you're thinking is? >> well, i have given that thought as you would imagine. i know that for a period of time before the financial crisis, david bushnell would say, you know, our stressed testing is ask or why -- x. or y., and we would have to have a decline of x. or y. and we haven't had that since the great depression. and i have thought about why, in this time period, we had such a huge decline. how could that be the case? i'm certainly not an in depth

expert on the mortgage market, but my guess is that the period of time before the crisis in which home prices appreciated so much, and in which so much expansion of lending occurred, could be seen as a bubble period in housing, as well as other things. so that if you were to draw a trendline that would go up a number of degrees, that because of the easy money, and other factors, that trendline in housing would have accelerated very quickly. so instead of going up at a steady incline, it went up at a rapid incline. and i think that coming back down on the other side of that is the 30% kind of number that

we see. so the decline is a function. >> we have had bubbles before. we have had perhaps not quite as large swing. this was a very large bubble, but we have had them before. but when they deflated, the mortgage failures as probably mr. bushnell told you, were not substantial. it was certainly not 30%. it was early not a 30% decline in housing values. were you aware, for example, that in this particular bubble, 26 million -- 27 million really, mortgages were subprime or alt-a? that is to say, they were ready to fail as soon as the bubble deflated. now, when asked mr. bushnell that yesterday, he was not aware of it. i asked other people at the table yesterday whether they

were aware of it, and they were not aware of it. when alan greenspan testified, however, he mentioned there were 12 million mortgages that were made by fannie mae and freddie mac, that were not reported as alt-a or subprime by them. so people were not aware that a very substantial number, almost half, of all the bad mortgages in the economy at that time were made by fannie and freddie and were either guaranteed by them or on their books. now, would it make it somewhat clear to you why this happened, why we had a 30% decline in housing prices if you understood or new at the time that so many other mortgages, half of all mortgages in our financial system, were of poor quality? >> well, commissioner, it's hard to put yourself back mentally at that time frame. after all, that's happened, the

events of the last couple of years calling one's thinking. it's hard now to think of a subprime loan as not being a quote bad loan. but i'm not sure that wasn't the case at the time. i'm not sure that, from a policy standpoint, from a lending standpoint, subprime loans were necessarily equate to bad loans. >> i'm really very happy that you said that because that is exactly right, and that's the point i think i would like everyone to understand. most people were very proud of the fact, especially here in this building, and elsewhere in washington, we're very proud of the fact that subprime loans were being made, and the homeownership rate in this country was going up during this period. now, when it turns out that these mortgages failed and caused, i believe, at least there are indicatioindications that because the financial

crisis, and we want is running away from it and trying to point fingers at who made these loans. but we have to remember that 64%, there was a 64% homeownership rate in 1994, but by 2005, and i'm talking about two administrations are, the clinton administration and the bush administration, it has gone up to 69%. and everyone was very proud of this. so i think we have to look at this as a question of government policy, not a question of casting blame on people who happen to be involved at the time. let me go to one other subject. the national community reinvestment coalition says in their annual report in 2007, that over four and a half trillion dollars in cra, that is community reinvestment act, commitments were made by banks in connection with efforts to get approvals from regulators for mergers.

you were much involved, i think, in this as the general counsel as citi for a while. and citi's commitment, if i recall the number currently, was something like $500 million, somewhere between $40,500,000,000,000. are you familiar with the fact that these commitments were made in connection with applications to the fed, or to another regular for approval of a merger of? >> that's a long time ago. but i would say in a general sense, yes. >> and while you're at citi, there were another is that these commitments were being met. that is to say, that they were made and that these loans had actually been made in order to provide financing for people to buy homes. were they, in fact, made? >> well, commissioner, i'm confident that the commitments

that the company made in the cra area were fulfilled. yes. i don't know the details, but i'm absolute confident that we would make these loans and we didn't. >> and the announcements were valid. the loans were actually made, okay. just one more question for you, and that has to do with the fact that you talked about the downgrade by the rating agencies as being precipitous and causing tremendous turmoil in the market. but the downgrade really haven't won a fact, and that is it was an accounting effect, wasn't it? that is to say, once the downgrade occurred, then it became necessary for financial institutions that held these mortgages to write them down in some way, or take losses on their balance sheets. i'd just like your views on this whole question of fair value

accounting and mark to market accounting, and the way the accounting rules operated to have an effect on the financial crisis. >> well, that's a very broad topic, and i'm sure you could have days of hearings just a mark to market accounting. >> i hope we will. >> i wish you well in that. [laughter] >> rollcall. and i hope i'm not here for it. but my basic view on that is that the debate on mark to market accounting i think is a false debate. the debate on mark to market accounting is either a all mark to market accounting or it should be no mark to market accounting. and by defining the debate that way, it becomes a very artificial discussion. in almost every area that we live in, there are moderating factors. if the stock market has a big down day it has stopped limits in it. if the company's pension plan is

underfunded, you can find it over a number of years. et cetera, et cetera et cetera. there are very f there's no question that the mark to market accounting is not associated with the cash flow of these instruments. there's no question of that. >> right. >> and it is entirely possible that at some point in the future, people will make a lot of money from these instruments because they will pay out. but again, the debate now isn't about those kind of issues. the debate is have to have mark to market accounts as a theoretical purity or we don't, and i thick think that is a false debate. >> thank you for that answer. mr. rubin, almost everyone who has come before our commission has testified that the high levels of delinquency and

qualities after the burt of the bubble in 2007 was one of the primary cause of the financial crisis. it was the deterioration, indeed, of these subprime loans that caused the c.d.o. problem that you are so well aware of. >> well, it was a question of how much i was going to list. >> you listed a dozen items. >> you're right, but i guess what i was thinking, what you said is factually correct. what i did was to list the factors that led to the subprime foreclosure rates rather than list the subprime foreclosure

rates themselves. i refer to overleveraging consumers. i referred to access lending by lenders. i referred if i remember correctly to regular problems, and i refer to the excesses and abuses in mortgage extension. it was that combination of factors that lead, or at least contribute greatly, to the problems of subprime. you're correct i could sit and all that led to the problems in subprime. i instead refer to the fact rather than to that particular consequence of the problems. >> when you were secretary of the treasury, do you recall the housing policies of the clinton administration and a strong effort to increase homeownership by increasing the credit available to moderate and low income borrowers? >> yes, i do spirit and those i said you felt were successful at the time he? i did indeed. >> and so you support those policies the? i did. >> between 1994 and 2005, as i mentioned before, the homeownership rate in the united states increased substantially.

would -- at the time, everyone was very pleased about this, as i mentioned. would you have gone to conferences at that point, understanding what you know now, and sent to congress we have to stop this subprime and alt-a lending, because sometime in the future it is going to cause a tremendous problems. would you have gone to as secretary of the treasury and done that? >> no. if i may, give you my view of that because i think you're raising a very, very important question. i believe the cra serve a very valuable purposes in making credit available to those who would otherwise not have access to credit, particularly inner-city to once again mentioned the list, is because it relates, the exact extent i think has given me some sense of this issue. what i think we do need and need very badly, i don't think the problem lies in c. or a and i

think it is important to subprime credit available. i think what our problem lies is that it is clear now that we've had this experience that there were excesses and abuses, and substantial excesses and abuses. so i think we need to continue with the cra. i think we continue to need and i think very important to make credit available in inner citi's and corresponding distressed rural areas. but i do think we need very strong consumer protection. because then you can get at the excesses and abuses of the problem. i think at least two respects, if i may, commissioner, i think speed if i can get more time. go ahead. >> i think we need effective disclosure but i think there are some instruments that are susceptible to abuse anything serious consideration to be hidden borrowing -- barring those estimates. >> cra is not the problem. but fannie mae and freddie mac have come on their balance sheet, had on the balance sheet in 2008, have on the balance

sheet probably today about 12 million subprime and alt-a loans that we didn't even really understand were on their balance sheet before they disclose it in 2009. that is one of the reasons we have this problem. did you ever attempt, when you were secretary of the treasury, to rein in the kinds of things that fannie and freddie were doing at that time? >> commissioner, at the time -- let me give you two responses to that if i may. if we have serious consumer protection put in place than the kinds of zones that you are referring to is, in fact, they are the consequences of excesses and abuses will no longer hopefully no longer exist, and the subprime loans or mortgages, if you will, on the books of fannie and freddie will be sound or at least problematically sound loves. >> mr. chairman, i would yield

the commission an additional five minutes. >> okay. when i was in treasury, we had concerns about fannie and freddie. every particularly had concerns about the very large organizations operating with the implicit guarantee of the federal government. and the deputy treasury secretary at the time, larry summers, was that my successor got involved with the issue. i was not personally that is all but he was very involved in focusing on those issues are. >> what would be your idea of a loan that would enhance the ability of low and middle income people to buy homes and affordable housing loan as an and freddie were required to make it, that would be a sound loan? i mean, if you are going to require organizations as fannie and freddie were required to make certain kinds of loans, how can you then say at the same

time, if we regulated these loans, they would be sound loans rather than the kind of zones that they seem to have made? well, i'm not expert on mortgage extension that i think what, this is a fight more time to think about i could give him or copperheads if response. but i think what i would do in part, consumer protection more generally not just with respect to fannie and freddie as i would have suitability requirements so that loans could only be extended to people who were thought to have the means because of their employment, taxes, whatever else, to constitute a sound borrowers. and as i said a moment ago i think there probably are certain instruments i would prohibit. if it were practical, and i think it may not be financially practical to do this, i do think it would be very important have some kind of counseling available to low income borrowers. because i think too often borrowers in a position, i have seen a lot of this, i think very

often low income borrowers really are not adequately equipped to make the decisions they need to make. but that may not be practical so i have suitability requirements. i would probably bar certain insurance and i would have disclosure done in such a way that it was readily accessible. >> and i assume down payments? >> oh, i would actually have adequate down payments. >> thank you very much. >> mr. chairman, might i briefly correct the record? staff is indicated to me in my opening remarks that i said that republicans gained a majority in the house of representatives and 1944. no matter how much that might be wished, it is true. it was 1994. i want the record to reflect that.

>> mr. georgio. >> thank you, mr. chairman. as they say, imitation is the sincerest form of flattery. and recognizing that the chair and vice chair have stolen some of my thunder regarding the collateralized debt obligation problem that i still feel compelled to return to it briefly, with both of you if i can. for at least two reasons. one is that citi wrote off more than 30 billion of the 43 billion that you had on the books, which was roughly a third of the capital that the whole bank had at the time. and second, because i think it is emblematic of something that went seriously wrong in our system that everybody believed was impossible. i mean, yesterday we had a panel of your underlings, if you will, who were very serious high ranking people within the bank, who sat there for them. mr. myers, bush know and bars. and they all made a lot of money

in one instance almost $100 million in the course of the three years before all the troubles hit it at citi. and notwithstanding that, notwithstanding their respective responsibilities originate these ceos, supervising the risk associate with them and all the other aspects of their responsibilities, all of them essentially said that this was inconceivable, unknowable, could not have happened, everybody thought it didn't happen, every other institution who was dealing with them at, had the same deal. and so we were hit with this calamity which nobody could have anticipated. and it seems to me that yesterday i likened it to the medieval, and today as i study it more, i'm beginning to believe that maybe it was hallucinatory. and this is something that i think really deserves exploration, because if you look at the fundamentals, it belies

logic. that's not to say that there were a lot of people who believed it, but i just want to focus your attention on it yet one more time, if i can. these rmbs securitizations that occurred resulted, and this is out of a goldman sachs analysis, you know, a post talking outs is basically that 75% of the tranches were aaa, 10% aa, 8% eight, 5% bbb and 2% equity. and the underlying rmbs. so the bbb tranches were at the bottom 7% of the tranches in the underlying securities. now, they take all the bbb tranches out of all these underlying rmbs and slice and dice him. and what you get in the collateralized debt obligation is 60% of something that is characterized to be aaa

supersenior tranches, 20% aaa, 6% aa, 5% a, and only 2% bbb, 2% bb and 5% equity. so suddenly you have taken what was the bottom of 7% of the underlying security, and made it, you know, 90% of it, more than 90% of the above a rated. and it strikes me that the fact that everybody believed this, regulators, mr. prince, you mention in your testimony, nobody questioned this, is highly troubling. because at the end of the day, this was the most significant single matter that impacted your books, and it certainly impacted the books of the thought of other financial institutions. so and i guess there is a comment that was given to us by a former senior staff member from the federal reserve who warned us that the quote,

species accuracy of complicated financial models should not be trusted. and basically, these models, presumably somebody was modeling this, and somebody believe in a modeling that resulted in these analyses, that is, the underwriting people at your shops, the credit rating agencies, the regulators to the extent that they be evaluated this, but we now know that everybody was horribly wrong to the tune of over a third of your capital. so, how do we address these kinds of dilemmas, i guess is what i would put to you? and maybe, mr. prince, you could respond to that briefly. >> well, i think you have stated it quite well. in hindsight, it's very hard to see how these structured products could have been accepted in the way they were accepted. i think that on a going forward

basis, if i can say so, the commission needs to think about the next issue. in other words, it's very unlikely that structured products are going to be a problem for anyone in our lifetimes. those are not likely to be accepted in the same way. >> thankfully. >> and the question really is, how could an industry, how could the control processes for an industry have missed something so universally? and how do you protect the next one? and i don't know what the answer is to that. i don't know whether the nex but hopefully part of the commission's effort will be try to examine why and how people as smart and with as much experience as a tom maharris,

and david bushnell, how all of them could have had what turned out to be a false belief about these instruments. >> thank you. mr. rubin? >> would you yield briefly? yes. >> this is on my 0 time. you are amazed that these products were accepted. my assumption is that wasn't meant in the context of something being offered and sthen something being accepted. you were surprised that people bought them in terms of the accepted aspect or that they were accepted as a product that would be worthwhile? because obviously you can't accept it unless it is offered. >> i was referring to the latter, mr. vice chairman. >> thank you. >> thank you. mr. rubin? >> commissioner, i would

respond to that very thoughtful question the following way. i have been involved in financial markets for about fourth-something years, and i can remember when the black and sholes models first came into prominence as a way to measure option volatility. of measuring option volatility. and we actually hired fisher black who've had he lived, had won a nobel prize because his codevelopers of that did. and long conversations with fisher about how to think about models. and a problem with all models come and it's one reason i made the suggested i do with respect to leveraged constraints, is that they are no better than the information you feed into them. and in this case, the information that was fed into them, and one reason what commissioner born is right about derivative regulation, though i would add margin capital requirements to be substantially increased as part. the information that a state

into them is usually 10 or 20 years of history may be. and in this instance, and i think the great lesson of this crisis is that the downside of the financial markets turn out not to be reflected at the expense of the last 10, 20, 30 or even 40 years. but rather to be far greater than that and far greater than anybody had thought. and i think the one thing that could have made enormous difference here is if there had been a recognition, although there were virtually almost no recognition of this, including by myself, that the real potential downside of our system on the stress conditions would not reflect any expense the last some decade, but rather was far worse. and i think as you all go forward, it seems to me that we need to do in both the private sector and the public sector is to have changes in reforms that reflect what is not a new understanding of the downside risk of our system.

>> okay. let me try to keep the focus on you folks were just a minute here, because you know, some people saw this. i'm not saying that you need to be as prescient as they were. but there is a famous december of '06 meeting that david, the ceo of goldman sachs had when they lost money for 10 days in a row. they have a trigger which you may know about when you lose money in a particular trade, for 10 days in a row you at least call a meeting. and they did, and they analyze this and they basically shifted their position to sort of offload some of their exposure to the mortgage markets, and, of course, people like paulson, you know, maybe $50 million betting against the subprime market on the hedge fund side. but mr. rubin, i'm trying to focus on you, you had a whole history at goldman sachs. and yet, careening into '07, if you will, citi made a number of

other bats that seems to me to have been in retrospect further putting you in jeopardy in this regard. i mean, you bought argent, ameriquest platform in february of '07. and were continuing essentially to advance your exposure in this regard. and let me just point out one other. in july of '07 you actually start to buy back, having to exercise the liquidity puts to bring the cdo back onto your balance sheet your balance sheet where they had been off-balance sheet. and both of you testified that it wasn't until something like october of '07 that it came to your attention. well, that seems awfully late. and maybe had given any position a position to note earlier, you might have taken some action to protect the balance sheet of the citi in the meantime. so, mr. rubin, could you respond to that?

>> if i may come you are correct commissioner, there were some people, there were some hedge fund managers, paulson was one that i think of her others. who did see this complete picture. i can't think -- i can't speak to what david saw. if you look at the various activities there engaged in, as well as these areas i think it bears us out, really saw the potential for the kind of prices that we had. in terms of the purchase back of put, at that point i wasn't aware of it and i think a testified, i know i said this in my statement, i wasn't aware of his 43 million-dollar exposure and to i think was september or there about. so those activity that was taking place in the business at a level that he just wouldn't say if you were on a board. and those positions were taken back pursuant to the poets because the market had, by instead, it basically had frozen. >> you couldn't sell them. they couldn't sell them.

but wouldn't that, wasn't that a signal to somebody question that didn't have anything to somebody that your exposure was dramatically increasing by having to take these back? >> well, let me just, if i may. you are correct. at least as i understand it, although i wasn't aware of it at the time, they had to buy back those tranches because the markets had fundamentally become frozen. >> but this is way earlier. this is almost, it's more than a year before leaving failed. nine before bear stearns, if i were correctly, july of '07. >> about three months before we became aware of these aaa positions. but they still believed, as i is dan and i think in good faith, as did the universe in general almost, with very few exceptions as you correctly say, that these were aaa security, the risk were minimum and them market would

clarify in time and would begin to function again. >> right. okay, yesterday we heard from -- well, let me actually ask you about one other question. i recall, it might memory serves, you had either missed your thanksgiving dinner i had to give up from a thanks giving there in november of 2007 to raise seven and a half billion dollars in capital from the i would be investment authority and i guess obviously you need that capital at that time. would have been possible for you to have raise more capital for citi either then or prior to then that might have avoided that taxpayers having to bail out citi at the time? now i recognize it was expensive capital. i get points plus 11% was really a hard money loan, and certain characterizations. but could you speak to the capital requirements? because dr. greenspan yesterday said that one of the things that he would not recommend, even

though he basically didn't take much responsibility for this, but he did suggest that on the go forward bases there are to be a whole lot more capital and a whole lot more liquidity required of these large financial institutions in order to avoid the risk that taxpayers will have to bail them out and if you get. >> and as you know for my statement i agree with dr. greenspan's position. i think it should be increased. my recollection, commissioner, is at that time which was shortly after our new ceo -- >> i'm struck of those when i was chairman, that was, we try to raise i think i'm right in this. you better ask others to confirm this but my recollection is we raise as much capital as we could in that period of time. i don't think there was the opportunity to raise more capital, although as i say,

there will be others who remember that better than i. >> your point is extended well taken. from that point forward, we had a highly proactive focus on raising private capital. and ultimately raise some numbers of tens of billions, although i don't remember the exact about during this period of difficulty for citi. but, of course, by that time the capital is hard to raise and more expected to raise, right? >> i don't think we ever -- again, there were others, commissioner, to have a better recollection of this than i do. but i don't think we ever held back because of price, at least not as far as i can recollect. >> mr. prince, if i could please. thank you. mr. prince, from '06 '07, this is referring back to the dance metaphor there, citi increased its leveraged loan exposure limit from 35 quadrillion, to 100 billion. if you are at all concerned about this business, how can you allow the limits to be tripled

during that period of? >> leveraged lending, commissioner, is a business of lending money to private equity firms and so forth for them to conduct their activities. it was widely reported in the press at the time that the private equity firms were driving very hard bargains with the banks. they were insisting on no mac clauses and payment in kind interest and so forth and so on. my belief in and my belief now is that one from in this business cannot unilaterally withdraw from the business and maintain its ability to conduct business in the future. running a security business is a lot like running a baseball team. where none of the players have contracts. and people can lead any day and go to another team. and if you are not engaged in business, people leave the

institution. and so it is impossible, in my view, in the leveraged lending business for you to say to your bankers, we're just not going to participate in the business for the next year or so, until things become a little more rational. you can't do that. and expect that you will have any people left to conduct business in the future. >> okay. if i could, just one more minute. there are several issues it seems to me that if we, i'm going to ask him and if we don't get a chance to answer them, i would ask you to try to respond in writing because there has been a lot of discussion about a whole variety of forms of arbitrage, which were engaged in by the principal financial institutions that are coming before us. regulatory arbitrage to the extent that smart lawyers try to structure things in a way to

yield the least restrictive regulatory process. capital arbitrage, very important in that people move things off balance sheet so that you don't have to hold capital against them, or you hold them in your trading desk where one of the fed employees that we interviewed said that if you hold the trading assets, the capital requirements are so little on those that are basically holding 750 or 800 to one left on the. so there is a lot different ways that very smart people who work for these institutions are able to avoid what it seems to me was one of the main glaring failures of our system in that insufficient capital, insufficient money was being put where their mouth was by these institutions, and being held to cushion yourselves against the risk. could you speak briefly to that? i know we don't have a lot of time. but, mr. prince? >> i think, commissioner, with

respect to that question is important enough and detailed enough that i would prefer to respond -- >> that would be fine. mr. rubenstein? i agree with chuck that a written response would be up early. i would make one show, if i may. i think one of the challenges of those who are engaged in a financial reform effort will face is the very technical -- a technicality of the problem, and i think the kinds of loopholes, the polls may be the wrong war. but the kinds of issues you have identified do need to be addressed in terms of increasing constraints on leverage that and i think that should hopefully we will be part of this process. but however you do it, i have been around as a long time, there'll always be people seeking to get, find ways around the. >> there's no question about it. >> but there could be some things done, and one thought is maybe you should a principle of the total amount of capital required for a pool of assets

should be the same after a securitization is before. you know, that you ought not to be able to transfer assets off balance sheet and end up with a circumstance where you don't have to hold any capital against them, particularly in circumstances where they may have to come back. and, you know, it's been pointed out to me that 50% of the mortgages that you held were off balance sheet in 2007, and 58% in 2008. now i know there is some new balance sheet requirements that have come in that may require you to bring some of them back on. but somebody believed that it was in the sfws of the organization in some capacity, i don't know what capacity, less capital, less visibility, who knows? but you moves a lot of assets off balance sheets, and you are not alone in that regard. it seems to me for transappearance and clarity, that needs to be addressed rmplets >> can i take one second? >> sure. >> you have identified a very

important problem. on the other hand, it is that securityization as long as it is on a sound basis that is important to our economic system. you need securityization that doesn't lead to problems. >> i know i am past my time. >> way past. >> let me say one thing. one idea that has been floated about is to have you take some risks in connection with the securities. maybe you need to hold them. greenspan said it in his prior testimony. maybe you need to hold them and align with the investor some portion of it so that your dig generals is appropriately incentivized to be sound. >> i yielded you a couple of minutes out of my time. just one note for commission members. according to our staff, this is just an estimate, but of the $51 billion in losses related

to sprimet exposure, close to $11 billion appeared the bank, and some forty-plus were in the non-bank, just for the numbers. >> thank you, mr. chairman. let me begin with apologies. due to the vagaries of travel i was late. that was not my intention. and that also because of prior commitment i was unable to hear the testimony yesterday of citi. to the extent i am less than perfectly informed, i apologize in advance. a advance. mr. dugan i did want to pick up on something. you said no one could have been foreseen this crisis. that was a universally held belief. i think the important thing is recognize, the question is not

foreseen the crisis, could have foreseen the spark that lit the crisis, which is the poor standards in underwriting, the poor assessment of risks associated with mortgages, the inadequate hedging and principal against that. if that's done, there is no crisis. in light of the fact that we've had housing crisis, the savings loan crisis that you are familiar and many are with the activities of fannie mae and freddy mac and identified them as a risk. in your experience, we've seen crisis in mexico, thailand, far east, wouldn't there be grounds to be a little suspicious at some point? >> that's a good question. i didn't say that no one could have foreseen it, i think some people did. what i said that very few people foresaw the full combination. and clearly. >> they didn't need to. the point is they didn't need to.

they needed to see the mortgage piece. >> well, you know, i'm not so sure about that. it seems to me that what you had -- and i said it in my opening statement, you had a large combinations of forces that come together. i at least thing in the discussion that one can can have -- i think that a few of those that occurred, you would have had a very different experience. i think was the extraordinary combination of factors coming together. you could say well, you could see some of theses. why didn't you suggest that could be a problem. as i said in my opening statement, i did worry about excesses, and talked about it in speeches, what i didn't see, and virtually nobody saw, it it wasn't only the excesses but so many other factors coming together at the same time. i think it's that combination that led to the crisis. it's interesting. i know you've been around these for a long time too. as long as we have had capital market, we've had crises. you look back and you look back

and say these were obviously warning signs. but they are not obviously at the time. they are only obviously in hindsight. i personally think that unfortunately, market-based systems, which i believe in strongly, will have periodic down cycles. not like the one we just faced. that's what i think is important. >> in your testimony you did talk about your low rates reaching for yield. one way to interpret that is many people, citi included, were increasingly boring at very short term and lending longer to take advantage of the steep yield curve. my question is did citi create a structure which was in light of the way the yield curve shifted too depend on a steep yield curve to survive the change in rates? >> well, i actually saw something different. i'm not sure i understand the question. across the financial world, not

just in this country, but around the global, there was a carry trade. which are what you are referring to, i think. >> well, in particular, just your off-balance-sheet activities, funding things that very short maturities to make money at the longer maturities and reach yield. that is something that came too much of the business model across citi? >> well, that's a good question. and i don't know that -- i would say in retrospect not just as citi, i'm just repeating myself, but across the entire financial system there was a dependence -- i shouldn't say dependence, but there was a great deal of this kind of a carry trade going on. i met on my statement something slightly different. the massive influx of capital from abroad that caused the bond market to be lower than they would have. that was very centrally involved, as you know well, i know your background, mortgage

yields tend to be the function of tenure. that's what my reference was to. >> one the risk is interest rate risk. the question becomes risk management. you said very clearly, you cannot over state the need for risk assessment in running your business. as i understand it, one of your capacities was managerial advice, that strikes me central to both of your portfolios, i just want to review some the things, at least the preparation for this hearing reveals. on march 29, 2004, the fixed income derivatives of citi bank, which included the business cdos, including that quote the quality of risk management is less than satisfactory. and that report was transmitted to citi bank some six months later. certain cdo tranches, supersenior positions continue to pose risk management challenges. obviously, citi had the chance

to respond to that. you seem to place a lot of reliance on the credit rating agencies. how much reliance was placed on the rating agencies, from each of you? >> well, commissioner, with respect, the position that is are involved weren't known to me and i think to bob until september, october. so, of '07. >> so you don't know. >> you asked how much did we? >> how much did citi? >> i don't know the answer to that. david bushnell was here yesterday. i think he would have been the proper one to answer that question. >> mr. robert rubin? >> yeah, i'll identify with something that chuck said. i'll add one penalty if i may. both of us learned about --

well, i'll speak for myself, i think it was also true of chuck, we learned about this in the fall of '07, and clearly, -- i remember that initial -- when i initially heard about it. and i had a reaction which is in my statement. you'll see it there. to the effect that if you are engaged in arbitrage kind of business and probably caused me to think that way because of my background, the other side of that transaction is to completely dispose of the risk. but the people who were running the businesses reply. and i think the reply was totally understandable, these were triple a securities, and that was all triple a securities had been seen in the time i've been in the business. i would say from their response that they were very much relying on those aaa rating. although i also understand and i don't know where i know this from, but david bushnell's people did enormous amount of

independent analysis as well. i believe that's where i saw the number, they had calculated one in 10,000 probability of the default. >> so you are both comfortable, it's fair to say that citi had adequate supplement risk assessment -- >> excuse me? >> adequate supplement risk assessment on top of the credit agencies. >> i think you need to go -- >> you were his superior, were you satisfied? >> i think david who i knew well was knowledgeable and capable -- >> is this a yes? >> this is a -- yes. >> mr. prince? >> i had great confidence in david bushnell before this and i have great confidence in him now. i would trust his judgment on how this best should have been run. >> you felt the internal processes, while you weren't aware of the details of the assessment of the risk, the

internal processes thinged appropriately. >> correct. >> in the occ examine of citi bank that ended december 31, 2007, it's stated that traditionally the board have been provided limited information on the risk impacting this entity. consequently, they had been unable to become fully familiar with the risk assumed in the bank. in light of that assessment by a key regulator, are you still happy with the fact that the company is proud of -- this is your response. the company is proud of the processes at the world and bank level. do you still feel there's a reasonable basis for citi bank to be proud? >> i'm sorry. >> prior to the answer, 5 minutes additional. >> thank you. >> i'm sorry, what's the date of that report? >> december 31, 2007, for the year ending 2007. >> that was after i left. i haven't seen that or the company's response to it. but i think it's -- i think it's world noting that the

regulators, including the fed were involved in the company throughout this entire period -- the fed saw everything that went to the board of directors at every meeting. and if they felt that the processes relating to the board were inadequate, it probably useful for them to raise it at an early point in time. >> mr. robert rubin? >> i think that -- and i'm repeating what i said earlier, that david bushnell was extremely well qualified for his job and i don't have any doubt that they act in good faith deciding what needs to be brought to the board. i think they had good processes. i think that after the fact, well, let me add one more thing if i may, because it's

important. i think in terms of the facts at the time that those positions were taken, they were evaluating them and making positions to retain them, rather than dispose of them. they saw aaa securities, and de minimus risk opinion these securities had a very different look. i think in evaluating whether they did what they needed to do in terms of bringing issues to the board's attention, you have to evaluate them at term and what was responsible for them to do at time. my judgment would be that they acted in good faith and did what they felt was appropriate. >> the fed at the same time, this is the report of the senior supervisors meeting which had participates from the federal reserve bank, board, office of

the stroll, and japan's fsa, and the fsa, felt that poor communication across all business lined created silos that senior management did not fully appreciate the market risk or of the retained supersenior cdo positions. and that management founded the balance sheet and risk management was not adequately enforced. so in both the measurement of risk and conveyance of risk, the same regulators who you place such great faith appeared to be inadequate. are you still satisfied with the metrics and the conveyance of the assessed risk? >> that report that you just read, it was dated when? >> this was date november 19, 2007. >> can i add -- >> mr. holtz-eakin was flying

in. this was the meeting that robert rubin attended, part of david bushnell was there earlier. >> i think you have to distinguish, it's very important point. i'd like to spend a moment if i may. >> yes. >> i spent a career evaluating trade operations in goldman sachs when i was running it and corunning it and so forth. and the challenge always was to try to figure out whether people had academied i think the report you need to read is not the one you just read. they knew what had happened. i think you need to look at the reports before they knew what had happened so you would know what they felt -- >> please continue. our apologies. >> you did nothing wrong. we did. >> i apologize. i think what one needs to do is

to look back at the reports that were issued before the crisis developed. and then if there were problems -- and i don't know if those reports stated the problems or not. i assume the regulators would have brought them to the attention of the company, and the company would have addressed them. i lived this for years. it is very difficult after the fact to trying to make a judgment on what was reasonable at the time because you get so influenced by knowing what had happened. >> fair point. are you wear of any reports from supervisors are prior to the crisis, 2004, 2005 or 2006, which would suggest this same characterization by skibank communication of risk? >> there were such reports, i wasn't aware of them, and if there were surf reports, the regulators would insist they be addressed. >> we can assume the existence

of the reports, and i would ask the liberty to come back to you with additional questions on that front. i yield back my time. >> i think you did point out that he did reference reports that were precrisis very specifically, and i think you referenced the 2004 and 2005 reports that are very clear on the subject. we will direct the commission staff to provide that information to you. i want to correct something for the record. when i asked the question to the staff of on balance sheet and off balance sheet losses, there was a miscommunication. the $10 billion and $40 billion do not use. i will say the losses in the nonbank were substantial. . t sincerely thank

both mr. prince and mr. robert rubin for being willing to appear before us today and help us with this important inquiry. mr. robert rubin, you said in your book several years before the financial crisis e -- you -- erupted that unregulated derivatives can become stressed when the markets become stress. do you believe they did contribute to the financial crisis? >> i believe at the very least, the credit default swaps seem to have played a role in the financial -- and maybe even a meaningful role in the financial crisis. whether any derivatives beyond that did or did not, i do not know, commissioner. my reference by the way, in the book, which i appreciate you book, which i appreciate you obviously read was derivatives more broadly, not

just over-the-counter derivatives. >> do you know think there's a need for any regulation of the otc derivatives market? >> i think there should be. i thought this when i was at goldman sachs. i think there should be regulation of the over over-the-counter, but listed derivatives should be enhanced. >> you say in your testimony that you feel that standardized derivatives should be exchange traded and that customized contracts should be at least cleared if possible and if not, there should be disclosure of information about them. could you elaborate on what benefits you think that would provide? >> at very least, -- well, if

you standardize them, i know you are expert in this field, commissioner, if you can standardize the instruments, not only do you have disclosure and transparency to the markets and regulators but potential nets that could considerably reduce the risk. the over-the-counter derivatives -- i understand this is difficult, it does seem to me if it was possible to put the over the-counter derivatives, you increase risk and transparency. if that was technically not possible, i understand there was a lot of technical problems, it seems to me at the very at least, there ought to be some means found for creating transparency so the regulators at the very least, the regulators know what the exposures are. >> you've said in the past that there was no political will.

>> uh-huh. >> to regulate over-the-counter derivatives. do you -- in your view, was the lack of political will related to pressure by the financial services industry? >> in the -- i think there were very strongly held views in the financial services industry in opposition to regulation. i think they were not overcomable. that's probably not a word, insurmountable, when i was at goldman sachs for the last year or two, my senior partner and i developed a concern. i went to see mr. fisher, and he agreed. so i started an effort to see if we could do something, our focus then was on margin requirementsments. didn't have the breath of the later proposals. it very quickly became apparent there was no possibility moving

forward. that was for the very reason you said. the industry had very strong views on this. it wasn't going to be something that we could do. >> do you think that the lack of political will may also have been effected by a pervasive view that the market was appropriately self-regulatory and that there wasn't a need for regulation? >> i don't -- that's a level of sophistication -- it's a terrifically interesting and important question. but i don't think when you got into the political arena that really was what this was about. i think there was more about the interest of those involved and their ability to affect those interests. effect -- eff, effect those interests. rather than the more

sophisticated interest that you are raising. >> you said you think at the at least credit default swaps played a role in the financial crisis. looking at the bigger over over-the-counter derivative markets, there's a lot of interconnectivity that's created through the contracts, there's also a lack of transparency. and i wonder whether or not those problems plus the lack of effective price discovery played a role in some of the financial panic that struck in 2007 and 2008. >> no, that point is extremely well taken. it's too big to fail idea, but the other idea is too interconnected to fail. that's the point you are raising. i think the answer to your question is, yes. >> do you think that you're

proposals for exchange trading if possible, clearing, if possible, disclosure of information at least to the regulator regulators would address some of that problem? >> you know, in part, commissioner. i felt back when i was at goldman sachs and i felt ever since and the still now, you do need one more piece. i think you need increased capital and margin requirements. because that will give you greater cushion in the event that problems occur. i think i said in my book, as long as you have normal conditions, i don't think any of this is a problem. the trouble is under stress conditions, you can get very serious issues very quickly. so i think you need a bigger cushion. >> that connection, you know, there are margin requirements on exchanges. they can be raised.

and probably should be raised, in the over the the -- over-the-counter derivatives markets, the instruments themselves has length themselves to high levels of leverage. there are a number of instruments which have been seemingly been designed just to build in a great deal of leverage. and there aren't currently any mechanisms to require margin or collateral on that. is that correct? >> yes, that is correct. >> do you think -- i'm concerned that some of the complexity that's entered into the market, some of the highly complex instruments may not really be

fully understood by the parties either by the over the counter derivatives dealers themselves, their management and board -- boards, or by the entities that are purchasing them. and i think particularly of the problems we have heard in municipalities like jefferson county, alabama, the greece problems, that were evidently somewhat designed to disguise the amount of greece's exposures and debt. i would like your views on the need for this degree of complexity. i'm not sure regulators have the capable of understanding these instruments. i don't know if anybody else

does fully. >> no, it's a very good question, commissioner. and i think i recollection is i did discuss this in my book. i maybe wrong. but i think i did. i think the complexity is understandable and -- well, complexity per se is never useful, but it's the product of the purposes that are trying to be accomplished. on the other hand, i think your point is correct. i lived this for a long time. i think your point is correct. use of these instruments don't understand the complexities and the risk embedded in them, not under normal circumstances, but stressed conditions. that's one reason why i think capital margin requirements could be increased. number one, at least you would have greater cushion. and i also think that if you had greater capital and margin requirements, it would cause people to focus more on trying to understand the risk they were taking. and probably result in less use

of these instruments, and i think on balance, that would be a desirable outcome. >> thank you. >> o.k.. mr. thompson. >> yes, ms. murren, do you have a question before i go to mr. thompson on this point? >> follow up on your comment about your perspective that you think -- >> i yield the commissioner two minutes. >> fine. >> it'll be short. you mention capital requirements are very important. did citigroup ever create products that were specifically designed to avoid capital requirements? >> i don't know the answer to that. >> and do you, mr. prince, would you create a product simply to, or at least one the principal reasons for designing was the avoid capital requirements? >> i think the answer is no. because the product would have to be designed as something that a client would want. in other words, you wouldn't create a product that was

internally focused. if your question is would the team create products and in the course of creating the products try to minimize capital burdens, my guess is the answer is yes. but i don't know for sure. >> so then it wouldn't surprise you to know that in the minutes of one of your meetings that specifically relate to the creation of new products on this instance, it would be liquidity puts, that there was a notation that specially referenced the fact that this type of structure would avoid capital requirements? >> i have no way of responding without seeing the document and understanding the context. >> what is the document? >> it's the minutes after meeting that took place in 2002 of a c mac->> which is the committee that approved new products, yes? >> yes. >> we'll provide that document. if the staff could make sure we follow up. >> thank you. >> can we -- let's do this.

mr. thompson, is it absolutely, mr. wallison. >> thank you, mr. chairman. the topic you are on is actually something that is important to me and all around financial innovation. and mr. robert rubin, you've had a long, long career in both private sector and public sector, you've seen innovation in this industry for a long time, and you've understand the public policy role for making sure that we protect the public's interest when there are innovations that hit a marketplace, regardless of industry. so i guess my question of you is what steps should be taken to ensure that products that have a societal effect, like some of the structured products that were brought to market by this industry are well tested before they get there, before we create in the process another calamity like the one we're experiencing? >> interesting question.

i think that probably as desirable as it would be to accomplish the purpose that you just outlined, that may not be doable, because the problem is -- well, let me put it differently. when problems develop, it's usually because of some set of circumstances that hadn't been anticipated. so what you can do in internally and what all of the institutions do to, they test their instruments against -- i think i said this before actually, some past history of 10 years or 20 years or whatever maybe. they look at worse reasonable case. what are the risk of losses? and one thing or another. then what happens when you have great difficulty is something else happens. something you didn't anticipate. because of that problem, it's actually a very good question. because of that problem, it it seems to me that the answer comes back to where i was before. i think you have to create a

system that can deal with the unanticipatable or at least unanticipated, that's why i think restraints have to be increased on all of these products. i might add, i think it's important. i'd like to add one thing if i may, i think financial innovation does play an important role in our economy and constructive role. i think you need an appropriate, if you will, regulatory framework for it. >> while some would argue that financial innovation is nothing more than regulatory arbitrage of one sort or another, would you agree or not with that? >> i don't think so. i think an awful lot of regulation has nothing to do with arbitrage. i remember the case of the country that had very large exposure. they needed -- they didn't need. they decided they wanted some way to hedge themselves so they cannot to fund their social programs. it had nothing to do with regulatory. but they did need to create an

innovative structure to do that. but on the other hand, i think we have to recognize that there's systemic risk in created in doing that. that's why i think you need the find of framework that we were discussing a bit ago. >> mr. prince, can the risk management systems of an organization like citi keep up with the rate and pace of innovation that goes on within the organization of citi? >> well, that's a -- that's a very important question. i think that the risk function we had at citi was extremely robust as i said, david was one the best risk managers on wall street. we had a couple of thousands of people in the risk organization independent of the businesses able to say no any time they

wanted to. the businesses operated under the constraints risk limits and so forth. a different question, and perhaps the one you are getting to is whether or not the intellectual capacity, the smartness of the people can keep up with the innovation of the traders and so forth. i think the key there, what i took very seriously as my job was to make sure we had the best people involved. when i came ceo, the first thing i did was to put david in charge. he understood the securities. he'd been a trade never his past life. i made the risk function independent of the businesses, i took great comfort over the years from the frequent comments from the regulatory authorities,

commenting on david's strength as an individual and on the strength of the function. notwithstanding after the fact document apparently. and i think that's in some level the best you can do. we never had a situation where a product went out the door this hadn't been looked at my -- by risk. and whether they times they didn't do as good of a job as they could have, i'm sure, human nature being what it is. but to set up a structure and to put the right people in the structure, is, i think, the best you can do. just one point, i think the regulatory situation ought to be changed. >> that's where i'm going next. >> i think all of the different regulators and the different schematics, i think is crazy. and i think to the extent your

earlier question went to that, i wanted to make sure i commented on that. >> innovator by their sheer nature are passionate about what they do. and so it's my personal opinion is it's not clear to me that a risk management function can keep up with the passion and the creativity that a very aggressive innovative team brings to bear. i think that poses a systemic risk, quite frankly, to the industry because of the base of innovation that has occurred. but that's just my opinion, if i might add. on the regulatory front, yet, mr. bushnell said that he thought that some consolidation of the regulatory oversight was, in fact, warranted, because there were way too many regulators that they would have to deal with. if i look at what happened in canada, if i look at what happened in the uk, would you

comment given that you are a global bank on the differences that you observe in the regulatory scheme of their and the recovery process, perhaps, because all of those economies were hit just like we were. but the recovery process and the rigor of their oversight, versus what we have here. >> i think that with respect too brought of a question for me to cover. let me give you the best answer i can under the circumstances. i think that the regulatory structures and the various jurisdictions you've talked about compare with the united states in some ways more favorably. the regulatory structure in the u.s. being historically based from the time after the depression has great inefficiencies in it. great over laps. great reden dun sis. and i think that a more streamlined and a more efficient regulatory structure would lend

itself to greater probity for the industry. i think the way that the various economies have reacted to the crisis maybe due in part to that. but i think is also due in part to the nature of the closed or open nature of the financial services industries. and in canada, for example, it is a more closed industry. and in the u.s. and uk it is more open to the market, the system in distress. so it's not just the regulatory environment. >> all right. thank you very much. i yield the rest of my time, mr. chairman. >> thank you. >> thank you, mr. thompson. now mr. wallison, you had an item. and mr. georgiou and we'll go to the vice chair and i have just a few remains questions, yes. >> thank you very much. this is for mr. robert rubin. i could have misunderstood this. i thought you said when you were at goldman sachs, you were concerned about something in the derivative markets.

i thought it might have been credit default swaps. >> oh, no. i don't think credit default. to the best of my knowledge, credit default were not -- >> important. >> they didn't exist until later. >> what was it that you went to see mr. fisher about. >> oh, i'll tell you what i was concerned about. october 18, 1987 we had a 22% drop in the stock market. >> right. >> some of the traders who were involved at that time, they thought that portfolio insurance had had a real effect on that. it's an issue we haven't discussed here. it's not a credit issue. it's the ability or rather the potential for the derivatives to feedback into and exacerbate cash market movements. and so what i thought was we should have higher margin requirements on derivatives because of that potential for under stressed conditions for derivatives to feedback. that was the framework for that discussion. >> i see. now when you are secretary of

the treasury, however, you opposed any regulation of derivatives. so why -- >> no. >> why did you oppose it? >> no, let me -- >> at least, that's the story we have. maybe you want to clear that up. >> i'm aware of that. let me response. it'll take a potential or two. there were two issues. i was not opposed to the derivatives. my views was as i said a bit ago. there were two issues. commissioner born very rightly raised the question of risk and over-the-counter derivatives p p i agreed with her view about these risks. there was a second issue. and the second issue which i had been adviced upon by consul -- council for treasure we was that the framework that was being considered could create legal uncertainty, that it could take years to resolve that in court,

and it could lead to chaotic conditions. i was not opposed to regulations of the derivatives. ives actually trying to accomplish something when i was at goldman sachs. my views have not changed since then. >> okay. >> you know, peter -- go ahead. >> just one more quick question. >> well, we're out of time. can you submit it for the record and can you say the question and we'll get a written response? >> all right. do you want to state what it is? >> let me just state is. that is you were talking about stress in the cds market. that it becomes more dangerous when there's a lot of stress. but my understanding is throughout the financial crisis, even after lehman, the cds market has continued to function. and so i just want to understand -- don't answer it now please. because we don't have the time. >> oh. >> i would like you to respond in writing to the question of why it is that the cds market

was not disrupted and continue to function. >> i think it functioned with enormous volatility. i'd be delighted to response. >> mr. georgiou. >> i wanted to state something for the record. as you respond to the issue that was raised by commissioner murren on the capital arbitrage with regard to the liquidity puts, those are to be distinguished from an unconditional line of credit that might otherwise be necessary to backstop the commercial paper that you were selling. and that, of course, you would have to show on your books and capitalize whereas the liquidity put was, you know, was off-balance-sheet and not appropriately capitalized or not required to be capitalized under the rules or at a very, very significantly less margin. i'll just leave you with that as you respond to that in writing. thank you. >> mr. thomas?

>> thank you, mr. chairman. i want to thank both of you. just one specific question. again, if i want to do in t in writing. i'm a little confused in terms of talking about managing the company, stress test, the rest. it's my understanding that citi really didn't have the technical capacity to assess the rmbs models until '07. which i'm wondering what was going on prior to '07 in terms of management test, questions being offered. so i'll give you documents and we can fit it together and you can give me a timeline. i started out about talking about the garden of good and evil. and i meant that. because unfortunately and frustratingly, we can agree that all models, all rating, all

stress tests are useful. and then you can say all models, all ratings, all stress test may not be useful. in a terms of a model that you look at or a model that you don't look at it. it means then that you've got to go to some timeless kind of approaches to a certain degree. i will tell you, i wouldn't be here if the function of this commission was to examine policy that would be offered by the commission for congress to create legislation to deal with this problem. because i've been down that road too many times before. i like things that are twofers and threefers. one the reasons that i like capital, it gives the cushion. but it also slows everything

down. we've seen folk partly in the dot-com bubble create synthetic capital. it's hard to create synthetic. that's why i live dividends in terms of operations of company. you got cash on the barrel. >> if you agree to devices that do this, you are getting away from reality. let's have been standardized and customized. it will be three weeks with the market comes up with things that will fit and they will all be customized, they are not standard. and you are simply shifting those standards. i am happy that we are not doing this. the capital, there is a lot of transparency, and especially, responsibility tied to the behavior. i will tell you, it is impossible for me to go back

home, which i will do shortly, to tell people that we had a panel of four people who, over three-five years, earned, based on the creativity that they supervise and could not understand, almost $150 million. that same group, on the way down, did not have any money brought back. i do not like the government telling people the money that they can make. but if there is not some attempt by this industry to give value that is equal -- across the corporate model, with what ordinary people perceive as the value, i cannot comprehend a baseball player making a quarter-trillion dollars over 10

years. but i can measure this. i can look at the batting average and the errors, and there are all kinds of ways to do this. i want to thank you. this is not taken out for a certain, extraordinary aspect. he may give them interest in the national and the international. we have been given no opportunity to understand the declarations about how we used all the things that were available and nobody knew about this. understanding about how we used all of the test available and nobody knew. yes, but something happened. something was created -- assumptions were made, and behavior has to have consequence s. so say you're sorry, and you can make your stock argument, most of these guys that were in front

of us yesterday got something other than that as well, to make the argument that somehow a simple apolly still allows you to make a profile of income based upon what devastated everyone else, doesn't fit the scale test. no matter how often you feel really, really sad about what happened. thank you, mr. chairman. >> all right. mr. prince and mr. robert rubin. let me make a couple of conclusionary comments having heard a day and a half of comments and having read along with commissioners very extensive documentation and interviews. let me preface this by saying that if i die 51% right and 49% wrong, i'll be a happy man. i don't assure to reach from mr.

greenspan thinks he's reach which is 70/30. i think you're a man of good faith. i want to bring us back here to why we are here today. we have been examined how this financial empire failed to the point where the united states government had to provide $45 billion in the assistance as well as $301 billion in guarantees of assets. i also want to kind of key off something mr. holtz-eakin said. which is in one particular area, subprime lending with there was a massive failure. approximately $50 billion in losses. what i've been struck by in the documentation and the testimony is is i've been struck by frankly how much folks in the organization did not know about what was going on and i'm particularly struck by how much the two of you did not know about how much was -- what was going on within your organization at the end of the day you were the head guys.

you were the chairman and ceo. and not, i might add mr. robert rubin, you were in the suite of executive offices. if you look at the record, mr. holtz-eakin did point out a number of regulatory reports on the table. mr. bowen had sent information up about $50 billion a year business in which mortgages were being bought and then sold in which they were appeared to be very substantial compliance issues. we've discussed the fact that citigroup had $11 billion of warehouse lines out to subprime originators which you as management were not aware of. mr. holtz-eakin referenced the senior supervisors report. which did reference issues. even today i think it's clear from the record that even at hfbs and bear stearns, there were not the highest level of decisions about how to handle subprime. that didn't come until september

and october. it just seems to me at the end of the day, the two of you in charge of this organization did not seem to have a grip on what was happening. now, mr. prince, i will say that on november 4th, you took responsibility and you resigned. mr. robert rubin, i want to ask you very clearly, because you've gone out of your way in the interviews and public statements to make a very fine point or a very large point about how you were not involved in operations. you said you made speeches warning about potential risk. you were chairman of the executive committee of the board of directors. you attended weekly business. your compensation was $1 million plus $14 million guarantee bonus. mr. prince, in your interview, you indicated the level of into action was frequent. if one of you were out of town,

you would talk by phone every other day. mr. robert rubin, you were very involved in the investment banking business. i guess i would ask you very clearly, do you bear central responsibility for the near collapse but for the u.s. government of citigroup? >> i think, mr. chairman, let me respond in a number of parts if i may. i think you posed obviously an important question. number one, the executive committee of the board which we just referred to my being chairman of presidentive body. it didn't have a decision. what it did was it met between board meetings. those meeting were very infrequent. it wasn't a substantive part of the decision-making process of the institutions. it was designed to -- it was designed to be convened by the chairman, which was me so the ceo could get formal approval.

it was not a subcititive part of the institution. i think all of us -- i said this in my comment, i think all of us in the industry who failed to see the potential for this serious crisis and failed to see the -- and failed to see the multiple factors at work, bear responsibility. and i think we all have a great deal to regret in that respect. i was not involved, as you correctly say, in the management of the people or the personnel. i was a member of the board, i worked extensively with clients, my interaction on other issues was on a strategic and managerial level. and i think -- as i said in my

statement, that the aaa securities that were at the heart of this problem were understandably viewed by those who were conducted the business or involved in the business as being essentially a de minimus risk. >> it went wrong. even at the end, investors be being informed and the audit risk and board which you are a member is being told $55 million on the same day. i don't know if you can have it two days, you were either pulling the levers or asleep at the switch. i'm not so sure apologies are important as assessment of responsibility. because that's the way in which you move forward.

in fact, instead of asking what did you do, what didn't you know and why didn't you know it? >> i think the board of which i was a part and me the other activities that i was involved in had a very serious commitment to oversight and to assuring as best we could the institution conducted its business appropriately. but, mr. chairman, a board cannot know what was going on in the positions of an constitution, of a trading institution. there probably were some number. i would guess it was $1 trillion plus of transactions that went through citi every day , what you can do, and what in my judgment citi did as being a member of the board, is making sure you have the proper people in place, trading, risk management, checks and balances functions which included our

internal auditor, legal council, cfo and the rest. and you can be sure that you have robust processes at board level. which i don't think is any question that we had. as i think i mentioned earlier, reports to the board at every meeting about the risk and the institutions, and you were depending on those processes, on having the right people in those jobs, which i think we did, and depends on the processes be robust and active. >> aisle going to make the -- i'm going to make one more comment. you were a garden variety board member. you can characterize, i think to most people chairman executive of the board of directors implied leadership. certainly $15 million a year guaranteed assumes responsibility. i just think -- excuse me mr. prince, when he resigned said it was the honorable thing to do. i just my point i think that

leadership and responsibility matters. >> i agree with that. if i may say so, mr. chairman, the executive committee is misconstrued in that continue. there was a formal administrative apparatus of the institution and had it nothing to do with one overthrow of the institution. i did feel in '07 because of the -- not because of the problems, i did feel in '07 that i should not get a bonus. the reason was i felt that as my stage of my career, one thing or another, that money could be better used by the rest of the institution by other purposes. soy went to the compensation -- so i went to the compensation and suggested that i did not get a bonus in '07 and i did the same thing in '08. >> well, this is -- you will be the only one in the end that can make the assessment of responsibility. a risk business always implies that there's upside and downside, it's not about the fact that there were failures but acknowledging and

understanding are important. but that's up to you for people to judge. >> i agree with that. i think it's important to say what the institutions work and what they can play and cannot possibly play. >> you make your case, mr. vice chair. >> here's my point before you leave the point --ing >> we're not leaveing -- >> excuse me. >> you didn't ask me my opinion. but i would like to state if i may. >> mr. robert rubin? >> i think it was absolutely wrong to suggest that mr. robert rubin had any responsible for the what happened attestedty -- at citigroup. >> i appreciate that. mr. prince, you were ceo. and you resigned? >> yes, sir. >> what happened after you left? >> is this a rhetorical question? >> no.

who assumed the ceo? >> mr. crenshaw became the ceo the day i resigned. >> okay. then what happened in the terms of the office of ceo? >> at that point a search was conducted and vikram became ceo. >> notwithstanding all of the discounting , it's really hard to believe that in a time of stress, based upon your background, your experience, your involvement not only at goldman sachs and secretary of treasury and the role that you played at your thanksgiving dinner to do the kinds of things that you had a have fairly significant knowledge in the corporation, to then back away from any kind of critical

decision, i'll accept it because you've said that's the case. but it just brings into question any number of items we've been asking which have been discussed because you've had such an overall structure. you were so coordinated. you trusted all of those people under you. yet, when we come back, i the record is open, in terms of the written questions. you said that you would respond to them. i want to let you know as we finish this, that in the attempt to understand, one corporate model, there will be other questions trying to understand how, with middle management and upper management -- how the ceo and chairman of the board handle -- they were confident with the assurance that they

know what is going on but that everyone denied responsibility. >> may i make one correction? >> i need to be corrected? >> i was not the chairman of the board. i only became the chairman of the board after he stepped down. that was in the four and five weeks of the searching process. >> why would they make to the chairman of the board if you did not know about the operation of the company in any meaningful way? >> i had a lot of understanding about the structure of the company. >> you will look for someone who hopefully has the understanding and knowledge of some of the problems. all that i am is saying, you have the problem. there are multiple denials and then you are in the position. >> i did not believe that there were multiple denials. there is the role that the board

played with the functioning of the institution, when he stepped down -- i was asked to be the chairman of the board. we wound up with a great selection for the new ceo. >> we can talk about the board of selection and we can do this all that we want in terms of the corporate models. but there are people in those positions and you have a higher confidence in some people than others. we have interviewed some of them. at some time, you cannot understand an institution simply by following the lines of the structure function model, or even the dotted lines. the dotted lines. and what we're trying to say is it's really hard for us to believe, especially on my personal knowledge and involvement in any institution that i'm aware you've been

involved in of this ability to fall back to a structure function model and argue about the box you were in. i have never, ever seen you accept the outline, the frame, or the structure of a box. >> well -- >> if you wanted to accomplish something that you felt fairly strongly about, and it's difficult for me to say you're finished. but i wanted to end on a compliment. :

i want to thank both of you for taking your time today, that answers to the questions, and i appreciate this very much. we will read-adjourn at 12:30, and we will read-commence at 12:30. we will read-commence at 12:30. ññññññññññ >> the financial crisis commission continues its work tomorrow morning as the court -- as they will question the former executives for companies supported by fannie mae. you can watch these on c-span2

and c-span.org beginning at 9:00 eastern. >> next on c-span, a discussion about the structure of u.s. intelligence agencies. and then, president obama and the russian president will sign a nuclear weapons treaty. and we will have the reaction from an opposing group, and another group in favor of this agreement. >> this weekend, on book tv. debra amis on what has happened to the peak -- to the sunni people after the fall of saddam hussein. and the india-pakistan relations. this book is called, field notes on democracy. and then, ralph peters will look at u.s. foreign policy.

the entire weekend schedule is on booktv.org. this month, see the winners of the c-span video documentary competition. they submitted videos on the challenges that the country is facing. you can see the winning videos just before "washington journal." for a preview of all the winners, go to studentcam.org. >> and now, a discussion on the state of the intelligence community. this is part of a conference marking the fifth anniversary of the creation of the office of national intelligence. this is an hour and 15 minutes.

>> thank you very much. i am the project director for the national security preparedness group. i will turn the panel over to walter. each protest that will give a five-seven minute opening statement. and then, we will open this up to questions and answers. he first came to the paper in 1966 after serving in the counter-intelligence corps. his articles were in the package that received the pulitzer prize for national reporting, along with many other honors. he has been a news consultant

and he was the winner of an emmy in writing and intelligence documentary. he is the dean of the intelligence community press corps. please joining -- please join me in welcoming thehim. >> thank you very much. it is good to hear. that is a short introduction, and this is better. an interesting subject and we have an illustrious panel, and the question is, are we more safe? on my right is jane harman. i met her 40 years ago. >> i was 5 years old. [laughter]

>> she was a long-time member of the house intelligence committee. she is one of the authors of this legislation. general haden was here at the beginning as a deputy director of national intelligence. fran townsend was in the white house when the bill was being considered, and when this was passed. somebody who has spent time at justice and the white house, to bring another view to this. i think that what we will do, is each member will give of five or seven-minute overview and then i will ask a couple of questions. and then, we will proceed with other questions from the floor.

congresswoman? >> thank you very much, and good morning, everyone. the bipartisan polycentric -- policy center is living up to its name. you are all definitely bipartisan. i assume that all of you, including all of us on the panel, are committed to making intelligence work better. my answer to the question is that we are safer in the last five years. part of the reason is because we were able to do intelligence reform. i would not call this a paradox. i would say that this is a fact because we were able to legislate, not perfectly, but adequately. let me also salute the bipartisan team in front me.

they embody to me what the elected officials should be like. that are much smarter than i am. they did this, voluntarily. they are bringing real quality to the policy making, and they are focused on completely different challenges in the post-9/11 world. i just think that we should all -- we should salute their leadership. [applause] and so, walter has said that i was one of the big four. we are as big as we need to be. one of the bid for people who

was helping to write the final intelligence reform five years ago. another of them is susan collins. and there are also joe lieberman and hoekstra. the females that 98% of the work. that is why the product is as good as it is. let me say a few things. after i read my newspaper, i want for you to know the i actually read the print newspapers. i wanted to show solidarity with the washington post and the rest of you writing for these products that we all need. in reading my newspaper, i was reading about the consulate and i sent an e-mail to our fabulous ambassador to pakistan.

and i said, i am happy to hear that you are safe. we went there, fondly, a few months ago. we also met with the consulate general. and she said, the star performer was the intelligence agency. they are doing a fabulous job in pakistan. pakistan and yemen are two of the most dangerous places on the planet and the intelligence agencies are doing a great job. i was in yemen last week. i have been trying to go there for many years. i spoke to the government official. talk about a paradox. the terrorist, the first terrorist in terms of a threat

against us is al-alaki and he was the imam at the mosque in san diego. two of the hijackers ended up in san diego. the man that we should have found before the attacks in 2001 is at large in yemen. he is in the sides of the people of yemen. he is a person who is -- he was an advisory to the shooter at fort hood, and he was in the plot to have the nigerian blow up the airplane over detroit. and in the last several weeks he has been calling for more attacks against the united states. and again, the intelligence --

the women and men, in a combination of agencies, are hard on the case. and i believe that they will be successful. we are talking about the events since 2004 that are keeping us safe. let me tell you why intelligence reform is necessary and why the product is a very good product. we were operating before 9/11 on the 1947 business model. everyone remembers that the cia and the intelligence structure was part of the national security act of 1947. this was designed to keep us safe during -- in a bipolar world. and this was working very well. and then the berlin wall came