The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
June 9, 2010
Phil Angelides
Via Email and Federal Express
Brad S. Karp, Esq.
Paul, Weiss. Ritkind, Wharton & Garrison LLP
1285 Avenue of the Americas
New York, NY 10019-6064
BKarp c paulweiss.com
Clla irma n
Rc:
Hon. Bill Thomas
Vice Chairlllan
Follow-Up to Fimmcial Crisis Inquiry Commission hearing on
April 7-9,2010 and participation by Citigroup, Inc. or those
acting or having previously acted on its behalf
Dear Mr. Karp:
Brooksley Born
COlllmissiollcr
Byron S. Georgiou
COllllllissioller
On April 15,2010, Chairman Angelides and Vice Chairman Thomas sent several
letters thanking your clients for testifying at the April 7-9, 2010 hearing and
notifying them that Financial Crisis Inquiry Commission ("FCIC") staff would be
sending additional, written questions in the near future. This letter contains those
questions.
Senator Bob Graham
Commissioner
Keith Hennessey
COlI/missiO/lcr
Douglas Holtz-Eakin
Commissioner
Heather H. Murren, CFA
Commissioner
John W. Thompson
COlllmissioner
Each set of questions is directed at a specific individual. If that individual lacks
sufficient knowledge to answer the question completely, the individual should
provide as much information as possible and you should designate an alternative
person or persons with knowledge to provide any additional information. In such
a situation, identify the persons by name responsible for the additional
information.
Please note that several questions are posed to multiple individuals to obtain
different opinions or perspectives. Each person should respond.
When answering all questions, the relevant time period is January 1, 2000 to the
present, unless otherwise indicated. Please have your clients provide answers and
any additional information by June 22, 2010. 1
Peter J. Wallison
Commissioner
I The answers your firm's cl ients provide to the questions in this letter are a continuation of their
testimony and under the same oath they took before testifying on April 8, 2010. Further, please be
advised that according to section 1001 of Title 18 of the United States Code, "Whoever, in any
matter within the jurisdiction of any department or agency of the United States knowingly and
willfully falsifies, conceals or covers up by any trick, scheme, or device a material fact, or makes
any false, fictitious or fraudulent statements or representations, or makes or uses any false writing
or document knowing the same to contain any false. fictitious or fraudulent statement or entry.
shall be tined under this title or imprisoned not more than five years, or both."
1717 Pennsylvania Avenue, NW, Suite 800 • Washington, DC 20006-4614
Wendy Edelberg
Executive Director
202.292.2799 • 202.632.1604 Fax
Mr. Brad S. Karp, Esq.
June 9, 2010
Page 2 of 5
1. Ms. Susan Mills, Managing Director of Mortgage Finance, Citi Markets & Banking, Global
Securitized Markets
(a) What percentage of Citigroup's2 residential mortgage-backed securities were purchased
by Fannie Mae and Freddie Mac, respectively?
(b) Did the operation you managed incur any losses as a result of the implosion in the
housing market? If so, what caused those losses and what is the estimated amount of such
losses?
(c) In each year, what was the total decline in value and actual dollar losses on the portfolio
of whole loans that Citigroup purchased and maintained on its books? What portion of
the decline in value and actual dollar losses in each year is associated with the purchase
of distressed or so-called "scratch and dent" loans?
(d) What were the total losses from loans held on Citigroup's books that were supposed to be
repurchased by companies that had gone out of business?
2. Mr. Nestor Dominguez, Former Co-Head, Global Collateralized Debt Obligations Citigroup
Markets & Banking, Global Structured Credit Products
(a) With respect to Collateralized debt obligations ("COOs") that contain residential
mortgage-backed securities ("RMBS"), in each year, how large (in terms of both number
of total CDOs and dollar values) was Citigroup's cash CDO business versus its synthetic
CDO business?
(b) Did the super-senior CDO bonds that Citigroup held on its books suffer any actual cashflow losses, as opposed to write-downs associated with a loss in value? If so, please
quantify and describe the cash-flow losses associated with the super-senior positions?
(c) You testified that Citigroup was able to sell the super-senior CDO tranches. Please
describe all sales of super-senior COO tranches to third parties. What was the
approximate date when it became difficult to sell those tranches?
Please note that any references to "you," "your," or "Citigroup" herein refers to Citigroup Inc.
and any of its predecessors, subsidiaries, and any of its divisions, partnerships, branches, its
international, foreign, national, regional and local offices and all other persons acting, purporting
to act, or having previously acted, on its behalf.
2
Mr. Brad S. Karp, Esq.
June 9, 2010
Page 3 of 5
(d) Please describe the vintage of each of the super-senior CDO bonds that Citigroup held as
of November 4,2007. What was the oldest vintage tranche held as of that date?
(e) Were there any discussions of selling the super-senior tranches at a discount to remove
them from Citigroup's books?
(1) Did Citigroup sell or transfer any CDO bonds or tranches to other CDOs or CD02S that
Citigroup sold to investors? If so, identify all such sales or transfers. Were any of the
sales or transfers associated with the inability to sell the bonds or tranches to investors?
(g) To your or Citigroup's knowledge, was any collateral manager of COOs that Citigroup
structured or underwrote involved in shorting, directly or indirectly, any of the COO
bonds or underlying collateral that the collateral manager had selected for the COO?
3. Mr. David C. Bushnell, Former Chief Risk Officer, Citigroup, Inc.
(a) What is the distribution of Citigroup's business on a world-wide basis as measured by its
total assets and income?
4. Mr. Murray C. Barnes, Former Managing Director, Independent Risk Citigroup, Inc.
(a) I low was Citigroup able to book its super-senior tranches at par and keep them at that
valuation for an extended period of time?
(b) Please describe the stress tests that were performed on the super-senior CDO bonds that
Citigroup held on its books. What were the assumptions used?
5. Mr. Robert E. Rubin, Former Director, Senior Counselor, and Chairman, Citigroup, Inc.
(a) Please provide a timeline showing precisely how Citigroup responded to Richard
Bowen's concerns regarding underwriting standards and who was involved in the
responses.
(b) With regard to subprime exposure in the fourth quarter of 2007, please explain the
discrepancy and delay between the $13 billion subprime figure released to the public on
October 15 and the $55 billion presented to Citigroup's Corporate Audit and Risk
Committee and Board of Directors. (Please note that according to Page 1 of Citigroup's
"Risk Management Review," the $55 billion was comprised of $13 billion subprime
Mr. Brad S. Karp, Esq.
June 9, 20ID
Page 4 of5
exposure, $16 billion in direct super senior debt, and $27 billion in liquidity and par
puts.)
(c) Please comment on the use of regulatory and capital arbitrage by financial institutions
and their role in the financial system.
(d) Throughout the crisis, how was the CDS market still able to function, despite being
subject to significant stress? Please provide your opinions on the functioning of the CDS
market during the financial crisis.
6. Charles O. "Chuck" Prince, III, Former CEO and Chairman, Citigroup, Inc.
(a) With regard to subprime exposure in the fourth quarter of 2007, please explain the
discrepancy and delay between the $13 billion subprime figure released to the public on
October 15 and the $55 billion presented to Citigroup' s Corporate Audit and Risk
Committee and Board of Directors. (Please note that according to Page 1 of Citigroup's
"Risk Management Review," the $55 billion was comprised of $13 billion subprime
exposure, $16 billion in direct super senior debt, and $27 billion in liquidity and par
puts.)
(b) Please comment on the use of regulatory and capital arbitrage by financial institutions
and their role in the financial system.
(c) Did Citigroup ever create products that were specifically designed to avoid capital
requirements?
(d) Were new products ever designed solely to reduce capital burdens? How does this
correspond to the 2002 CMAC memo describing the liquidity puts?
(e) Did Citigroup have the technical capacity to assess the quality of RMBS (in CDOs) prior
to 20077
Mr. Brad S. Karp, Esq.
June 9, 20ID
Page 5 of5
The FCIC appreciates your cooperation in providing the information requested. If you have any
questions or concerns, please do not hesitate to contact Brad Bondi at (202) 292-1341 or
bbondi@fcic.gov ; or Jeff Smith at (202) 292-1398 or jsmith@fcic.gov.
Sincerely,
Wendy Edelberg
Executive Director
Financial Crisis Inquiry Commission
cc:
Phil Angelides, Chairman, Financial Crisis Inquiry Commission
Bill Thomas, Vice Chairman, Financial Crisis Inquiry Commission
Bradley J. Bondi, Assistant Director and Deputy General Counsel
Jeff Smith, Investigative Counsel
4843-5647-5398. v I
MATTHEWW. AB80TT
ALLAN J . ARFFA
PAUL. WEISS, RIFKIND, WHARTON & GARRISON LLP
UNIT 3601 . FORTUNE PLAZA OFFICE TOWER A
NO 7 DONG SANHUAN ZHONGLU
CHAO YANG D I STRICT
BEIJING 100020
1265 AVENUE OF THE AMERICAS
NEW YORK. NEW YORK 10019- 6064
TELEPHONE 1212) 373 · 3000
LLOYD K GARRISON
RANDOLPH E . PAUL
SIMON H . RIFKIND
LOUIS S . WEISS
JOHN F WHARTON
ROBERT A . ATKINS
JOHN F. BAUGHMAN
LYNN B . BAY RO
DANIEL J .
ER
CRAIG A . B
N-
MITCHELL
PEOPLE ' S REPUBLIC OF CHINA
TELEPHONE t B8- 10 ) 5828· 6 3 00
C1946- 1991 )
( 1946- ' 956 )
( t950 a 199S I
( t 927 ~ 1950,
(1927 ~ 1977 )
'2TH FLOOR , HONG KONG CLUB BUILDI NG
3A CHATER ROAD. CENTRAL
HONG KONG
TELEPHONE 1852) 2B41\ ' 0300
ALDER CASTLE
10 NOBLE STR E ET
L ONDON ECZV 7JU , U K
TELEPHONE 144 20) 7367 1600
WRITER'S DIR E C T DIAL NUMBER
212373-3316
FUKOKU SE)MEI BUILDING
2 · 2 UCHISA)WAICHO 2 · CHOME
CHIYODA- KU , TOKYO 100-0011 , JAPAN
TELEPHONE 181 · 3) 3597 · 8 101
WR ITER ' S DIRECT FACSIMI LE
212492-0316
2001 K STREET. NW
WASHINGTON. DC 20006· 1047
TELEPHONE 1202) 223 · 7300
WRITER ' S DIRECT E -MAIL ADDRESS
bkarp@paulweiss.com
ERG
MARK S . B
N
BRUCE BIR
1M
H . CHR I ST
BOEHNING
ANGELO BONVINO
HENK BRANDS
JAMES L . BR OCHIN
RICHARD J . BRONSTEIN
DAVID W. BROWN
SUSANNA M . BUERGEL
PATRICK S . CAMPBELL JEANETTE K . CHAN
YVONNE Y. F. CHAN
LEWIS R. CLAYTON
JAY COHEN
KELLEY A . CORNISH
CHARLES E . DAVIDOW
DOUGLAS R. DAVIS
THOMAS V. DE LA BASTI D E ti l
ARIEL J . DECKELBAUM
JAMES M . DUBIN
ALICE BELI SLE EATON
ANDREW J . EHRLICH
LESLIE GORDON FAGEN
MARC FA L CONE
ANDREW C . FINCH
ROBERTO FINZI
PETER E . FISCH
ROBERT C . FLEDER
MARTIN FLUMENBAUM
ANDREW J . FOLEY
HARRIS B . FRE I DUS
MANUE L S . FREY
KENNETH A . GALLO
MICHAEL E . GERTZMAN
PAUL D . GINSBERG
ROBERT D . GOLDBAUM
ER IC S . GOLDSTEI N
ERIC GOODISON
CHAR
H . GOOGE. JR
ANDR
G . GORDON
• GUTENPLAN
WATHMEY. III
HALP
N
RMAN
H
500 DELAWARE AVENUE. SUITE 200
POST OFFICE BOX 32
W)LMINGTON. DE 19899·0032
TELEPHONE (302 ) 6~~ · 4410
E.
. H
R
N
M.
H
HIRSHMAN
JO
. HUANG
DA
S . HUNTINGTON
MEREDITH J . KANE
ROBERTA A . KAPLAN
BRAD S . KARP
JOHN C . KENNEDY
ALAN W . KORNBERG
DAN.EL J , KRAMER
DAVID K LAKHDHIR
STEPHEN P. LAMBJOHN E . LANGE
DANIEL J . LEFFELL
XIAOYU GREG LlU
JEFFREY D . MAR ELL
JULIA TARVER MASON
MARCO V. MASOTTI
EDWIN 5 . MAYNARD
DAVID W . MAYO
ELIZABETH R. McCO L M
TOBY 5 . MYERSON
JOHN E . NATHAN
CATHERINE NYARADY
ALEX YOUNG K . OH
JOHN J . O ' NEIL
KEL LEY D . PARKER
RO BERT P. PARKERMARC E. PERLMUTTER
MARK F. POMERANTZ
VAL ERIE E . RADWANER
CAREY R. RAMOS
CARL L . RE ISNER
WALTER G . RICCIARDI
WALTER RIEMAN
RICHARD A . ROSEN
ANDREW N . ROSENBERG
PETERJ . ROTHENBERG
JACQUEL INE P. RUBIN
RAPHAEL M . RUSSO
JEFFREY D . SAFERSTEIN
JEFFREY B . SAMUELS
DALE M . SARRO
TERRY E . SCHIMEK
KENNETH M . SCHNEID E R
ROBERT B . SCHUMER
JAMES H . SCHWAB
STEPHEN J . SHIMSHAK
DAVID R. SICULAR
MOSES SILVERMAN
STEVEN SIMKIN
JOSEPH J . SIMONS
MARILYN SOBEL
TARUN M . STEWART
E RIC ALAN STONE
AIDAN SYNNOTT
ROBYN F. TARNOFSKY
JUDITH R. THOYER
DANIEL J . TOAL
MARK A . UNDERBERG
LIZA M . VELAZQUEZ
LAWRENCE G . WEE
THEODORE V. WELLS. JR
BETH A . WILKINSON
STEVEN J . WILLIAMS
LAWRENCE I . WITDORCH IC
JORDAN E . YARETT
KAYE N . YOSHINO
TONG YU
TRACEY A . ZACCONE
T. ROBERT ZOCHOWSKI. J R
-NOT ADMITTED TO THE NEW YORK BAR
July 19,2010
By FedEx
Wendy Edelberg, Executive Director
Financial Crisis Inquiry Commission
1717 Pennsylvania Avenue, NW
Suite 800
Washington, DC 20006-4614
Financial Crisis inqltilY Commission ("Commission")
Dear Ms. Edelberg:
We represent Citigroup Inc. ("Citi" or the "Company") and certain current
and fonner Citi employees (the "Citi Employees") in connection with the FCIC's
requests for documents and infonnation and interrogatories relating to the Company. We
write to provide additional responses to the Commission's letter dated June 9, 2010, in
which questions are directed to certain Citi Employees concerning their testimony before
the Commission on April 7 and 8, 2010. The Company and the Citi Employees reserve
the right to supplement, amend, modify or correct any of the responses provided below.
*
I.
*
*
*
*
Responses of Susan Mills, Managing Director of Mortgage Finance, Citi Markets &
Banking (now known as Institutional Clients Group), Global Securitized Markets
(a)
What percentage of Citigrollp 's residential mortgage-backed securities were
purchasell by Fannie Mae lIlId Freddie Mac, respectively ?
CONFIDENTIAL
PAUL, WEISS, RIFKIND, WHARTON & G ARRISON LLP
Wendy Edclberg
2
Between January 2000 and June 20 10, Freddie Mac was a counterparty in
roughly .024 percent of all the trades executed by Citi's investment bank
involving RMBS issued from the SBMSI or the CMLTI shelves, including
newly issued securities and secondary trading (by dollar volume, Freddie Mac
was a counterparty in roughly 1.47 percent of all such trades); Fannie Mae
was a counterparty in roughly .022 percent of all such trades (or roughly 1.04
percent by dollar volume).
(b)
Did the operation) au I1lclI1aged incur allY losses as a result of the implosion ill
the hOllsing market? If so, what caused those losses and what is the estimated
amount of such losses?
The operation I managed, known as Mortgage Finance, did not incur losses
because it does not maintain distinct profit and loss accounting. However, my
group is affiliated with the Mortgage Trading desk within an area ofCiti's
investment bank known as Global Securitized Markets, which did incur losses
as a result of the events in the housing market that unfolded over the last
several years. These losses principally took three fonns: (1) We incurred
losses on mortgage loans held in inventory. The amount of these losses is
described in my response to item I(c), below. (2) We incurred losses on our
holdings ofRMBS bonds. Generally speaking, these losses began in 2007,
though we were net positive on the year. Between 2006 through 2009, the
only year in which we recorded a loss, net of hedges, was 2008. In 2008, we
lost roughly $1.17 billion. (3) We incurred losses- though we were never net
negative on a full-year basis- in connection with our warehouse lending
relationships with mortgage originators. I understand the Company already
has provided infornlation concerning our warehouse business to the
Commission in response to Interrogatory No. 39 ofthe Commission's
February 12,2010 request.
As I testified, it is my view that these losses resulted from an unprecedented
and unanticipated collapse in the housing market, which led to a decline in the
value of all mortgage loans, and which subsequently caused many of our
RMBS positions to perfornl worse than expected.
(c)
In each year, what was the total decline ill value and actual dollar losses on the
portfolio of whole loans that Citigroup purchased and maintained on its
books? What portion of the decline in value alld actual dollar losses in each
year is associated with the purchase of distressed or so-called "scratch lind
dent" loans?
Whole loan purchases and principal securitizations, particularly with respect
to subprime residential mortgages, did not constitute a substantial part of my
group's business until 2005 or thereabouts. (Prior to that time, our business
consisted mostly of underwriting securities for third parties.) Since 2005, we
have incurred net losses on whole loans held in inventory in three years: 2007
CONFIDENTIAL
PAUL , W EI SS, R IF K I ND , WHARTON & GARRISON LLP
Wendy Edelberg
3
(roughly $282 miIlion loss), 2008 (roughly $954 milIion) and 2009 (roughly
$205 miIlion loss). These figures represent total losses for our portfolio,
which means that they reflect, among other things, realized losses on whole
loan sales or REO sales, markdowns on inventory, and expenses.
Our records are not maintained in a way that would allow me efficiently to
detennine what portion of these losses is attributable to loans in inventory that
we classify as scratch and dent. However, scratch and dent loans, together
with loans in inventory that we classify as subprime, accounted for roughly 84
percent, 91 percent and 84 percent of our losses in 2007, 2008 and 2009,
respectively (with the remainder of the losses attributable to loans classified as
prime or Alt-A).I
(d)
What were the total losses from loans held all Citigrollp's books that were
supposed to be repurchased by companies that had gone out of bllsiness?
We do not maintain centralized records that would allow me to detem1ine our
total losses on loans in inventory that were pending repurchase when the seIler
went out of business. As a general matter, however, I know that we did incur
some losses on loans that were supposed to be repurchased by companies that
went bankrupt, such as New Century and American Home Mortgage.
II.
Responses of David C. Bushnell, Fonner Chief Risk Officer, Citigroup, Inc.
(a)
What is the distribution of Citigroup 's business all a world-wide basis as
measured by its total assets and income?
As I testified, I left the Company in 2007 and thus I no longer have access to
infonnation that would pennit me to respond to this question. However, the
Company has prepared the following chart, which I understand reflects the
distribution ofCiti's business activities across the major geographic regions
where it conducts business, on an income basis:
North America
EMEA
Latin America
Asia
2000..!
7,353
404
208
702
2001
8,918
572
120
1,539
2002
9,707
1,777
(47)
2,552
2003
12,602
1,753
645
2,509
2004
9,411
2,337
1,203
3,408
The figure for 2007 may be slightly distorted by the fact that the Company changed the manner in
which it accounted for its inventory of prime and Alt-A loans in or around August 2007. Prior to the
change, the Company did not track the profit and loss specifically attributable to prime and Alt-A loans
in inventory.
Unless otherwise noted. the figures for each year are stated in millions of dollars .
CONFIDENTIAL
PAUL, WEISS, RI F KIND , WHARTON & GARR ISO N LLP
Wendy Edelberg
NOIih America
EMEA
Latin America
Asia
4
2005
12,816
1,512
872
3,836
2007
(617)
(1,321)
1,789
4,738
2006
13,445
2,759
85 2
3,571
*
*
*
*
2008
(29,035)
(1,741)
(1,983)
1,619
j
2009
3,386
4,471
2,439
4,483
*
As we have discussed, the Company is providing the infonnation in this
letter pursuant to the Commission's representations that the infom1ation provided to the
Commission will be maintained in strict confidence and will be used by the Commission
solely for the purposes of this inquiry.
We understand from our discussions that the Commission's work, and the
materials it requests and obtains from the Company, are not subject to the provisions of
FOIA. We also understand that the Commission intends to keep the materials submitted
to it by the Company strictly confidential in connection with this inquiry.
If any person not a member of the Commission or its staff (including,
without limitation, any govemment employee) should request an opportunity to inspect or
copy any confidential infonnation provided by the Company, or if you or any member of
the Commission or its staff contemplates disclosure of this infonnation to any other
person, the Company requests that the Commission promptly notify Paul, Weiss, Rifkind,
WhaJion & Garrison LLP, 1285 Avenue of the Americas, N.Y., N.Y. 10019 (att'n Brad
Karp) and Citigroup Inc., 399 Park Avenue, N.Y., N.Y. 10022 (att'n PJ. Mode).
Please do not hesitate to contact me if you would like to discuss this letter
or any other matter.
Respectfully,
~cl ·~. Y(
{ ~/l~
D\- 7 /Y::' ~
Brad S. Karp
In 2009, Citigroup realigned its business into two separate entities: Citicorp and CitiHoldings. The
2009 figures reflect income results from the Citicorp portfolio only.
CONFIDENTIAL
PAUL. WEISS, RIFKIND, WHARTON & GARRISON LLP
1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019-6064
UNIT 3601, FORTUNE PLAZA OFFICE TOWER A
NO.7 DONG SANHUAN ZHONGLU
CHAO YANG DISTRICT
TELEPHONE (212) 373-3000
FACSIMILE
BEIJING 100020
PEOPLE'S REPUBLIC OF CHINA
(212) 757-3990
TELEPHONE (86-10) 5828-6300
LLOYD K. GARRISON (1946-1991)
RANDOLPH E. PAUL
(1946-1956)
SIMON H. RIFKIND
(1950-1995)
LOUIS S. WEISS
(1927-1950)
JOHN F WHARTON
(1927-1977)
FACSIMILE (86-10) 6530-9070/9080
12TH FLOOR, HONG KONG CLUB BUILDING
3A CHATER ROAD, CENTRAL
HONG KONG
TELEPHONE (852) 2846-0300
FACSIMILE (852) 2840-4300
ALDER CASTLE
WRITER'S DIRECT DIAL NUMBER
10 NOBLE STREET
LONDON EC2V 7JU, U.K.
212373-3316
TELEPHONE (44 20) 7367 1600
FACSIMILE (44 20) 7367 1650
WRITER'S DIRECT FACSIMILE
FUKOKU SEIMEI BUILDING
212492-0316
2-2 UCHISAIWAICHO 2-CHOME
CHIYODA-KU, TOKYO 100-0011, JAPAN
TELEPHONE (81-3) 3597-8101
FACSIMILE (81-3) 3597~8120
WRITER'S DIRECT E-MAIL ADDRESS
bkarp@paulweiss.com
2001 K STREET, NW
WASHINGTON, DC 20006-1047
TELEPHONE (202) 223-7300
FACSIMILE (202) 223-7420
MATTHEW W. ABBOTT
ALLAN J. ARFFA
ROBERT A. ATKINS
JOHN F. BAUGHMAN
LYNN B. BAYARD
DANIEL J. BELLER
CRAIG A. BENSON*
MITCHELL L BERG
MARK S. BERGMAN
BRUCE BIRENBOIM
H. CHRISTOPHER BOEHNING
ANGELO BONVINO
HENK BRANDS
JAMES L. BROCHIN
RICHARD J. BRONSTEIN
DAVID W. BROWN
SUSANNA M. BUERGEL
PATRICK S. CAMPBELL'"
JEANETTE K. CHAN
YVONNE Y. F. CHAN
LEWIS R. CLAYTON
JAY COHEN
KELLEY A. CORNISH
CHARLES E. DAVIDOW
DOUGLAS R. DAVIS
THOMAS V. DE LA BASTIDE III
ARIEL J. DECKELBAUM
JAMES M. DUBIN
ALICE BELISLE EATON
ANDREW J. EHRLICH
LESLIE GORDON FAGEN
MARC FALCONE
ANDREW C. FINCH
ROBERTO FINZI
PETER E. FISCH
ROBERT C. FLEDER
MARTIN FLUMENBAUM
ANDREW J. FOLEY
HARRIS B. FREIDUS
MANUEL S. FREY
KENNETH A. GALLO
MICHAEL E. GERTZMAN
PAUL D. GINSBERG
ROBERT D. GOLDBAUM
ERIC S. GOLDSTEIN
ERIC GOODISON
CHARLES H. GOOGE, JR.
ANDREW G. GORDON
BRUCE A. GUTENPLAN
2tl~E~.~VXtJ)~~UFr
III
CLAUDIA HAMMERMAN
GERARD E. HARPER
BRIAN S. HERMANN
ROBERT M. HIRSH
MICHELE HIRSHMAN
JOYCE S. HUANG
DAVID S. HUNTINGTON
MEREDITH J. KANE
ROBERTA A. KAPLAN
BRAD S. KARP
JOHN C. KENNEDY
ALAN W. KORNBERG
DANIEL J. KRAMER
DAVID K. LAKHDHIR
STEPHEN P. LAMB*
JOHN E. LANGE
DANIEL J. LEFFELL
XIAOYU GREG LlU
JEFFREY D. MAR ELL
JULIA TARVER MASON
MARCO V. MASOTTI
EDWIN S. MAYNARD
DAVID W. MAYO
ELIZABETH R. McCOLM
TOBY S. MYERSON
JOHN E. NATHAN
CATHERINE NYARADY
ALEX YOUNG K. OH
JOHN J. O'NEIL
KELLEY D. PARKER
ROBERT P. PARKER*
MARC E. PERLMUTTER
MARK F. POMERANTZ
VALERIE E. RADWANER
CAREY R. RAMOS
CARL L REISNER
WALTER G. RICCIARDI
WALTER RIEMAN
RICHARD A. ROSEN
ANDREW N. ROSENBERG
PETERJ. ROTHENBERG
JACQUELINE P. RUBIN
RAPHAEL M. RUSSO
JEFFREY D. SAFERSTEIN
JEFFREY B. SAMUELS
DALE M. SARRO
TERRY E. SCHIMEK
KENNETH M. SCHNEIDER
ROBERT B. SCHUMER
JAMES H. SCHWAB
STEPHEN J. SHIMSHAK
DAVID R. SICULAR
MOSES SILVERMAN
STEVEN SIMKIN
JOSEPH J. SIMONS
MARILYN SOBEL
TARUN M. STEWART
ERIC ALAN STONE
AIDAN SYNNOTT
ROBYN F. TARNOFSKY
JUDITH R. THaYER
DANIEL J. TOAL
MARK A. UNDERBERG
LIZA M. VELAZQUEZ
MARIA T. VULLO
LAWRENCE G. WEE
THEODORE V. WELLS, JR.
BETH A. WILKINSON
STEVEN J. WILLIAMS
LAWRENCE I. WITDORCHIC
JORDAN E. YARETT
KAYE N. YOSHINO
TONG YU
TRACEY A. ZACCONE
T. ROBERT ZOCHOWSKI, JR.
*NOT ADMITTED TO THE NEW YORK BAR
June 23, 2010
By Hand and E-mail
Wendy Edelberg, Executive Director
Financial Crisis Inquiry Commission
1717 Pennsylvania Avenue, NW
Suite 800
Washington, DC 20006-4614
Financial Crisis Inquiry Commission ("Commission '')
Dear Ms. Edelberg:
We represent Citigroup Inc. ("Citi" or the "Company") and certain current
and former Citi employees (the "Citi Employees") in connection with the FCIC's
requests for documents and information and interrogatories relating to the Company. We
write in response to the Commission's letter dated June 9, 2010, in which questions are
directed to certain Citi Employees concerning their testimony before the Commission on
April 7 and 8, 2010.
On behalf of the Citi Employees, we provide responses to certain of those
questions. We expect to provide further responses on a rolling basis over the next few
weeks. The Company and the Citi Employees reserve the right to supplement, amend,
modify or correct any of the responses provided below.
*
CONFIDENTIAL
*
*
*
*
PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP
Wendy Edelberg
I.
2
Responses of Nestor Dominguez, Former Co-Head, Global Collateralized Debt
Obligations, Citigroup Markets & Banking, Global Structured Credit Products
With respect to Collateralized debt obligations ("CDOs '') that contain
residential mortgage-backed securities ("RMBS''), in each year, how large
(in terms of both number of to tal CDOs and dollar values) was
Citigroup's cash CDO business versus its synthetic CDO business?
(a)
As I testified, I left the Company in November 2007. Accordingly, I no
longer have access to records that would permit me to respond to this
question or verify the accuracy of the Company's response. However, in
an effort to respond to this request, the Company has prepared the
following two charts, which provide information about three categories of
CDOs: (a) cash CDOs (i.e., the CDO collateral was acquired in cash
form), (b) synthetic CDOs (i. e., the CDO collateral was acquired in
l
derivative form), and (c) hybrid CDOs (i. e., the CDO collateral includes
both cash bonds and derivative positions).
Cas Ii
1
5
9
13
8
1
Syntlietic 0
0
2
0
7
1
'Hyb~ld
0
0
0
11
14
'.
;
..
0
Ci~kStructu~~d~D01S"'hhRM~.~ Collateral:"
.Total ~Npti9nal:J)omir.ValUe§~in~J)illions)"
'cJ
.C·
' L
~
12007
• I"
$0.4
Synthetic 0
Hybrid
o
: ••••
$4.7
$15.1
$11.3
$7.9
$0.6
o
o
$2.3
o
o
$7.9
$1
$7.7
$19.5
o
As I testified, I served as co-head ofCiti's global CDO business that focused on cash CDOs. I did not
oversee the desk at Citi that focused on synthetic CDOs with RMBS collateral.
CONFIDENTIAL
PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP
Wendy Edelberg
(b)
3
Did the super-senior CDO bonds that Citigroup held on its books suffer
any actual cash-flow losses, as opposed to write-downs associated with a
loss in value? Jjso, please quantifY and describe the cashjlow losses
associated with the super-senior positions?
Through the date of my departure from Citi in November 2007, I am not
aware of any super-senior CDO positions retained by Citi that suffered
actual cash-flow losses as opposed to mark-to-market write-downs. I am
informed that certain of Citi's retained super-senior positions suffered
cash-flow losses subsequent to my departure. I understand from Citi that
the Company separately will provide the Commission with information
about the nature and extent of these losses.
(c)
You testified that Citigroup was able to sell the super-senior CDO tranches.
Please describe all sales of super-senior CDO tranches to third parties.
What was the approximate date when it became difficult to sell those
tranches?
As I testified, Citi attempted to sell or obtain credit protection on certain of
the super-senior tranches of CDOs that Citi structured.
With respect to the CDOs that Citi structured with a liquidity-put feature,
the super-senior tranche was funded through the sale of short-term
commercial paper. Citi retained the risk associated with the super-senior
tranche in the event of dislocations in the commercial paper market. Citi
did not undertake to sell its retained exposure to these structures.
With respect to CDOs structured without a liquidity-put feature, I
understand that the Company previously provided the Commission with a
chart that lists the investors (or providers of credit protection) in each
tranche, including the super-senior tranche, of CDOs that included
subprime RMBS collateral from 2005 to 2007. (See CITI-FCIC
00091306 - CITI-FCIC 00091336.)
I do not recall a specific date when it became difficult to sell the supersenior tranches. However, I do recall that, beginning in August 2007, as
the subprime market experienced increasing difficulty, it became difficult
to find investors willing to acquire any tranches of CDOs.
(d)
Please describe the vintage of each of the super-senior CDO bonds that
Citigroup held as ofNovember 4, 2007. What was the oldest vintage tranche
held as of that date?
On November 4,2007, Citi announced that it held approximately $43
billion in net super-senior CDO exposure with subprime RMBS collateral
as of the third quarter of 2007. I understand from information provided by
CONFIDENTIAL
PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP
Wendy Edelberg
4
Citi that this $43 billion of super-senior CDO exposure consisted of
(a) approximately $18 billion of super-senior tranches of ABS CDO, and
(b) approximately $25 billion in commercial paper principally secured by
super-senior tranches of ABS CDOs.
Although I do not presently have access to records that would allow me to
respond to this question, the Company has prepared the two charts below
listing the vintage (closing date) for each of the super-senior tranches and
commercial paper secured by super-senior tranches that constituted the
$43 billion retained by Citi as of November 4,2007. The oldest vintage
bond is Grenadier Funding, which closed on July 14,2003.
CONFIDENTIAL
Pillars
5-Jan-04
G-Square
14-Dec-04
Summer Street
20-0ct-05
Topanga
18-Jan-06
GSC ABS CDO 2006-1 c
31-Mar-06
Madaket
11-May-06
Ivy Lane
18-May-06
Avanti
22-Jun-06
Cetus ABS CDO 2006-1
20-Jul-06
Capmark VI Revolver
24-Jul-06
Coldwater
17-Aug-06
Cetus ABS CDO 2006-2
27-Sep-06
Mugello ABS CDO 2006-1
14-Nov-06
Cetus ABS CDO 2006-4
15-Nov-06
Lacerta ABS CDO 2006-1
29-Nov-06
FAB
30-Nov-06
Octans ABS CDO 2006-3
6-Dec-06
HSPI I
12-Dec-06
Tallships
14-Dec-06
Cookson High Grade
5-Mar-07
PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP
Wendy Edelberg
CONFIDENTIAL
5
Adams Square III
6-Mar-07
Octonion
6-Mar-07
Palmer ABS CDO 2007-1
7-Mar-07
Plettenberg Bay
8-Mar-07
Laguna
28-Mar-07
Armitage
29-Mar-07
HSPI II
14-Jun-07
Pinnacle Peak
3-Jul-07
Bonifacius
27-Jul-07
Jupiter
2-Aug-07
PAUL, WEISS, RIFKIND, WHARTON & GARR SON LLP
Wendy Edelberg
(e)
6
Grenadier Funding
I4-Jul-03
Blue Bell
I2-Dec-03
Ajax Bambino
I5-Dec-03
Millstone Funding
4-Feb-04
Saturn Ventures II
22-Apr-04
Klio Funding
2S-Jun-04
Klio Funding II
29-0ct-04
Pinnacle Point
4-Nov-04
McKinley Funding
IO-Dec-04
Zenith Funding
2I-Dec-04
Quatro - PmX Funding
27-Dec-04
Kent Funding
6-Apr-OS
Athos Funding
I6-May-OS
McKinley Funding II
I8-Aug-OS
Klio Funding III
I-Nov-05
Raffles Place
I6-Nov-OS
Tierra Alta
30-Mar-06
Were there any discussions of
discount to remove them from
the super-senior tranches at a
's books?
I do not recall discussions of
discount.
the super-senior tranches at a
During my tenure, ho~ever, C' I did seek, from time to time, to hedge its
exposure to super-semor ABS I Os. Given the typically large size of
y small returns provided on those
super-senior tranches, and the I
counterparties able to assume the risk
positions, the universe of
Os was limited.
of the super-senior tranche of
CONFIDENTIAL
PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP
Wendy Edelberg
(f)
7
Did Citigroup sell or transfer any CDO bonds or tranches to other CDOs
or CDds that Citigroup sold to investors? .ifso, identify all such sales or
transfers. Were any of the sales or transfers associated with the inability to
sell the bonds or tranches to investors?
Citi was a large underwriter of CDO securities from 2003 to 2007. As
such, it would not be unusual for a Citi CDO to include some securities
from a CDO that Citi previously had structured.
I do not have access to records that would permit me to provide the detail
requested by the Commission. However, I understand that the Company
previously provided the Commission with a chart that details the amount
and percentage of Citi-structured CDO securities in Citi-structured CDO
transactions. (See CITI-FCIC 00091762.)
(g)
To your or Citigroup 's knowledge, was any collateral manager of CD Os
that Citigroup structured or underwrote involved in shorting, directly or
indirectly, any of the CDO bonds or underlying collateral that the
collateral manager had selectedfor the CDO?
I am not aware of an instance where a collateral manager of a Citistructured CDO, directly or indirectly, shorted the particular CDO bonds
(or underlying collateral) of that CDO.
II.
Responses of Murray Barnes, Former Managing Director, Independent Risk
Citigroup, Inc.
(a)
How was Citigroup able to book its super-senior tranches at par and keep
them at that valuation for an extended period of time?
As of June 30, 2007, and for prior periods, Citi primarily relied on
comparing the spread paid on its super-senior ABS CDO inventory to
spreads on recently-priced deals that were similarly AAA-rated, first-pay
tranches and that were, at the time, viewed as the most directly
comparable reference point for pricing purposes. This included other
super-senior ABS CDO securities and associated credit default swaps on
super-senior tranches executed with other financial institutions, as well as
first-pay CLO tranches backed by leveraged loans. In light of the
prevailing spreads observed from market transactions, Citi generally
carried the super-senior CDO securities at cost, or par. This marking
methodology reflected the view that a similar market-clearing transaction
represented the most directly comparable level against which to
benchmark the super-senior inventory. It was also consistent with the then
widely-held belief-both within the company and throughout the broader
market-that the super-senior positions bore almost no risk of principal
loss.
CONFIDENTIAL
PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP
Wendy Edelberg
By September 2007, and in subsequent periods, the absence of any CDO
new issuance given the stress seen in the subprime RMBS market meant
that Citi could no longer rely on other, recently-priced CDO deals for
comparison purposes. As such, Citi developed a proprietary model to
price its super-senior CDO inventory based, in part, on an intrinsic cash
flow methodology of the CDO"s underlying collateral. This model took
into account judgmental inputs such as forecasted house price
appreciation, employment and interest rates, as well as other factors. As
of September 30, 3007, applying the intrinsic cash-flow model, Citi took a
very modest markdown on the value of its portfolio of super-senior CDO
securities. As market conditions deteriorated significantly in October
2007, and then throughout 2008 and into the first quarter of 2009, Citi
took further markdowns on its super-senior CDO exposure as the
continued downward pressure on home prices adversely impacted the
underlying RMBS market.
(b)
Please describe the stress tests that were performed on the super-senior
CDO bonds that Citigroup held on its books. What were the assumptions
used?
The CDO business, including its retained super-senior exposure, was
subject to the same stress testing framework that was applied to all of
Citi"s trading businesses. Stress testing at Citi consisted of a three-pillar
approach:
The first stress test was referred to as the Historical Simulation
stress. It involved performing an historical simulation of market moves
over a three-month (or 65 business day) risk horizon, relying on historical
market moves going back to the late-1990s. Rolling 65-day market moves
were applied to current exposures and the aggregate P&L across the
portfolio was then ranked highest loss to highest gain. This stress test
effectively assumed that the magnitude of past market moves is
representative of the potential for adverse moves in the future and that the
historical correlation of market moves across every risk factor is
preserved.
1.
The second stress test was referred to as the Worst-Case Move
stress. It involved performing a historical simulation of market moves
over a three-month risk horizon, relying on the same data set as in i.
above. Historical 65-day moves were applied to current exposures but
instead of taking the aggregate P&L and then ranking the distribution
highest loss to highest profit, the Worst-Case Move Stress Test simply
took the largest 65-day loss for each risk factor and then aggregated those
losses. This stress test effectively assumed that the worst 65-day move in
each risk factor happens at the same time and so the historical correlation
11.
CONFIDENTIAL
8
PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP
Wendy Edelberg
9
of market moves breaks down. This was commonly viewed as a
significantly more severe stress test than i. since the correlation between
each risk factor effectively goes to the upper (+ 1) or lower (-1) bound,
whichever results in a larger loss.
The third stress test was referred to as the Risk Manager Estimate.
Its aim was to complement the stress tests described in i. and ii. by
enabling Market Risk to apply some judgment into the stress test analysis.
In order for this judgment to be applied consistently across all products
throughout Citi, the guidelines at the time required Market Risk to "stress"
the trading portfolio over a three-month risk horizon and to a 99.97%
confidence level (equivalent to a 3 in 10,000 event, which was viewed as
the default probability of Citigroup at the time given its then-AA rating).
For certain markets that exhibited a high degree of price continuity and
transparency, the need to apply judgment was less pronounced as
historical price moves during times of stress were commonly viewed as a
reasonable indicator of future potential moves. The judgment applied to
the Risk Manager Estimate stress was more relevant for markets that were
prone to greater price discontinuity and/or a sudden loss of liquidity.
111.
Prior to September 2007, the Historical Simulation stress and the Worst
Case Move stress would have both shown zero losses for super-senior
ABS CDO inventory. Also, prior to 2007, the Risk Manager Estimate
stress test assigned a nominal spread move to the super-senior ABS CDO
inventory that, while immaterial in absolute terms, was still viewed as
conservative in that it represented a spread widening of as much as 50% in
relative terms. With the benefit of hindsight, it is now clear that even the
Risk Manager Estimate (reflecting a 99.97% confidence) was overly
reliant on historical experience-a period in which super-senior ABS
CDO tranches had never been impacted.
After September 2007, the Risk Manager Estimate was enhanced by
incorporating some of the output from the intrinsic cash flow model,
including looking through to each CDO"s underlying collatera1"s
characteristics, including collateral type, vintage and level of credit
enhancement (subordination) and applying different stress moves to each
attribute. Given how prevailing market conditions were so out-of-samp1e
with the historical price experience of the underlying collateral types, a
much higher degree of judgment was applied to the stress testing
methodology.
CONFIDENTIAL
PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP
Wendy Edelberg
III.
10
Responses of Charles O. "Chuck" Prince, III, Former CEO and Chairman,
Citigroup, Inc.
(a)
With regard to subprime exposure in the fourth quarter of2007, please
explain the discrepancy and delay between the $13 billion subprime figure
released to the public on October 15 and the $55 billion presented to
Citigroup's Corporate Audit and Risk Committee and Board ofDirectors.
(Please note that according to Page 1 ofCitigroup's "Risk Management
Review, " the $55 billion was comprised of$13 billion subprime exposure,
$16 billion in direct super senior debt, and $27 billion in liquidity and par
puts.)
Having now reviewed the October 15, 2007 Risk Management
presentation to the Corporate Audit and Risk Management Committee, I
see that the description of Market and Banking's subprime exposure
explicitly differentiates the $13 billion in subprime exposure: "the total
subprime exposure in markets and banking was $13 billion" from the
remaining $43 billion in super-senior exposure. Although I believe I
attended the meeting where it was presented, I did not prepare or review
prior to the meeting the materials used at that meeting. Upon review, the
presentation appears to me to be consistent with a view that subprime
exposure was considered to be $13 billion. The "additional" exposure of
"$16 million in direct super senior and $27 billion in liquidity and par puts
appear to have been viewed separately. It is now clear that the Company's
retained exposure to super-senior CDO tranches and liquidity puts had a
significant negative impact on the Company and caused Citi to suffer large
losses. It is important to keep in mind, however, that the second half of
2007 was a period of unprecedented upheaval in the credit markets. I
believe that it was widely believed at the time by experts, both inside and
outside the company, that these above-AAA positions were extremely
unlikely to suffer any material loss of value-even though that belief
proved to be incorrect with the benefit of hindsight. As a result, the supersenior and liquidity put positions were conceived of as fundamentally
different in character from other subprime-related exposures that were
taking losses as of mid-October.
(b)
Please comment on the use of regulatory and capital arbitrage by
financial institutions and their role in the financial system.
There is a growing consensus that regulatory capital requirements need to
be reevaluated and reformed in order to incorporate some of the difficult
lessons learned during the course of this ongoing crisis. I share this view.
Regulatory capital requirements exist, of course, to help ensure the safety
and soundness of our banking institutions. The increasing prevalence of
tools such as securitization to reduce risk weighted assets has increased
CONFIDENTIAL
PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP
Wendy Edelberg
11
the challenges associated with relying on regulatory capital requirements
as a measure of the soundness of our financial institutions. These
challenges stem not just from the tools institutions use, but also in how our
regulatory capital requirements are applied, including that, in the past,
they often applied differently to different kinds of institutions (e. g.,
securities firms vs. banks) and differently to various subsets of holding
companies. From my perspective, reform must focus not just on the
methodologies by which regulatory capital is measured but also on the
participants in the marketplace whatever their differing forms of business
might be, in order to ensure that any reform is effective throughout the
financial system.
(c)
Did Citigroup ever create products that were specifically designed to
avoid capital requirements?
As I think about my nearly 30-year tenure at Citi, I cannot recall any
instance of Citi creating a product specifically designed to avoid capital
requirements imposed on the Company.
(d)
Were new products ever designed solely to reduce capital burdens? How
does this correspond to the 2002 CMAC memo describing the liquidity
puts?
During my testimony before the Commission, I mentioned Citi creates
products to meet the needs of its clients. In keeping with this primary goal,
it was both prudent and consistent with good financial management for
Citi's businesses to consider, among other factors, the capital impact of
products the businesses offered to clients.
During my tenure, we worked hard to put Citi's assets to work in an
efficient manner to accomplish that goal. Like other public companies,
Citi has an obligation to its shareholders to maximize revenues. In this
context, it would not be unusual for Citi to seek, in a manner transparent to
its regulators, favorable capital treatment for the assets it retained on
balance sheet. I have not previously reviewed the 2002 CMAC
memorandum that I understand is referenced in this question. (CITI-FCIC
99791.) However, based on my recent review, the memorandum, which
describes the expected regulatory capital treatment of a structure that
includes a contingent funding swap arrangement, appears to detail efforts
by the business to meet this goal.
(e)
Did Citigroup have the technical capacity to assess the quality of RMBS
(in CDOs) prior to 2007?
I do not have personal knowledge of the Company's technical capabilities
to assess the quality of the collateral underlying CDO structures, including
CONFIDENTIAL
PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP
Wendy Edelberg
12
RMBS securities. However, I am informed that, prior to 2007, it was
standard in the industry to rely upon ratings and other metrics in assessing
the quality of RMBS securities used as collateral in structured credit
products. Consistent with this standard, I do not believe Citi employed
analytic tools or models to independently and directly evaluate the quality
of RMBS securities collateral for CDO transactions.
*
*
*
*
*
As we have discussed, the Company is providing the information in this
letter pursuant to the Commission's representations that the information provided to the
Commission will be maintained in strict confidence and will be used by the Commission
solely for the purposes of this inquiry.
We understand from our discussions that the Commission's work, and the
materials it requests and obtains from the Company, are not subject to the provisions of
FOIA. We also understand that the Commission intends to keep the materials submitted
to it by the Company strictly confidential in connection with this inquiry.
If any person not a member of the Commission or its staff (including,
without limitation, any government employee) should request an opportunity to inspect or
copy any confidential information provided by the Company, or if you or any member of
the Commission or its staff contemplates disclosure of this information to any other
person, the Company requests that the Commission promptly notify Paul, Weiss, Rifkind,
Wharton & Garrison LLP, 1285 Avenue of the Americas, N.Y., N.Y. 10019 (att'n Brad
Karp) and Citigroup Inc., 399 Park Avenue, N.Y., N.Y. 10022 (att'n P.J. Mode).
Please do not hesitate to contact me if you would like to discuss this letter
or any other matter.
Respectfully,
fhdJ.~~
Brad S. Karp
CONFIDENTIAL
SAMUEL BRYANT DAVIDOFF
(202) 434-5648
Sdavidoff@wc.com
June 23, 2010
Wendy Edelberg
Executive Director
Financial Crisis Inquiry Commission
1717 Pennsylvania Avenue, N.W., Suite 800
Washington, DC 20006-5614
Dear Ms. Edelberg:
I have enclosed Robert E. Rubin’s responses to the questions directed to him in
your letter to Brad S. Karp of June 9, 2010.
Very truly yours,
Samuel Bryant Davidoff
Enclosure
cc:
Kevin M. Downey, Esq.
Brad S. Karp, Esq.
Responses of Robert E. Rubin
to FCIC’s June 9, 2010 Questions
(a) Please provide a timeline showing precisely how Citigroup responded to Richard Bowen’s concerns
regarding underwriting standards and who was involved in the responses.
Mr. Bowen’s November 3, 2007 e-mail was addressed to Mr. Rubin, David Bushnell, Gary Crittenden,
and Bonnie Howard. The e-mail was subsequently passed on to the appropriate personnel at Citigroup.
Citigroup should be able to provide a description of its response to Mr. Bowen’s concerns.
(b) With regard to subprime exposure in the fourth quarter of 2007, please explain the discrepancy
and delay between the $13 billion subprime figure released to the public on October 15 and the $55
billion presented to Citigroup’s Corporate Audit and Risk Committee and Board of Directors. (Please
note that according to Page 1 of Citigroup’s “Risk Management Review,” the $55 billion was
comprised of $13 billion subprime exposure, $16 billion in direct super senior debt, and $27 billion in
liquidity and par puts.)
I was not involved in drafting the October 15, 2007 presentation to the Corporate Audit and Risk
Management Committee. I was not a member of that Committee. To the best of my recollection, I did
not review that presentation. I also was not on the October 15, 2007 earnings call. Those at Citigroup
who were involved in preparing the presentation for the Audit Committee or who were on the earnings
call should be able to provide the analysis responsive to your question.
(c) Please comment on the use of regulatory and capital arbitrage by financial institutions and their
role in the financial system.
The term “capital arbitrage,” as I understand it, refers to reducing a financial institution’s capital
requirements by holding assets based in part on the particular regulatory risk assigned to the asset by
financial regulators, irrespective of true economic risk. In other words, a financial institution engages in
“capital arbitrage” if it holds asset A instead of asset B because, despite having similar real risk
characteristics, asset A has a lower regulatory risk weighting and, consequently, holding it requires the
financial institution to maintain less capital than it would have to maintain if it held asset B.
The obvious problem with “capital arbitrage” is that it can distort appropriate economic decisions based
on true economic risk, resulting in overleveraging of financial institutions, which, as I explained in my
testimony before the Commission, was one of the causes of the recent financial crisis. Although I am
not familiar with specific examples of this sort of arbitrage, it seems to me that the source of the
problem is in the process of modeling risk that must be undertaken in order to assign risk ratings to
assets. Mathematical models, to put it bluntly, cannot perfectly capture the complexity of real life.
Consequently, regulatory risk ratings will never perfectly reflect real economic risk, and will, standing
alone, always be subject to potential arbitrage.
1
My view is that this problem could be addressed by financial regulation that creates two sets of capital
requirements, one contingent on risk weighting and one based on simpler metrics that are not derived
from complicated mathematical models.
The term “regulatory arbitrage,” as I understand it, refers to the notion that financial institutions had
the ability to “shop” for a regulator by selecting the charter under which they operated. I am not
familiar with specific instances of this practice, but, to the extent such a practice existed, it can lead to
inconsistent regulatory oversight among regulated institutions. Financial reform should attempt to
eliminate the jurisdictional overlaps that permit this practice.
(d) Throughout the crisis how was the CDS market still able to function, despite being subject to
significant stress? Please provide your opinions on the functioning of the CDS market during the
financial crisis.
In my view the markets for CDS and other complex derivatives did not function with the necessary
collateral and margin requirements, standardization, transparency, and regulatory oversight needed to
properly understand the risks embedded in those instruments. I developed strong concerns about
systemic risk related to derivate markets when I was at Goldman Sachs and advocated increased capital
and margin requirements, as discussed in my book published in 2003. I continue to support those
measures in addition to current proposals for standardization, transparency, and oversight of the
derivative markets.
Prior to the financial crisis, the lack of transparency in the derivatives markets enabled financial
institutions to accumulate risk without full knowledge of the overall nature of the risks for individual
institutions and the financial system more generally. Increasing margin and capital requirements will
serve the dual purpose of providing companies with a greater cushion in the event losses are taken on
derivative instruments and of discouraging certain types of riskier behavior. Requiring standardized
derivatives to be traded on exchanges will also decrease risk by increasing transparency and allowing
regulators and users to better evaluate the exposure of market participants. For custom contracts, I
support greater disclosure and transparency requirements for those instruments as well, through the
use of clearinghouses if feasible.
2
September 21 , 2010
Phil AngeJides
Chairman
Hon. Bill Thomas
Via Email & Mail
Brad S. Karp. Esq.
Paul , Wei s~. Rifkin , Wharton & Gani son LLP
1285 A venue of the America~
New York, NY 100] 9-6064
BKarp@paulwei 's.com
Vice Cllnirmml
Re:
Financial Crisis Inquiry Commission Hearing on June 30, 2010
Brooksley Born
CO/1/missioner
Dear Mr. Karp:
Byron S. Georgiou
Thi ~
Comlllissioner
Senator Bob Graham
letter roIIow~ up on the leller dated June 9 2010 asking your client to
answer question5. in wliting . Please direct thi. que tion to the individual at
Citigroup that can provide a wrill en response to the following additi onal que tion
by October 1, 20 10.
Commissioner
Please provide a timeline showing in detail how Citigroup reoponded to
Richard Bowen' s November 3,2007 email in which Mr. Bowen outlined his
concerns regardi ng underwriting standard incl uding who was involved in
responding. (See attached.)
Keith Hennessey
Com/1/issioner
Douglas Holtz-Eakin
Commissioner
Heather H. Murren, CFA
111e FCIC appreciates your cooperation in providing the information requested .
Please do not hesitate to contact Sm'ah Knau!-l at (202) 292-1394 or
sknau ~ @fci c .g ov if you have any q u e ~t i on s or concerns .
CommissiOller
John W. Thompson
Sincerely.
Commissioner
Peter J. Wallison
Wendy Edelberg
Executive Director, Financial Cli sis Inquiry
Commission
Commissioner
c -:
Phil Angelides, Chairman, Financial Crisis Inquiry Commi:sion
Bill Thomas. Vice Chairman, Financial Cri sis Inquiry Commission
Attachment
1717 Pennsylvania Avenue, NW, Suite 800 • Washington, DC 20006-4614
Wendy Edelberg
Executive Director
202.292.2799 • 202.632.1604 Fax
PAUL. WEISS, RIFKIND, WHARTON & GARRISON LLP
1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019-6064
UNIT 3601, FORTUNE PLAZA OFFICE TOWER A
NO.7 DONG SANHUAN ZHONGLU
CHAO YANG DISTRICT
TELEPHONE (212) 373-3000
BEIJING 100020
PEOPLE'S REPUBLIC OF CHINA
LLOYD K. GARRISON
(1946-1991)
RANDOLPH E. PAUL
SIMON H. RIFKIND
(1946-1956)
(1950-1995)
LOUIS S. WEISS
(1927-1950)
JOHN F. WHARTON
(1927-1977)
TELEPHONE (86-'
Q)
5828-6300
12TH FLOOR. HONG KONG CLUB BUILDING
3A CHATER ROAD, CENTRAL
HONG KONG
TELEPHONE (852) 2846-0300
ALDER CASTLE
10 NOBLE STREET
WRITER'S DIRECT DIAL NUMBER
LONDON EC2V 7JU, U.K.
TELEPHONE (44 20) 7367 1600
212373-3316
FUKOKU SEIMEI BUILDING
WRITER'S DIRECT FACSIMILE
2-2 UCHISAIWAICHO 2-CHDME
CHIYODA-KU. TOKYO 100-0011, JAPAN
212492-0316
TELEPHONE (81-3) 3597-8101
WRITER'S DIRECT E-MAIL ADDRESS
2001 K STREET, NW
WASHINGTON, DC 20006-1047
bkarp@paulweiss.com
TELEPHONE (202) 223-7300
500 DELAWARE AVENUE, SUITE 200
POST OFFICE BOX 32
WILMINGTON, DE 19899-0032
TELEPHONE (302) 655-4410
November 1, 2010
MATTHEW W. ABBOTT
ALLAN J. ARFFA
ROBERT A. ATKINS
JOHN F. BAUGHMAN
LYNN B. BAYARD
DANIEL J. BELLER
CRAIG A. BENSON*
MITCHELL L. BERG
MARK S. BERGMAN
BRUCE BIRENBOIM
H. CHRISTOPHER BOEHNING
ANGELO BONVINO
HENK BRANDS
JAMES L. BROCHIN
RICHARD J. BRONSTEIN
DAVID W. BROWN
SUSANNA M. BUERGEL
PATRICK S. CAMPBELL*
JEANETTE K. CHAN
YVONNE Y. F. CHAN
LEWIS R. CLAYTON
JAY COHEN
KELLEY A. CORNISH
CHARLES E. DAVIDOW
DOUGLAS R. DAVIS
THOMAS V. DE LA BASTIDE III
ARIEL J. DECKELBAUM
JAMES M. DUBIN
ALICE BELISLE EATON
ANDREW J. EHRLICH
LESLIE GORDON FAGEN
MARC FALCONE
ANDREW C. FINCH
ROBERTO FINZI
PETER E. FISCH
ROBERT C. FLEDER
MARTIN FLUMENBAUM
ANDREW J. FOLEY
HARRIS B. FREIDUS
MANUEL S. FREY
KENNETH A. GALLO
MICHAEL E. GERTZMAN
PAUL D. GINSBERG
ROBERTO. GOLDBAUM
ERIC S. GOLDSTEIN
ERIC GOODISON
CHARLES H. GOOGE, JR.
ANDREW G. GORDON
BRUCE A. GUTENpLAN
GAINES GWATHMEY, III
ALAN S. HALPERIN
CLAUDIA HAMMERMAN
GERARD E. HARPER
BRIAN S. HERMANN
ROBERT M. HIRSH
MICHELE HIRSHMAN
JOYCE S. HUANG
DAVID S. HUNTINGTON
MEREDITH J. KANE
ROBERTA A. KAPLAN
BRAD S. KARP
JOHN C KENNEDY
ALAN W. KORNBERG
DANIEL J. KRAMER
DAVID K. LAKHDHIR
STEPHEN P LAM8*
JOHN E. LANGE
DANIEL J. LEFFELL
XIAOYU GREG LlU
JEFFREY D. MARELL
JULIA TARVER MASON
MARCO V. MASOTTI
EDWIN S. MAYNARD
DAVID W. MAYO
ELIZABETH R. McCOLM
MARK F. MENDELSOHN
TOBY S. MYERSON
JOHN E NATHAN
CATHERINE NYARADY
ALEX YOUNG K. OH
JOHN J. O'NEIL
KELLEY D. PARKER
ROBERT P. PARKER*
MARC E. PERLMUTTER
MARK F. POMERANTZ
VALERIE E. RADWANER
CAREY R. RAMOS
CARL L. REISNER
WALTER G. RICCIARDI
WALTER RIEMAN
RICHARD A. ROSEN
ANDREW N. ROSENBERG
PETERJ.ROTHENBERG
JACQUELINE P. RUBIN
RAPHAEL M. RUSSO
JEFFREY D. SAFERSTEIN
JEFFREY B. SAMUELS
DALE M. SARRO
TERRY E. SCHIMEK
KENNETH M. SCHNEIDER
ROBERT B. SCHUMER
JAMES H. SCHWAB
STEPHEN J. SHIMSHAK
DAVID R. SICULAR
MOSES SILVERMAN
STEVEN SIMKIN
JOSEPH J. SIMONS
MARILYN SOBEL
TARUN M. STEWART
ERIC ALAN STONE
AIDAN SYNNOTT
ROBYN F. TARNOFSKY
JUDITH R. THOYER
DANIEL J. TOAL
MARK A. UNDERBERG
LlZA M. VELAZQUEZ
LAWRENCE G. WEE
THEODORE V. WELLS, JR.
BETH A. WILKINSON
STEVEN J. WILLIAMS
LAWRENCE I. WITDORCHIC
JORDAN E. YARETT
KAYE N. YOSHINO
TONG YU
TRACEY A. ZACCON E
T. ROBERT ZOCHOWSKI, JR.
"NOT ADMITTED TO THE NEW YORK BAR
By E-Mail & FedEx
Sarah Knaus
Financial Crisis Inquiry Commission
1717 Pennsylvania Avenue, NW
Suite 800
Washington, DC 20006-4614
Financial Crisis Inquiry Commission ("Commission ")
Dear Ms. Knaus:
As you know, we represent Citigroup Inc, ("Citi" or "the Company") in
connection with its responses to the Commission's requests for documents and
information, We write in response to your September 21,2010 letter regarding the
actions undertaken by Citi in response to Richard Bowen's November 3, 2007 e-maiL
On behalf of the Company, we provide the following information.
The first issue set forth in ML Bowen's e-mail, relating to the
correspondent channel, was first raised by ML Bowen in mid-2006, and ML Bowen
participated in the processes put in place by the Company, beginning in mid-2006, to
address the issue, In mid-2006, Richard Bowen reported certain issues relating to the
pre-purchase underwriting review by CitiMortgage of certain third-party originated
mortgages through the correspondent channeL In response to ML Bowen's expressed
concerns: (a) an investigation was immediately undertaken that resulted in the head of
the group responsible for the pre-purchase underwriting review being terminated; (b)
promptly thereafter, a working group, including ML Bowen, met to establish a plan for
addressing the issues raised; (c) members of the working group reviewed, assessed, and
CONFIDENTIAL
2
PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP
revised existing policies and procedures governing the relevant underwriting review; and
(d) additional resources, including additional personnel and technological resources, were
developed and deployed to address the issues identified, among other remedial steps.
The second issue set forth in Mr. Bowen's e-mail, relating to the Wall
Street channel, was resolved by the Company prior to Mr. Bowen's e-mail. In mid-2007,
several months before Mr. Bowen's November 3,2007 e-mail, a review was undertaken
of the process by which certain third-party originated mortgages were purchased through
CitiMortgage's Wall Street channel. Prior to Mr. Bowen's November 3,2007 e-mail, the
Wall Street channel was closed.
Following the receipt ofMr. Bowen's November 3,2007 e-mail, a review
of the issues raised in Mr. Bowen's e-mail was undertaken which included, among other
things, review of the status of and actions undertaken with respect to the processes
identified by Mr. Bowen in his e-mail.
*
*
*
*
*
Citi reserves the right to supplement, amend, modify or correct the
response provided above.
As we have discussed, the Company is providing the information in this
letter in response to the Commission's requests and pursuant to the Commission's
representations that the information provided to the Commission will be maintained in
strict confidence and will be used by the Commission solely for the purposes ofthis
mqmry.
We understand from our discussions that the Commission's work, and the
materials it requests and obtains from the Company, are not subject to the provisions of
FOIA. We also understand that the Commission intends to keep the materials submitted
to it by the Company strictly confidential in connection with this inquiry.
If any person not a member of the Commission or its staff (including,
without limitation, any government employee) should request an opportunity to inspect or
copy any confidential information provided by the Company, or if you or any member of
the Commission or its staff contemplates disclosure of this information to any other
person, the Company requests that the Commission promptly notify Paul, Weiss, Riikind,
Wharton & Garrison LLP, 1285 Avenue of the Americas, N.Y., N.Y. 10019 (att'n Brad
Karp) and Citigroup Inc., 399 Park Avenue, N.Y., N.Y. 10022 (att'n P.I. Mode).
Please do not hesitate to contact me if you would like to discuss this letter
or any other matter.
Respectfully,
{~
\'
I.
.
U/ir.~~( . j, )~21 !t~-k
Brad S. Karp
CONFIDENTIAL
@FedFRASER