Citigroup's board was blindsided by the collapsing mortgage market and unaware it was sitting on tens of billions of dollars of mortgage derivatives in the run-up to the financial crisis, its former bosses told a commission of inquiry.
The bank's former chief executive Charles "Chuck" Prince, making his first public appearance since resigning at the end of 2007 in the face of spiralling losses, said he was sorry that no one had foreseen a calamity that led to two taxpayer bailouts for the company.
The Financial Crisis Inquiry Commission (FCIC), set up by the US government to investigate the causes of the meltdown, has turned its attention to Citigroup, which was the country's biggest bank and remains squarely in the camp of firms deemed "too big to fail".
Yesterday's testy hearing in Washington also took evidence from Robert Rubin, the former Goldman Sachs boss and US Treasury Secretary under Bill Clinton, who was one of Citigroup's most senior board members until last year. He has been criticised for taking $15m (£9.8m) a year in salary and bonuses as Citigroup headed to the brink of bankruptcy.
Mr Prince, who quit in November 2007, as losses on sub-prime mortgage investments were emerging, told the FCIC: "I can only say that I am deeply sorry that our management – starting with me – was not more prescient and that we did not foresee what lay before us." Mr Rubin also expressed "regret".
But their statements angered some members of the commission, who pointed out that both men had kept their salaries and bonuses while leaving the taxpayer to pump in $45bn to save the company in 2008. The US government still maintains a 27 per cent stake, which it plans to sell down this year.
"Something was created, assumptions were made and behaviour has to have consequences," Bill Thomas, the commission vice-chairman, said. "To make the argument that a simple apology still allows you to maintain a profile of income based on what devastated everyone else, doesn't fit the scale test, no matter how often you feel really, really sad about what happened."
Mr Prince came under further fire for saying about the booming credit markets in the summer of 2007 that "as long as the music is playing, you've got to get up and dance. We're still dancing."
Explaining his comments he told the hearing: "Running a securities business is a lot like running a baseball team where none of the players have contracts. People can leave any day and go to another team. It's impossible to say to bankers that we are not going to participate in a business for the next year or so until things become more rational. You can't do that and expect that you'll have any people left to conduct business in the future."
Both former executives painted a picture of a financial system in the grip of a great error, where too much faith had been put in computer models that suggested financial products bore little risk, and in credit rating agencies, which certified that many complex mortgage derivatives were as safe as government bonds. One commissioner, Byron Georgiou, said they were describing a financial system that was "hallucinatory".
Phil Angelides, FCIC chairman, told the two men they "did not seem to have a grip on what was happening" at the company in 2007, as problems in the US housing market rippled through the banking system. Sub-prime mortgage lenders began going bust early in the year, and hedge funds invested in mortgage derivatives called CDOs started getting into trouble in the summer. But it was not until September 2007 that the board finally discussed Citigroup's holding of $43bn of supposedly high-quality CDO tranches. Of that $43bn, the company had to write off $30bn, wiping out much of its capital cushion.
"It is hard for me to fault the traders who made the decisions to retain these positions on Citi's books," Mr Prince said. "After all, having $40bn of AAA+ rated paper on the balance sheet of a $2 trillion company would typically not raise a concern."
On Wednesday the commission took evidence from lower-ranked Citigroup executives. Richard Bowen, a former business chief underwriter for Citigroup's mortgage business, said he warned the bank's senior executives of the declining standards of the mortgages in 2006.
Mr Prince said he had suffered alongside shareholders as a result of Citigroup's near collapse. "As I sit here today, I hold virtually every share of stock I acquired over a nearly 30-year career, and I watched it go from $50 to $30 to less than $1 a share. I watched the great majority of my personal net worth disappear."