Reply #29: A glimpse into the vapid thought process of Citi executives

[ozymandius]

Citibank Like S&P assumed house prices can't go down

Eric Dash and Julie Creswell who argue that Citibank took insane risks holding CDOs on its books, because of a failure of the fixed incomes risk management team, reckless 'short termism' and two amazing mistakes. The two alleged mistakes are that they trusted the ratings agencies and that they assumed that the national average house price would certainly not decline. These are actually similar mistakes as at least one rating agency, S&P, making the same insane assumption about house prices.

They write:

when examiners from the Securities and Exchange Commission began scrutinizing Citigroup’s subprime mortgage holdings after Bear Stearns’s problems surfaced, the bank told them that the probability of those mortgages defaulting was so tiny that they excluded them from their risk analysis, according to a person briefed on the discussion who would speak only without being named.

Later that summer, when the credit markets began seizing up and values of various C.D.O.’s began to plummet, Mr. Maheras, Mr. Barker and Mr. Bushnell participated in a meeting to review Citigroup’s exposure.

The slice of mortgage-related securities held by Citigroup was “viewed by the rating agencies to have an extremely low probability of default (less than .01%),” according to Citigroup slides used at the meeting and reviewed by The New York Times.

.....

To make matters worse, Citigroup’s risk models never accounted for the possibility of a national housing downturn, this person said

This is amazing. It's not as if no one with an Op-Ed column in the New York Times was discussing the possibility of a national housing downturn. I can't believe that this was an honest oversight. The anonymous source doesn't say either "“I just think senior managers got addicted to the revenues and arrogant about the risks they were running. As long as you could grow revenues, you could keep your bonus growing.”

http://angrybear.blogspot.com/2008/11/citibank-like-s-assumed-house-prices.html