Former Treasury Secretary Rob Rubin, also a former Citigroup (C) board member, joined former Citi CEO Chuck Prince this morning and offered up his prepared remarks to the Financial Crisis Inquiry Commission about the credit crunch.
“The market for credit had gone to excess” Rubin told the Commission, and the cyclical downturn that was expected was traded for a severe financial crisis. The Crisis was the cause of “an extraordinary combination of powerful factors” rather than a single thing.
“Almost all of us involved in the financial system [�] missed the powerful combination of forces at work and the serious possibility of a massive crisis,” writes Rubin. “We all bear responsibility for not recognizing this, and I deeply regret that.”
Citi suffered worse than some firms because of its playing around with “super senior tranches of collateralized debt obligations,” observed Rubin.
But — Ah Ha! — Rubin was skeptical at the time: “I believed, perhaps because of my background in arbitrage, that these CDO transactions were not completed until the distribution was fully executed.” But the triple-A securities had always been good money, so no one at Citi, apparently, worried.
Rubin’s recommendation for the lessons of the crisis: step-up leverage constraints, using models other than strict risk calculations because “models cannot fully capture reality”; regulate derivatives; give power to regulators to “resolve” troubled banks, to avoid “moral hazard”; implement consumer protection, including “understandable disclosures,” suitability requirements, and prohibition on “abusive practices.”
Previously: Prince�s Contrition: Citi Was Not Too Big to Manage, April 8, 2010.
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