The first public hearings by the Financial Crisis Inquiry Commission were notable for what did not happen. The well-prepared Wall Street bankers faced the cameras with apparent humility, parried Commission clunkers with their own platitudes, and left pretty much unperturbed. Those who expected the reprise of the 1930s Pecora hearings must have been disappointed. “Pecora’s revelations enraged the public and stampeded Congress into creating the SEC and separating commercial banks from investment banks,” according to Paul Wiseman in his USA Today column, “Depression-era star muckraker shapes Wall Street inquiry.” He added: “In public hearings, Pecora squared off against the elite financiers of the age, pointing at them with his cigar and coaxing them into what [Senate historian Donald] Ritchie calls ‘startling admissions of wrongdoing.”
Here, much of the wrongdoing was already exposed, and the references to some of it were anti-climactic. Despite self-serving denials, Wall Street executives and their own economists knew (and willful blindness does not equate to “not knowing”) that there was a housing price and mortgage bubble brewing at least as early as 2005, which they expected to burst. These already highly-compensated executives, with the complicity of their boards of directors, knowingly created exotic and complex derivatives based on residential mortgage loans they knew to be unsound, convinced rating firms to rate securities they knew to be toxic as investment grade, and “bet the company” on a trillion dollars of it, all in order to reap huge windfalls for themselves and their cronies at the expense of their shareholders, customers, the economy, and the public at large.
What’s the difference between this conduct and a criminal enterprise? Wall Street is barely legal? Maybe not. At a minimum, this is crony capitalism at its worst.
And let’s get one thing straight: the Wall Street titans (whether they “get it” or not, whatever that means) have no intention of changing how they operate in any meaningful way. As Bloomberg’s recent interviews with new MIT MBAs showed, what attracts them to Goldman Sachs and other Wall Street firms ? even today, after all this – is the prospect of obscene personal wealth. That is what motivated the behavior that created the crisis, and that is what is motivating the bankers’ efforts to resist meaningful reform.
Yes, the commissioners pressed the bankers about executive compensation, managing risks, lending practices, but they received scripted, unresponsive answers, and nothing came of it. For example, “If you do everything right in business, you’re going to make mistakes,” said Jamie Dimon. What an inappropriate and meaningless statement in this context.
One thing the bankers were clear on was that their too-big-to-fail monstrosities should not be sliced up into littler monsters. According to the Wall Street Journal, Mr. Dimon said: “the solution is not to cap the size of financial firms.” Instead, he said, “we need a regulatory system that provides for even the biggest banks to be allowed to fail, but in a way that does not put taxpayers or the broader economy at risk.” Read that out loud. Can we allow the biggest banks to fail in a way that doesn’t put taxpayers or the broader economy at risk? We can’t, and that’s why they need to be downsized.
While the bankers paid lip service to the need for better regulation, they don’t mean it; their lobbyists are fighting it. “If the leaders of Wall Street believe regulation is needed, as they stated today before the Financial Crisis Inquiry Commission, then they should tell their lobbyists because they are fighting every serious regulatory change and improvement being considered by Congress,” John Taylor, president of the National Community Reinvestment Coalition, said in a statement after the hearing.” “Based on what we heard today [about missing the multiple indicators of a housing bubble about to burst],” he added, “they should be firing people, not giving them bonuses.”
The four banks represented at the inquiry received more than $90 billion directly from the $700 billion bank bailout, and billions more from the Federal Reserve. Moreover, Goldman Sachs received $12.9 billion of taxpayers’ funds that were received by American International Group and paid over to Goldman at 100 cents on the dollar. Yet the banks argue that they can pay out huge bonuses to senior executives because they are free of the strings that were attached to the TARP money, which was paid back.
Noting that “people are angry” over Wall Street’s bailout-boosted profits, Mr. Angelides, the Chairman, vowed that the commission would become “a proxy for the American people?their eyes, their ears, and possibly also their voice’.If we ignore history, we’re doomed to bail it out again.”
The House of Representatives has already passed its regulatory reform legislation. The Senate is poised to do the same. Unfortunately, meaningful reform has already been watered down by special interest groups and lobbyists associated with Wall Street. Whatever meaningful work the Commission is doing is going on behind the scenes. The hearing was little more than political theater.