Banks tells MPs 'we made mistakes' on credit crunch

04 December 2007

Executives from some of the world’s largest investment banks today admitted they may have made investment products so complex investors may not be fully aware of the risks of investing in package debt products, but denied MPs’ accusation the same institutions were ‘reckless’ in their activities.

Under intense grilling by UK MPs of the Treasury Select Committee in London, executives from UBS, Citigroup, Deutsche Bank and Goldman Sachs today conceded they may have not done enough to ensure sophisticated investors, hit by the recent credit and liquidity crisis this summer, fully understood what they were investing in when buying MBS’ packaged as collateral debt obligations (CDOs).

During the 90-minute public meeting on financial stability and transparency, the chairmen Gerald Corrigan of Goldman Sachs, William Mills of Citigroup, alongside Lord Aldington of Deutsche Bank and Jeremy Palmer of UBS were cautious to admit liability in any way and all said they believed the disclosures on complex products such as (CDOs) were sufficient, but acknowledged, when asked by TSC chairman John McFall MP, “products are repackaged in such a complex manner the original designers do not recognise the end product neither the buyer nor the seller has an idea of the underlying characteristics of the loan they are buying” and “the structure became so complex they are not recognised by the designers”.

At the end of this morning’s meeting, Corrigan said: “Mistakes we made there is no question about that, but it is also true the conditions which materialised were anything but standard and were really quite extraordinary. Investors are treated as if they are professional, and we take steps to ensure. In certain slight cases, it is not clear whether investors fully understood what they were buying, as was the case in Germany.”

He had earlier noted pension funds had been affected by the credit crunch.

“There are institutions, including pension funds, that have experienced some losses too. Institutions do have an affirmative responsibility to work with pension funds to help them understand the nature of these investments, and I, on behalf of Goldman Sachs, have been doing exactly that to help them enhance their own risk management and due diligence responsibilities,” said Corrigan.

That said, all refused four officials refused to accept the market contagion was the result of “snooty attitudes of bankers”, as previously described by the German finance minister, despite an accusation from McFall evidence indicates their own views of the recent crisis was  “flying in the face of reality”.

“We have gone through a period of stability of low interest rates, that search for yield is quite legitimate in investors, such as pension funds. I believe investors were given all the facts. Complexity is a fact of life and the information was available,” said Palmer

“Events of the last months are the result of the economy, not the fault of bankers. The end buyers of those complex instruments were sophisticated instruments which were invited to review all the structure and documents with them. As to loss, with the benefit of hindsight, there were areas that should have reviewed further,” said Mills.

“There is simply no question over recent years the inner workings of the financial system have become increasingly complex and, in addition, the structure of the systems have tightened between markets and institutions. It is incumbent upon all of use to spare no effort at all in seeking to master our understanding of this highly complex environment.
Unfortunately, it is also inevitable that when markets are strong and buoyant, there is a natural aversion to be the last one in and first one out,” said Corrigan.

Later in the meeting he added: “For a sophisticated investor, the disclosures were pretty good. Could they have been better? Yes. About the question of opacity: if you read the disclosures, you should be able to understand them, but I suspect the amount of diligence that went into this was not enough,” he continued.

When ask by chairman of the TSC John McFall whether activity and subsequent losses essentially amounted to a herd mentality among investors, Corrigan admitted “that is correct”.

MPs reminded the audience losses at the four firms were believed to have totally $8-11bn (€5.42bn-€7.46bn) at Citigroup, alongside UBS’$3.8bn, and £179m (€250m) for Deutsche Bank while Goldman Sachs’ flagship hedge fund fell 12% to predicted losses of around £1.5bn.

© Graham Bishop