AAA Ratings Lulled Citi CEO and Others Into False Sense of Security

Prince

When Chuck Prince was CEO of Citigroup from 2003 to 2007, he didn’t know about a surge in mortgage risk that his own investment bankers loaded on to its bank’s books.

Bloomberg reports that because such debt carried top credit ratings from firms such as Standard & Poor’s, few financial executives paid attention to the potential dangers.

'If someone had elevated to my level that we were putting, on a $2 trillion balance sheet, $40bn of AAA rated, zero risk paper, that would not in any way have excited my attention', Prince told the Financial Crisis Inquiry Commission, according to a transcript of his testimony released in 2011.

Mortgage securities granted top grades started souring in 2007, leading to ballooning losses. Citigroup required a $45bn federal rescue, the largest of the bank bailouts that put taxpayer money at risk. The Justice Department sued New York-based S&P and parent McGraw-Hill Cos. last week over the damage caused by the practices allegedly behind the inflated rankings that contributed to the biggest financial crisis since the Great Depression.

Some of the biggest losers were banks, including Citigroup and Bank of America, which created and purchased collateralized debt obligations. Many of these investments - created by packaging mortgage-backed bonds, derivatives and other CDOs and dividing them into new securities with varying degrees of risk - imploded within a year after they were sold, even though they had pristine credit ratings.

Hit the link below to access the complete Bloomberg article:

Rating Victims Didn’t Know S&P’s Toxic AAA Born of Greed

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