WASHINGTON — A former mortgage executive from Citigroup Inc. has accused bank executives of violating their own risk management policies and ignoring his warnings about the coming financial crisis.
Richard Bowen on Wednesday told a panel investigating the roots of the crisis that he raised concerns about mortgage risk starting in 2006. He said he sent an email about it to former chairman Robert Rubin and others in November 2007.
Bowen sent weekly messages to managers raising concerns about his group’s risk management. But he wrote to Rubin and other executives in 2007, “These breakdowns have not been communicated to or recognized by” Citi’s top audit or finance executives.
Bowen said at the hearing that he doesn’t know whether any executives acted on his warnings about the bank’s purchase of suspect mortgages.
In testimony to the Financial Crisis Inquiry Commission, Bowen said he discovered in mid-2006 that more than 60 per cent of the mortgages bought and resold by subprime subsidiary Citifinancial Mortgage didn’t meet Citigroup’s underwriting standards.
Bowen was a chief underwriter for the division. He was responsible for loans bought from other lenders. Many of these loans were bundled and sold as complex investments.
Citigroup disputed his account. Spokeswoman Molly Meiners said in a statement that the issues Bowen raised were “promptly and carefully reviewed when he raised them and corrective actions were taken.”
Bowen’s testimony came on the first of three days of hearings by the FCIC. Earlier Wednesday, Alan Greenspan defended his tenure as head of the Federal Reserve in the years leading up to the crisis. As he has in the past, Greenspan disputed critics who say he kept interest rates too low for too long, encouraging risky lending.
Greenspan also hit back against criticism that his Fed failed to regulate high-risk loans to borrowers who couldn’t afford the debt. Many of those loans became the toxic assets that sparked the crisis.
Greenspan insisted the Fed lacked authority to regulate the non-bank lenders that issued most subprime mortgages.
But Phil Angelides, the panel chairman, referred to internal Fed documents in which staffers had recommended “broad prohibitions on deceptive lending.”
Angelides said the Fed had issued guidance on predatory lending but had failed to regulate it.
“Why, in the face of all that, did you not act to contain abusive, deceptive subprime lending?” Angelides, a former California state treasurer, asked Greenspan.
Greenspan pointed to a string of actions he said the Fed took. Angelides countered that the Fed’s actions covered only one per cent of the subprime lending market.
“You could’ve, you should’ve and you didn’t” regulate the lending activities, he said.
In his opening remarks, Greenspan blamed a litany of other parties and historical events for the meltdown but accepted no responsibility for himself or the Fed, which he led from 1987 until early 2006.
He said excess saving in developing countries left too much money in the system. And he said credit rating agencies undercounted the risk of mortgage investments.
Greenspan said demand from the government-backed mortgage giants Fannie Mae and Freddie Mac inflated the housing bubble. He said the government policy of encouraging home ownership pushed Fannie and Freddie to create demand for risky loans. Those firms play a vital role in the mortgage market by buying up mortgage loans and packaging them into bonds that are resold to global investors.
Republicans say those companies, with the government’s encouragement, deserve most of the blame for propping up the housing bubble. But Democrats argue that Fannie and Freddie lowered their lending standards to compete with big Wall Street players who were gaining market share during the boom years.
In any case, said Mark Zandi, chief economist at Moody’s Analytics, the Greenspan Fed’s decision not to set national mortgage lending standards was a key factor in the housing bubble — far more so than Fannie and Freddie.
Zandi noted that countries like Canada and Germany with tighter regulations largely avoided the bust, while countries that followed the U.S. model of light regulation fell into crisis.
“The Federal Reserve had that authority,” Zandi said in an interview. “They just never acted on it. That was a clear policy decision.”
Zandi also rebutted Greenspan’s argument that his Fed’s low-interest-rate policy played no role.
“The aggressive monetary policy in the wake of the tech bubble contributed to the inflating of the housing bubble,” Zandi said. “There’s strong evidence that the Federal Reserve kept interest rates too low for too long.”
Regarding his own missteps over his two decades as Fed chair, Greenspan said, “I was wrong 30 per cent of the time, and there were an awful lot of mistakes in 21 years.”
He would not cite any specific failures, except banks’ and regulators’ collective failure to anticipate that so many challenges would hit the financial system at once.
Greenspan said future credit crises will be prevented only if banks:
— Are required to hold more capital as a buffer against future loan losses.
— Are forced to keep more cash-like assets instead of investments that can be hard to sell
— Are required to hold more collateral to protect against default by other financial companies.
The 10 bipartisan commissioners later will grill former and current executives of Citigroup Inc. about that bank’s role in financing and reselling mortgage investments.
The three days of FCIC hearings are focused on high-risk mortgage lending and the way trillions of dollars in risky mortgage debt was spread through the financial system. They are designed to provide a firsthand accounting of decisions that inflated a mortgage bubble and triggered the financial crisis.
The panel is using Citigroup as a case study because the bank was heavily involved in every stage of that process. The bank was a major subprime lender through its subsidiary CitiFinancial. Other divisions of Citigroup pooled those loans and loans purchased from other mortgage companies and sold the income streams to investors.
As borrowers defaulted, Citigroup took losses on mortgage-related investments it held on and off its books. Mortgage troubles at Citi, defunct investment bank Bear Stearns and elsewhere exposed cracks in the financial system.
Congress created the FCIC last year to examine the causes of that crisis. It is structured like the 9/11 panel that examined intelligence failures preceding the Sept. 11 terrorist attacks. The FCIC is charged with examining topics from executive compensation to tax policy and must issue a report Dec. 15.
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AP Real Estate Writer Alan Zibel contributed to this report.