Bankers say credit crunch mistakes made

By Clara Ferreira-Marques and Steve Slater

LONDON (Reuters) - Top executives from four of the world's biggest banks told MPs on Tuesday that errors were made during the recent credit-market crunch but said they had not been reckless or failed to tell clients of risks.

"Mistakes were made, there's no question about that," Gerald Corrigan, managing director and co-chair of risk at Goldman Sachs (GS.N), told the cross-party parliamentary committee.

"But it's also true that conditions that materialised, especially in the subprime mortgage market, are by any standards quite extraordinary."

Corrigan and executives from Citigroup (C.N), Deutsche Bank (DBKGn.DE) and UBS (UBSN.VX) were accused by MPs of losing sight of risks, of failing to do enough to explain complex products to investors and of acting recklessly -- particularly in the sale of structured credit products.

In a heated hearing lasting over an hour -- part of an inquiry into financial stability and credit market turmoil -- MPs said banks had created complex financial instruments that meant the mis-selling of home loans in Chicago could result in the near collapse of Northern Rock NRK.L.

The four banks acknowledged that the search for higher yields during a period of low interest rates had boosted the demand for more complex and sophisticated investment products -- and strengthened the interdependence of instruments and markets.

"It's inevitable that when markets are strong and booming there's a natural aversion to being the first one into a market and the last one out. That's a fact of life," Corrigan said.

But all four dismissed accusations that investors -- particularly those investing in collateralised debt obligations (CDOs) and other complex instruments -- were not told of the risks or given enough information to understand the products.

"The end-buyers of these complex instruments were sophisticated institutions," William Mills, head of Citigroup's markets and banking in Europe, Middle East and Africa, said.

In the end, however, some investors still proved not to be sophisticated enough: "It is not clear that investors fully understood what they were buying," Charles Aldington, chairman of Deutsche Bank London, said.

LEARNING THE LESSONS

Corrigan and Mills acknowledged the reputation of banks had been hit by the market turmoil, which was sparked by a U.S. housing market downturn and spilled over to other products.

Only one of the four banks testifying on Tuesday -- Goldman -- said explicitly it expected to make a profit over the length of its involvement in the subprime market since the market took off around 2003, thanks to its hedging and its more cautious stance on the subprime sector from earlier this year.

But Goldman's Corrigan said banks and regulators now needed to strengthen "shock absorbers" in the system, adding that some types of structured products would "go the way of the dinosaurs".

Asked to qualify how long the credit market troubles would last, one banker said he expected a better 2008.