Financial crisis panel to hold hearings on risky mortgage loans that crippled banking system

Financial crisis panel turns to risky mortgages

WASHINGTON — A panel investigating the roots of the financial crisis will press current and former executives of Citigroup Inc. at hearings this week about the bank’s role in spreading trillions of dollars in risky mortgage debt through the banking system.

The hearings are the first by the Financial Crisis Inquiry Commission to focus on a single company. Witnesses include former Citi CEO Chuck Prince and former Chairman Robert Rubin, who was Treasury secretary during the Clinton administration.

The panel also will hear from former Federal Reserve Chairman Alan Greenspan; a former risk officer with failed subprime lender New Century Financial Corp.; and former executives and regulators from government-backed mortgage giant Fannie Mae. The three days of testimony are designed to provide a firsthand accounting of decisions that inflated a mortgage bubble and triggered the financial crisis.

Much of the tension at hearings Wednesday and Thursday will come as the 10 bipartisan commissioners examine Citi’s role in financing, packaging and selling risky mortgage loans.

Citi was a major subprime lender through its subsidiary CitiFinancial. The bank pooled those loans and loans purchased from other mortgage companies and sold the income streams to investors. As borrowers defaulted, Citi absorbed 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. In late 2007 and throughout 2008, those fissures grew into a full-fledged credit crisis that crippled the global economy.

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 terrorist attacks of Sept. 11, 2001.

Like that panel, the commission has authority to issue subpoenas to compel witnesses to testify or force companies to turn over documents. The commission is charged with examining 22 topics — from executive compensation to tax policy — in a report it must issue Dec. 15.

The hearing comes less than a month after fresh questions arose about political fundraising by commission chairman and former California Treasurer Phil Angelides.

During his 2002 re-election campaign, Angelides solicited donations from a top executive with JPMorgan Chase & Co, according to a report issued March 18 by the Securities and Exchange Commission. JPMorgan is paid by California to underwrite billions of dollars in municipal bonds annually.

The executive later sent a note to other key executives and a bank lobbyist calling Angelides “an important client” and asking them to help raise $10,000, the SEC report says. The executive oversaw the part of the company that includes the municipal bond business.

The report does not address Angelides’ role because the SEC does not have jurisdiction over campaign finance. Instead, the report deals with a rule that bars banks from underwriting bonds for governments within two years after a bank executive donates to an official in that government.

Greenspan’s testimony Wednesday will open the hearings. Critics say his policy at the Fed of keeping interest rates low encouraged lending to borrowers who had little or no chance of repaying.

Wednesday’s remaining two panels will include testimony on subprime lending and risk management at Citigroup. Former risk management executives are expected to say they sounded alarms about the growing danger of Citi’s mortgage lending and finance activities but were ignored by senior management.

Prince and Rubin will testify together Thursday. The panel will then hear from regulators of Citi’s Citibank subsidiary: Comptroller of the Currency John Dugan and former Comptroller of the Currency John Hawke Jr.

Friday’s testimony will focus on the role of Fannie Mae, the mortgage finance company whose rescue has required government commitments totaling $75.2 billion. The panel will hear from two former Fannie Mae executives and two former regulators of Fannie Mae and its sister company Freddie Mac.

The commission staff has received written responses from Wall Street CEOs who appeared at the first hearing in January and has requested documents from some banks.