Yesterday, the Financial Crisis Inquiry Commission (FCIC), a congressionally appointed commission tasked with researching the financial collapse, held the first day of a three-day hearing entitled, “Subprime Lending and Securitization and Government-Sponsored Enterprises (GSEs).” Testifying before the FCIC were the following witnesses:

Session 1: The Federal Reserve

  • Alan Greenspan, Former Chairman, Board of Governors of the Federal Reserve System  

Session 2: Subprime Origination and Securitization

  • Richard Bitner, Managing Director of, Author, “Confessions of a Subprime Lender: An Insider’s Tale of Greed, Fraud & Ignorance”
  • Richard Bowen, Former Senior Vice President and Business Chief Underwriter CitiMortgage Inc.
  • Patricia Lindsay, Former Vice President, Corporate Risk New Century Financial Corporation
  • Susan Mills, Managing Director of Mortgage Finance Citi Markets & Banking, Global Securitized Markets  

Session 3: Citigroup Subprime-Related Structured Products and Risk Management

  • Murray C. Barnes, Former Managing Director, Independent Risk Citigroup, Inc.
  • David C. Bushnell, Former Chief Risk Officer Citigroup, Inc.
  • Nestor Dominguez, Former Co-Head, Global Collateralized Debt Obligations Citi Markets & Banking, Global Structured Credit Products
  • Thomas G. Maheras, Former Co-Chief Executive Officer Citi Markets & Banking  

Mr. Greenspan opened the hearing. His prepared testimony focused on the causes of the recent financial crises. Among other causes, Mr. Greenspan cited the large imbalance of demand created by investments in subprime mortgage-backed securities by GSEs. He specifically discounted subprime mortgage originations as a major factor. “Let me respectfully reiterate that, in my judgment, the origination of subprime mortgages – as opposed to the rise in global demand for securitized subprime mortgage interests – was not a significant cause of the financial crises.” While admitting that the housing price bubble was also engendered by lower interest rates, he stated that “it was long term mortgage rates that galvanized prices, not the overnight rates of central banks.” He concluded his prepared testimony by suggesting that in order to prevent future crises increased capital and liquidity requirements should be imposed on banks.

Following his prepared remarks, Mr. Greenspan responded to questions from the Commissioners. Responding to statements that the Federal Reserve failed to stop subprime lending and mortgage originations, he noted that the Federal Reserve had warned about their risks in 1999 and again in 2001. He also emphasized that the Federal Reserve is not an enforcement agency and argued that if the Federal Reserve had tried to slow the housing market amid a “fairly broad consensus” about encouraging homeownership, “the Congress would have clamped down on us.”

In the second session, the Commissioners began to assess the mortgage lending operations of subprime lenders. The witnesses laid out how money center banks became heavily involved in subprime mortgages and packaged them into collateralized debt obligations (“CDOs”). The witnesses noted that lending standards fell which helped maintain the housing market and the associated business on Wall Street. Ms. Lindsay explained that common sense practices were abandoned in the lending process and the risk was layered rather than offset. “The business became volume driven and automated. A broker could get a loan pre-approval in 12 seconds or less with our proprietary system. If we couldn't close a loan quickly, one of our many competitors would.” The second session also devoted considerable attention to Mr. Bowen’s testimony that he began raising concerns regarding risk management as early as 2006, and communicated them to the Consumer Lending Group and the executive committee of Citigroup in 2007.

In the third session, Citigroup executives testified regarding the write-off of approximately $45 billion in complex mortgage bonds which had previously been considered safe. The panel testified that they were surprised by the downgrading of CDOs and defended their actions as rational at the time. Mr. Maheras explained “Citi’s primary C.D.O. losses stemmed from client-driven activities resulting in the holding by Citi of very low-interest yielding[] securities." He observed that “it would be somehow more reassuring to conclude that we made an ill conceived trading bet or that we invested in business that was overly risky, or even that we lacked proper controls – but I do not believe any of those to be the case. . . No one, including myself, ever conceived we would see real estate prices plunge 30 to 40 percent, with homeowners walking away from homes en masse for the first time ever.” Mr. Bushnell echoed this point by noting that others made the same mistake and he called it a “rational, but in retrospect, mistaken business judgment” to keep such a large position in CDOs. Vice Chairman Bill Thomas and other commissioners criticized the failure to recognize real estate price risk and executive compensation practices.

This morning, the FCIC will hear testimony from Chuck Prince, the former Chairman of the Board and Chief Executive Officer of Citigroup and Robert Rubin the former Chairman of the Executive Committee of the Board of Directors of Citigroup, Inc. In the afternoon, the FCIC will hear testimony from John C. Dugan, the Comptroller in the Office of the Comptroller of the Currency and John D. Hawke Jr., the former Comptroller.