Today the Financial Crisis Inquiry Commission (FCIC) may have a chance to live up to it's progenitor, the Pecora Commission. In 1933, Ferdinand Pecora's cross-examination of the president of National City Bank lead to the executive's resignation and helped set the stage for a Wall Street overhaul.Today, the FCIC will be interviewing Robert Rubin, the former chairman of Citigroup -- the financial institution descended from National City Bank -- about his role in the crisis, and the FCIC is coming prepared. Yesterday, a former Citigroup manager who oversaw consumer loans turned whistle-blower, testified that he warned Rubin and other Citi execs about the dismal quality of mortgage loans they bought and packaged to resell as securities. For his troubles, he was reassigned:
In mid-2006 Bowen discovered that over 60 percent of the home loans his group bought and sold were defective, meaning they were not underwritten to Citigroup's stadards, or did not have all the required documents. By 2007, that number swelled to more than 80 percent.... On Nov. 3, 2007, Bowen sent an email to Robert Rubin and senior finance and risk management executives at Citigroup with the subject line "URGENT -- READ IMMEDIATELY -- FINANCIAL ISSUES."
"The reason for this urgent email concerns breakdowns of internal controls and resulting significant but possibly unrecognized financial losses existing within our organization," Bowen wrote.
It's unclear how those executives responded, if at all, to the e-mail; that's what the committee will be wondering, too. Nor is it illegal, necessarily, for the bank to sell defective loans (unless they misrepresented the quality) -- but the scandal is rarely what's illegal. What it reveals is the pernicious behavior by some financial firms that calls out for more effective supervision, at both the consumer level and as these loans are being combined into securities.
The hearing starts at 9:00 this morning; you'll probably be able to watch it on C-SPAN; the first round of questioning by Chairman Phil Angelides is usually the most interesting, so watch for that.
-- Tim Fernholz
