FCIC - April 7, 2010 - Two, make that three Stunners!

As posted here in 2009 -the financial services industry should PAY for the costs of the FCIC - today's testimony turned up at least two stunning, make that three revelatory statements.

STUNNER #1-Nestor Dominguez, head of Citigroup CDO's, late in the day tossed out, "but it didn't extend the housing bubble" - as a paranthetical to Ms. Brooksley Born's line of questioning upon RMBS, Cash CDO's, and Synthetic CDO's. Synthetic CDO's were created primarily, but not limited to bundling then securitizing Credit Default Swaps (CDS) upon CDO's. CDO's were created by combining tranches of different, usually mezzanine level, RMBS into a new structure - ostensibly to create an improved, more highly rated security, the result of different, diversified cash flows and underlying house collateral.

Not just an innocuous statement, but it's a veritable Stunner IMO - the it he was referring to were synthetic CDOs. The opposite of synthetic CDOs are cash CDO's funded by RMBS or in parlance of the old days, REMICs. So the logical conclusion - I at least reached - and reached months ago - was that greater issuance of RMBS and Cash CDO's were - at least in part - underpinning, if not causing or driving the escalation of house prices aka the "housing bubble"!

Subtract the RMBS and CDO issuance and there simply would NOT have been the money to pay to originate more paper. At any point in time - any of these Investment banks - could have and should have said NO to buying any more mortgage originations; we know now that few refused.

STUNNER #2 - the second stunner - and also near the end the day - Mr Bushnell, Citigroup head of risk management, was asked by Mr Angelides, when senior management and board of directors of Citigroup became aware of the "liquidity puts" - was it only in late September / early October 2007; yes Mr Bushnell responded that that was a fair characterization along with his revelation that he provided the Board with basic tutorials around the same time.

Along with Mr Prince's statement (and Mr Rubin's previous statements in interviews prior to the FCIC hearings) that prior to September 2007 - he "didn't know about the Super Senior CDO's" in Mr Angelides questioning. Wonder - how much of Citi's profits and traders, managers' executives officers' compensation were comprised of mark to model gains from 2003 to 2007 up to that point?

Yet two months later, Citigroup went oops and disclosed November 4, 2007 "exposure" now amounted to $55B comprised of $16B Super Senior CDO's, $27B Liquidity and Par Put's upon same/similar, $12B Subprime with below AAA ratings from the Citigroup Risk and Audit committee presentation to senior management NOT the $13B reported publicly on June 30, July 11, or October 15, 2007.

"Didn't know" ? - WTF - talk about a potential violation of several years worth of Sarbanes Oxley personal certifications surrounding internal controls! Can we expect, Mr Thomas' statements to cause an action requesting clawbacks of "hockey stick era" compensation?

I now recall the the one and the same Cititgroup needed a guarantee upon $300B in assets in 2008, continues to sponsor the Rose Bowl - and yes, paid it's registered reps over $2B in CASH retention bonuses in March 2009 to simply stay on the job.

STUNNER #3 - Example of a wasted email, Mr Bowen, Citibank Chief of Mortgage underwriting, in 2006 (not a typo) warned senior management including Robert Rubin, that upwards of 60% of mortgages were "defective" meaning not up to Citi's own standards - yet had been packaged off to investors - with puts under reps and warrants back to? You guessed it - Citibank.

Only OPM yet again - this time Taxpayers' money; some things don't seem to change; I can at least hold out some hope.