More on the FCIC Hearings

by Dollars and Sense

Here is something from The Nation; it is somewhat in contradiction to what I posted late last week (here), which portrayed the hearings as letting Wall Street off the hook, whereas this piece finds the testimony (and the quesstioning?) pretty damning of Wall Street, regulators, and ratings agencies, but says that the media have stopped covering the hearings. Sheila Bair's testimony was great; click here for a pdf of her full testimony.

Financial Crisis Inquiry Commission Turns Up the Heat

By Greg Kaufmann | January 15, 2010

Two days of Financial Crisis Inquiry Commission hearings have me rattled about how little has changed about our financial system and how much is still at risk. They also have me wondering this: where the hell are the media?

For the first day of panels, reporters were squeezed together in the back rows after filling more reserved seating than I've seen at any prior hearing during this session of Congress. But as I wrote previously, after the banksters had preened for the cameras and recited their testimony like four schoolboys BSing their way through an oral report, the press vanished, missing out on more candid and informative witnesses.

Yesterday, day two of the hearings, maybe a dozen reporters attended, fewer than were at for the press conference afterward. What did they miss?

For starters, FDIC Chairman Sheila Bair testified that the credit-default swaps (CDS) market still poses a systemic threat and that even she can't access CDS information to accurately assess financial institutions' exposure.

Bair and SEC Chairman Mary Schapiro were in agreement with Commission Chair Phil Angelides's assessment that the credit rating agencies were "proved to be worthless and remain so today," given that they are paid by the very Wall Street firms who are profiting from AAA-rated securitized assets.

State attorneys general Lisa Madigan of Illinois and John Suthers of Colorado revealed that not only were their warnings about unscrupulous and predatory lending practices ignored but that their investigations were actively thwarted by federal regulators who in turn did nothing--under the guise of pre-emption.

Madigan also described how rate sheets reveal that Wall Street paid mortgage brokers and loan officers more for risky mortgages--with low teaser rates, pre-payment penalties, low or no documentation--because the consequent higher interest rate paid by the borrower would bring in more income. Wall Street wasn't the victim of bad underwriting that it claims to be; indeed, it incentivized it.

Denise Voigt Crawford, a Texas securities regulator for twenty-eight years, discussed the revolving door between agencies and the industries they regulate, and the "chilling effect [it has] on the zeal with which you regulate."

Schapiro, Bair and Madigan argued that Wall Street should have to "skin in the game" when securitizing assets. As things stand now they sell them with a bought and paid for AAA-rating, and then take their profits even if the underlying assets are worthless. Madigan said of mortgage-backed securities, "At the end of the day, the people who had the risk were on the very front end, the borrower, and on the very back end, the investor. All the other market participants were paid along the way, and they didn't hold on to any of that risk."

Bair said the agency that could have done something about subprime products early on--when it had a report on problems back in 2000--was the Fed.

"I think the only place to tackle that on a system-wide basis for both banks and non-banks was through...the Fed [which had] the authority to apply rules against abusive lending across the board to both banks and non-banks," said Bair. "If we had had some good strong constraints at that time, just simple standards like you've got to document income and make sure they can repay the loan--not just at the start, but at the reset rate as well--we could have avoided a lot of this."

So why didn't the Fed and other federal agencies act?

"It can be very difficult to take away the punch bowl when, you know, people are making money," said Bair. She also talked about "pushback" from both the industry and the Hill--as late as 2007-- when the FDIC tried to "tighten up" on subprime mortgages and commercial real estate.

Reforms discussed included a systemic risk council, a consumer financial protection agency, an industry-funded mechanism so that large firms can be broken up and sold off without taxpayer money, greater disclosure of compensation structures and a single clearinghouse for derivatives like credit-default swaps.

But the task of this commission isn't to open its hearings by announcing the necessary reforms. It's to tell the story of what caused this meltdown, which should galvanize public demand for the necessary reforms. In that regard I think the commission is off to a decent start. They are breaking down tough concepts, showing the interconnectedness between Wall Street, legislators and regulators and fishing with dynamite when it comes to exposing bad actors.

But time is short--the FCIC's report is due in December of this year. It's going to have to be fearless, and build momentum quickly by bringing in big players and asking them tough questions. That's the only way a bipartisan populist backlash will fight for reform--and it's the only way the media might consider showing up too.

Read the original article.

Labels: Credit Default Swaps, financial crisis, Financial Crisis Inquiry Commission, Sheila Bair, Wall Street

 

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1/18/2010 03:10:00 PM 0 comments

 

Wall Street Off the Hook

by Dollars and Sense

Two good items on the Financial Crisis Inquiry Commission; hat-tip to LF. The first is from Newsweek Online:

Off the Hook

Wall Street and Washington escape whipping again as the Financial Crisis Inquiry Commission gets underway.

By Michael Hirsh | Newsweek Web Exclusive | Jan 14, 2010

One sure measure of a successful Washington hearing is the presence of tension, lots of it. Key witnesses are put on the spot. Truths are revealed under close questioning. Embarrassing discrepancies are exposed. Think of the Watergate hearings. Or Iran-contra. Judged by that standard, the inaugural session of the Financial Crisis Inquiry Commission on Wednesday was a failure. Left largely unchallenged, Wall Street's finest might as well have been at home dozing in their dens.

The first sign of trouble came when chairman Phil Angelides thanked the visiting chairmen of Goldman Sachs, JPMorgan Chase, Morgan Stanley, and Bank of America for their "thoughtful" opening statements. Things got progressively more pillowy from there, drifting into outright farce when Bill Thomas, the vice chairman, opened with a drawn-out reflection on the Haiti earthquake and then said that all the questions he could possibly have were already on page A27 of the day's New York Times, which had asked financial experts to suggest lines of inquiry. The remaining commissioners followed with a series of mostly general and scattershot questions that turned what should have been a hot seat for the bankers into a Barcalounger.

Read the rest of the article.

And this is from Paul Krugman's column in yesterday's Times:

Bankers Without a Clue
By PAUL KRUGMAN | Published: January 14, 2010

The official Financial Crisis Inquiry Commission—the group that aims to hold a modern version of the Pecora hearings of the 1930s, whose investigations set the stage for New Deal bank regulation—began taking testimony on Wednesday. In its first panel, the commission grilled four major financial-industry honchos. What did we learn?

Well, if you were hoping for a Perry Mason moment—a scene in which the witness blurts out: "Yes! I admit it! I did it! And I'm glad!"—the hearing was disappointing. What you got, instead, was witnesses blurting out: "Yes! I admit it! I'm clueless!"

O.K., not in so many words. But the bankers' testimony showed a stunning failure, even now, to grasp the nature and extent of the current crisis. And that's important: It tells us that as Congress and the administration try to reform the financial system, they should ignore advice coming from the supposed wise men of Wall Street, who have no wisdom to offer.

Consider what has happened so far: The U.S. economy is still grappling with the consequences of the worst financial crisis since the Great Depression; trillions of dollars of potential income have been lost; the lives of millions have been damaged, in some cases irreparably, by mass unemployment; millions more have seen their savings wiped out; hundreds of thousands, perhaps millions, will lose essential health care because of the combination of job losses and draconian cutbacks by cash-strapped state governments.

And this disaster was entirely self-inflicted. This isn't like the stagflation of the 1970s, which had a lot to do with soaring oil prices, which were, in turn, the result of political instability in the Middle East. This time we're in trouble entirely thanks to the dysfunctional nature of our own financial system. Everyone understands this—everyone, it seems, except the financiers themselves.

There were two moments in Wednesday's hearing that stood out. One was when Jamie Dimon of JPMorgan Chase declared that a financial crisis is something that "happens every five to seven years. We shouldn't be surprised." In short, stuff happens, and that's just part of life.

But the truth is that the United States managed to avoid major financial crises for half a century after the Pecora hearings were held and Congress enacted major banking reforms. It was only after we forgot those lessons, and dismantled effective regulation, that our financial system went back to being dangerously unstable.

Read the rest of the column.

Labels: bailout, financial crisis, Financial Crisis Inquiry Commission, investment banks, Paul Krugman

 

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1/15/2010 10:36:00 AM 0 comments

 

Financial Crisis Inquiry Commission Hearings

by Dollars and Sense

The hearings for the Financial Crisis Inquiry Commission are going on right now. Zachery Kouwe of the New York Times' blog Dealbook is "live-blogging" the hearing right now (how's that for an example of compound-transitive-verbing?!).

Meanwhile, today's NYT op-ed section has a nice survey of questions some experts would like to ask the bankers in the hearings. My favorites are from Simon Johnson of MIT and Yves Smith of Naked Capitalism:

1. Describe in detail the three worst investments your bank made in 2007 and 2008—that is, those transactions on which you lost the most money. How much did the bank lose in each case?

2. What was the total compensation of each manager or executive supervising those three transactions—including yourself—in 2007 and 2008?

3. Are those executives still with your bank? What investments do they supervise today? How much will they be paid for 2009, including their bonuses?

—SIMON JOHNSON, a professor at the M.I.T. Sloan School of Management and a senior fellow at the Peterson Institute for International Economics

Some of your firms received payouts on credit-default swap contracts with American International Group. Most of those guarantees resulted from hedging supposedly safe investments (they had AAA ratings, after all) with A.I.G. or other insurers. This hedging allowed traders to book "profits" that had not yet been earned—profits that would be counted in calculating their bonuses.

However, this insurance was likely to fail, as your risk managers surely knew. It involved so-called wrong-way risk: the guarantor (A.I.G.) was certain to be damaged by the same event (the housing market collapse) that would lead you to seek payment on the insurance. The insurance was effective only because the government stepped in, theoretically on the taxpayers' behalf, and made payments for A.I.G., an otherwise bankrupt firm. Since employees' bonuses, and ultimately yours, were based on these fraudulent profits, my questions are these:

1. How much profit did your firm record for bonus purposes on these trades that ultimately delivered huge losses? How much of those bogus profits were paid out in bonuses?

2. Have you made any effort to recover the bonuses? If not, why not?

—YVES SMITH, the head of Aurora Advisors, a management consulting firm, and the author of the blog Naked Capitalism and the forthcoming book "Econned: How Unenlightened Self-Interest Undermined Democracy and Corrupted Capitalism"

Read the full list of questions.

Speaking of Yves Smith, she had some interesting things to say today about something that is looming behind today's hearings: the Obama administration's recent talk of levying some kind of tax/fine on the big banks--separate from the tax on transactions that many have been calling for, and from the idea of a special tax on bankers' bonuses. (A NYT editorial today (? or yesterday--I can't tell) came out in favor of the new tax/fine, but called for a tax on bonuses on top of that.) But according to Yves, the O. admin. will come out with a more concrete proposal today:

Obama to Announce $120 Billion TARP Fee

Ah, the machinations that Faustian bargains produce!

The Obama Administration is now caught in its own machinations and is having to backpedal fast and hard from its bankster friendly posture, or at least have the public believe it is executing that maneuver.

While I cannot fathom the logic, Team Obama clearly decided to throw in its hat with the industry from the beginning, supporting a whole raft of tricks to keep banks from recognizing losses (heavens, might expose that some were bankrupt and require that incumbents be given the heave ho!). It also assisted in the “talk up the bank stocks” effort, since goosing prices would allow some banks to sell shares and save the new Administration the unpleasant task of figuring out how to resolve and recapitalize the sickest bank. It never seemed to occur to them that the best time for a President to take unpopular but productive action is at the start of his tenure. Nor did they anticipate that the public was not as dumb and inattentive as they assumed, and has taken notice of how the Administration has hitched its wagon to that of the plutocrats.

Now some readers might argue that, gee, things look better than the did in March, surely this Team Obama program was not such a bad idea. Well, actually, it was and is. The record of serious financial crises shows that regulatory forbearance (which is letting banks soldier on with the hope they will earn their way out of their messes over time) is more costly than forcing them to recognize losses and recapitlize them. Not only are the ultimate bailout costs higher with the "let 'em off easy" approach, but economic recovery is weaker too.

Team Obama is now having the contradictions in its stance exposed. If the banks were really healthier due to their own efforts, the salvos against them would be unwarranted. Here they had gone over the brink, pulled themselves up by their bootstraps. All these complaints about their earnings and bonuses are mere class jealousy. But no one save the banksters themselves believe that tripe. The banks got massive subsidies during and after the crisis; they continue now with the Fed's super low rates and continued intervention in the mortgage markets (theoretically ending in March, but most informed observers expect the central bank to blink).

But Team Obama does not want to play up the extent to which the industry has benefitted from public munificence; that only stokes the deserved and correct public anger, which includes the Administration for cutting such a crappy deal with the industry. So it has the PR conundrum of having it be beneficial for political reasons for them to beat up on the financiers, but now being so deeply aligned with them as to make that impossible, save perhaps on a few narrow issues that it hopes will have sufficient peasant-appeasement value. Any full-bore attack would represent an embarrassing change from the Administration's past fawning posture, and would also require the sacrifice of a senior head or two, presumably starting with Timothy Geithner, to look credible. But Obama seems constitutionally incapable of firing anyone, no matter how much it would serve him to do so.

The sketchy announcement du jour, that Obama will announce a $120 billion TARP fee this week (hhm, conveniently timed to distract attention from the start of the hearings into the crisis and Wall Street bonus announcements) illustrates the bizarre position the Administration is in. Alert readers may recall that Obama was touting the performance of the TARP at his Lehman anniversary speech in September. It repeated that palaver in December.

Read the rest of the post.

We will be on the lookout for the best analyses of and commentaries on the testimony in today's hearings. If you find something particularly cogent, let us know.

Labels: Financial Crisis Inquiry Commission, investment banks, Obama administration, Simon Johnson, TARP program, Yves Smith

 

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1/13/2010 11:08:00 AM 0 comments

 

Memo to Investigators: Dig Deep (Greider)

by Dollars and Sense

From The Nation, posted to their website yesterday. For more on the Pecora hearings, check out this NYT op-ed from way back in January.

Memo to Investigators: Dig Deep

By William Greider | October 8, 2009

When the Financial Crisis Inquiry Commission opened for business on September 17, it was a nonevent for the media. Leading newspapers brushed aside chairman Phil Angelides, the former California state treasurer, and his declaration of purpose--"uncovering the facts and providing an unbiased historical accounting of what brought our financial system and our economy to its knees." As Angelides put it, "The fuses for that cataclysm were undoubtedly lit years before. It is our job to diligently and doggedly follow those fuses to their origins."

The press has moved on. Financial crisis was last year's story. Didn't the Treasury and Federal Reserve announce they have already turned things around? Hasn't the president proposed a bunch of complicated reforms (boring!) for Congress to enact? Yes, but that is the problem. How can Washington reform the financial system when we still don't know what happened?

We may know the broad outlines, but the landscape remains littered with unanswered questions and informed suspicions about who did what to produce the breakdown. The relevant facts are still buried in the files of Wall Street firms and the regulatory agencies that utterly failed as watchdogs. The Angelides commission has the subpoena power to dig out secrets--from e-mails and private memos, and through testimony under oath--that can disclose political deal-making and ruinous financial strategies. Given the rush of events, the commission may be the public's last, best chance to get at the truth of the matter.

Congress created the ten-member commission (six Democrats, four Republicans) to identify the root causes of the financial crisis. It listed more than twenty areas for inquiry, from the collapse of individual institutions to the complex financial instruments now known as toxic assets. It is a gigantic task fraught with explosive implications for government and finance.

The commission has chosen an executive director with an impressive twenty-five-year history of uncovering corporate fraud and malfeasance. Thomas Greene, chief assistant attorney general from California endorsed as a nonpartisan straight shooter by the Republican and Democratic attorneys general he served, has led complex investigations into anti-trust, price-fixing and deceptive accounting gimmicks on cases involving big names like Enron, Microsoft and El Paso Natural Gas. The financial crisis has all those elements and more.

"If we do this right," Angelides said, "our work can serve as an antidote--much as the Pecora hearings did in the 1930s--to the kinds of financial market practices that none of us would want to see be repeated ever again."

In the New Deal years, the Congressional investigation led by Ferdinand Pecora helped build the case for landmark regulatory reforms--legislation establishing the Securities and Exchange Commission and the Glass-Steagall Act, which separated commercial banks from risk-taking investment banks. Like Pecora, Angelides does not intend to propose policy solutions but simply to discover what really happened.

"I'm very serious on this point," Angelides told me in an informal conversation. "If we stick to the hard facts, we might turn up some perpetrators, but our job is to accomplish something more than that. If we pursue all the facts, we can give the American people a clear understanding of what occurred during the last twenty years or so. What forces lit the fire that led to this explosion? What exactly happened with those financial firms that failed? What happened in regulation or at the Federal Reserve? What happened in the economy to fuel the fire? Where were the firefighters? Who was asleep? Who was awake? Who sounded the alarm and was ignored? It could be a very disturbing story."

Washington cynics have low expectations for Angelides. Too many important people just want the whole thing to go away. The Obama administration had hoped to pass its reform package quickly and then move on. But the White House plan, which rearranges the boxes among regulatory agencies and puts the Fed in charge, is stalled by rising skepticism in Congress and doubts expressed by establishment figures like former Federal Reserve chairman Paul Volcker, who is particularly wary of making the "too big to fail" doctrine into a permanent assumption. In a statement to the House Banking and Financial Services Committee on September 24, Volcker asked, "Will not the pattern of protection for the largest banks and their holding companies tend to encourage greater risk-taking, including active participation in volatile capital markets, especially when compensation practices so greatly reward short-term success?" Volcker wants commercial banks restored to their narrower purpose--taking deposits and lending to borrowers, instead of playing in high-risk financial markets. He does not say so directly, but that would restore some protections enacted seventy years ago by Glass-Steagall and repealed by the Clinton administration.

Read the rest of the article.

Labels: Ferdinand Pecora, financial crisis, Financial Crisis Inquiry Commission, financial regulation, Pecora hearings, Phil Angelides, William Greider

 

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10/09/2009 02:38:00 PM 0 comments