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Citigroup's Charles Prince, Robert Rubin: Innocent as Sin

Former Citigroup (C) CEO Charles Prince and key boardmember Robert Rubin face a critical question: What didn't they know, and when didn't they know it?

That's what the Financial Crisis Inquiry Commission tried to find out Thursday, as the panel pressed the banking executives to explain how Citi nearly met its doom two years ago. Byron Georgiou, a member of the FCIC panel who has expertise in financial fraud, said the duo didn't learn of the company's huge exposure to collateral debt obligations until October 2007, months after financial warning signs had indicated major trouble in the lending and securities markets.

"That seems awfully late," said Georgiou, noting that some financial firms were able to take evasive action by reducing their potential losses on derivatives. "Maybe if you had you had been in a position to know earlier, you might've taken some ameliorative action to protect the balance sheet of Citi in the meantime."

That failure to act promptly amounted to a massive managerial breakdown at multiple levels, he suggested.

Yet throughout their three-hour testimony, Prince and Rubin insisted that Citi's risk management practices were sound. They also had a ready answer when FCIC members asked who is to blame for the company's woes: Everyone. Lenders, credit rating agencies and other banking industry parties all assumed that the securities fueling the financial system were safe, even as the loans backing those instruments were falling to pieces, the execs said.

"We all bear responsibility for not recognizing this, and I deeply regret that," Rubin said in his prepared testimony.

Apology accepted.

Except that saying that everyone is to blame is the next best thing to saying that no one is. Prince, Citi's CEO from 2003 until November 2007, and Rubin, who served on the board into 2009, also sought to defend themselves by characterizing the financial crisis as an unpredictable event, a "black swan" born of some inconceivable confluence of factors.

That brought this memorable outburst (at 50:54 in the video) from Commissioner Bill Thomas, a former Republican congressman:

"What do you get paid for if it isn't having some intuition, understanding, knowledge?" he asked. "Or do you just do what everybody else is doing because everybody else is doing it, and if you don't do it then you won't make money -- because I do think it's all about money. And it was big money on the way up, but never at any point is it on the way back down. What I'm saying is that when I get this kind of argument as to what what happened in hindsight, it's listening to someone blame the inferior quality of leather in a pair of shoes based on the feed that some person supplied to a feedlot feeding the cattle to produce the leather."
Grandstanding? Sure. These hearings, like all such inquisitions, are as much about theater and political posturing as they are about getting to the bottom of things. To this end, Thomas fenced with Rubin, who served as U.S. Treasury Secretary in the Clinton Administration, over how much credit the GOP should get for the booming economy in the 1990s (Do it on your own time, boys.)

Yet Thomas is right. It's one thing to apologize for your actions, quite another to take ownership of the consequences. Prince and Rubin describe Citi as well managed, governed and run. OK. Then how is it that the company (and other firms) would've ended up on the trash heap of financial history if U.S. taxpayers hadn't bailed it out? Do we simply chalk it up to an 80-year storm and pull up our collars until the next one makes landfall? Or perhaps we should, like Alan Greenspan, just pin it on the nearest patsy?

I bet most people would rather not. A key element of financial reform is that near-mythical beast, accountability. What would it look like in this case? Making big banks smaller, for one. After all, if even well-managed, governed and run megabanks like Citi can fail, then we should try to minimize the damage when judgment day comes. Citi and other Wall Street execs should also disgorge some of the ill-gotten gains they pocketed during the boom.

Let upside and downside walk lovingly hand-in-hand, just like all the econ textbooks recommend. Let blame fall where it belongs.