WASHINGTON/NEW YORK (Reuters) - Charles “Chuck” Prince and Robert Rubin are often blamed for hobbling Citigroup Inc (C.N), but the former CEO and senior adviser are expected to defend themselves vigorously at a public hearing this week.
Prince, who famously said in mid-2007 “as long as the music is playing, you’ve got to get up and dance,” and Rubin will be grilled by a commission investigating the causes of the financial crisis.
The ostensible topic of the hearing is subprime lending, securitization and government-sponsored enterprises, but the real focus seems to be Citigroup.
The bank, spared scrutiny in the commission’s first hearing, is in many ways a poster child for what went wrong during the financial crisis.
Bad bets on repackaged debt securities, consumer loans, and other assets forced Citigroup to take three separate government rescues totaling $45 billion, more support than any other major bank. When the dust settled, taxpayers held about a third of Citigroup’s common stock and $27 billion of its debt.
Two figures at the center of the meltdown were Rubin, who was on Citigroup’s board and advised the firm beginning in 1999, and Prince, the bank’s chief executive from 2003 through late 2007.
They are scheduled to testify before the Financial Crisis Inquiry Commission on Thursday, following an appearance by former Federal Reserve Chairman Alan Greenspan on the first day of the hearing Wednesday.
Rubin, a former Treasury secretary under President Bill Clinton, is often criticized for pushing Citigroup to risk more of its own money in trades. Those trades ended up triggering billions of dollars of writedowns for the bank.
Rubin has said in the past that he was an adviser to the bank, not a decision maker, and that at one meeting, when the issue of risk management came up, he said taking on more risk could make sense only if the bank had the right people and technology. A person familiar with the hearings expects him to make those points again. Rubin declined to comment.
Rubin is also criticized for receiving an outsized salary while he was at the bank. In 2006, for example, he earned nearly $30 million. But people who have worked with Rubin say he was very good at talking to clients, and won business for the bank.
Rubin will also face questions from Brooksley Born, a former head of the Commodity Futures Trading Commission and now a member of the FCIC. Born and Rubin faced off over derivatives in the late 1990s.
In 1998, Born tried to regulate some over-the-counter derivatives, but Rubin and others objected and ultimately won out. Some critics argue that unregulated over-the-counter derivatives markets linked banks with one another in a way that made it hard for bank overseers to allow financial institutions to fail during the crisis.
Prince exited Citigroup discredited in the eyes of many, but he left a wealthy man. He resigned in late 2007 with $39.5 million in stock, options, bonus and perks, despite Citigroup having just posted a huge writedown on subprime assets.
One of his biggest gaffes was telling the Financial Times in July 2007 that global liquidity was enormous and that only a significant disruptive event could create difficulty in the leveraged buyout market. “We’re still dancing,” he said.
Just a few months later, an epic global credit crunch began.
The FCIC will likely look into why Prince was so wrong about the pending crisis, said Simon Johnson, a business professor at the Massachusetts Institute of Technology and co-author of “13 Bankers: The Wall Street Takeover and the Next Financial Meltdown.”
“Is he a hapless chump or is he the guy that had the incentive to get it wrong?” Johnson said.
Prince, a lawyer by training, was a protégé of Sanford “Sandy” Weill, who over the course of two decades built Citigroup into a financial supermarket. Prince could not be reached for comment.
To some analysts and experts, the FCIC hearing is nothing more than theater and an exercise in rehashing information that has already been disclosed.
“These commissions are a political exercise, but they will not influence government policy,” said Roy Smith, a finance professor at New York University’s Stern School of Business.
The commission was supposed to be like the Pecora Commission, which held hearings starting in 1932 and found objectionable industry practices that led to the Securities Act of 1933 and the Securities Exchange Act of 1934.
But the FCIC has started late, as legislation is already winding its way through Congress. If the Democrats lose big in midterm elections in November, the commission’s recommendations may become even more irrelevant.
Douglas Elliott, a former JPMorgan investment banker now with the Brookings Institution think tank in Washington, said the best Prince and Rubin can hope for is to not give any more memorable quotes.
“The world blew up and the major players in financial world are all implicated to some extent. There’s no way to come out of it looking good,” he said.
Reporting by Karey Wutkowski and Dan Wilchins; editing by John Wallace