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Greenspan defends decisions before panel investigating crisis
The Fed should take a "proactive" stand in dealing with potential asset bubbles, William C. Dudley, president of the Federal Reserve Bank of New York, said in a speech Wednesday. The central bank should act when the popping of those bubbles could risk a financial crisis, the government has tools that might work and officials are confident that the costs of using those tools are worth the benefits, Dudley said at the Economic Club of New York.
"Despite the fact that it is hard to discern bubbles, especially in their early stages, I conclude that uncertainty is not grounds for inaction," he said.
The financial crisis commission also heard from a former Citigroup executive, who told the panel he tried to warn higher-ups about the bank's business practices starting in 2006 and asked for an investigation. The warnings continued through 2007 and were issued in weekly reports, in e-mails and in meetings, Richard M. Bowen III said.
His warnings were not promptly heeded, he said. "I believed that these practices exposed Citi to substantial risk of loss," Bowen told the panel. Massive losses at the firm eventually led to a $45 billion investment by the federal government meant to prevent a collapse.
Bowen pointed to a November 2007 e-mail he sent to Robert Rubin, a former Treasury secretary, and three other members of Citigroup management. "The reason for this urgent email concerns breakdowns of internal controls and resulting significant but possibly unrecognized financial losses existing within our organization," the letter said.
In 2006, Bowen said, he discovered that 60 percent of the mortgages purchased and sold by Citigroup were defective. "We continued to purchase and sell to investors even larger volumes of mortgages through 2007," he said in his prepared testimony. "And defective mortgages increased during 2007 to over 80% of production."
Citigroup said in a statement that Bowen's warnings were "promptly and carefully reviewed when he raised them and corrective actions were taken."
"Unfortunately, our diligence practices did not detect what we now know to be the most significant downturn in the U.S. housing market for generations," Susan Mills, a managing director of Citigroup Global Markets, told the panel.