January 11, 2010
In my last posting, I discussed the need for a 9/11-type of commission to investigate and provide an accounting of the Federal Reserve’s role in causing the financial crisis. A more broad-based inquiry into the causes of the financial crisis is being conducted by the Financial Crisis Inquiry Commission, led by former California State Treasurer, Phil Angelides. The Financial Crisis Inquiry Commission (FCIC) was created by section 5 of the Fraud Enforcement and Recovery Act (or FERA) which was signed into law on May 20, 2009. The ten-member Commission has been modeled after the Pecora Commission of the early 1930s, which investigated the causes of the Great Depression, and ultimately provided a basis for reforms of Wall Street and the banking industry. Like the Pecora Commission, the FCIC has subpoena power.
On Wednesday, January 13, the FCIC will hold its first public hearing which will include testimony from some interesting witnesses. The witnesses will appear in panels, with three panels being heard on Wednesday and two more panels appearing on Thursday. The witness list and schedule appear at The Huffington Post website. Wednesday’s first panel is comprised of the following financial institution CEOs: Lloyd Blankfein of Goldman Sachs (who unknowingly appeared as Dr. Evil on several humorous, internet-based Christmas cards), Jamie Dimon (a/k/a “The Dimon Dog”) of JP Morgan Chase, John Mack of Morgan Stanley and Brian Moynihan of Bank of America. Curiously, Vikram Pandit of Citigroup was not invited.
Frank Rich of The New York Times spoke highly of FCIC chairman Phil Angelides in his most recent column. Nevertheless, as Mr. Rich pointed out, given the fact that the banking lobby has so much influence over both political parties, there is a serious question as to whether the FCIC will have as much impact on banking reform as did the Pecora Commission:
Though bad history shows every sign of repeating itself on Wall Street, it will take a near-miracle for Angelides to repeat Pecora’s triumph. Our zoo of financial skullduggery is far more complex, with many more moving pieces, than that of the 1920s. The new inquiry does have subpoena power, but its entire budget, a mere $8 million, doesn’t even match the lobbying expenditures for just three banks (Citi, Morgan Stanley, Bank of America) in the first nine months of 2009. The firms under scrutiny can pay for as many lawyers as they need to stall between now and Dec. 15, deadline day for the commission’s report.
More daunting still is the inquiry’s duty to reach into high places in the public sector as well as the private. The mystery of exactly what happened as TARP fell into place in the fateful fall of 2008 thickens by the day — especially the behind-closed-door machinations surrounding the government rescue of A.I.G. and its counterparties.
A similar degree of skepticism was apparent in a recent article by Binyamin Appelbaum of The Washington Post. Mr. Appelbaum also made note of the fact that the relatively small, $8 million budget — for an investigation that has until December 15 to prepare its report — will likely be much less than the amount spent by the banks under investigation. Appelbaum pointed out that FCIC vice chairman, William Thomas, a retired Republican congressman from California, felt that the commission would benefit from its instructions to focus on understanding the crisis rather than providing policy recommendations. Nevertheless, both Angelides and Thomas expressed concern about the December 15 deadline:
The tight timetable also makes it impossible to produce a comprehensive account of the crisis, both men said. Instead, the commission will focus its work on particular topics, perhaps producing a series of case studies, Angelides said.
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Both Angelides and Thomas acknowledged that the commission is off to a slow start, having waited more than a year since the peak of the crisis to hold its first hearing. Thomas said that a lot of work already was happening behind the scenes and that the hearing next week could be compared to a rocket lifting off after a lengthy construction process.
Even as books and speeches about the crisis pile up, Thomas expressed confidence that the committee’s work could still make a difference.
“There are a lot of people who still haven’t learned the lessons,” he said.
One of those people who still has not learned his lesson is Treasury Secretary “Turbo” Tim Geithner, who is currently facing a chorus of calls for his resignation or firing. Economist Randall Wray, in a piece entitled, “Fire Geithner Now!” shared my sentiment that Turbo Tim is not the only one who needs to go:
There is a growing consensus that it is time for President Obama to fire Treasury Secretary Timothy Geithner. While he is at it, he needs to clean house by firing Larry Summers, by banning Robert Rubin from Washington, and by appointing a replacement for Chairman Bernanke. It is time for a fresh start.
Geithner is facing renewed scrutiny due to his questionable actions while at the NYFed. As reported on Bloomberg and in the NYT, secret emails show that the NYFed under Geithner’s command prohibited AIG from reporting that it was passing government bail-out funds directly to counterparties, including Goldman Sachs.
Beyond that, Professor Wray emphasized that Obama’s new economic team should be able to recognize the following four principles (which I have abbreviated):
1. Banks do not face a liquidity crisis, rather they are massively insolvent. Reported profits are due entirely to trading activities – which amount to nothing more than a game of Old Maid, with institutions selling bad assets to each other at inflated prices on a quid-pro-quo basis. As such, they need to be shut down and resolved. …
2. Saving financial institutions does not save the economy. …
3. As such, all of the bail-outs and guarantees provided to financial institutions (over $20 trillion) need to be unwound. Not because we cannot “afford” them but because they are dangerous. Unfortunately, Congress has come to see all of these trillions of dollars committed to Wall Street as a barrier to spending more on Main street. …
4. Finally, we need an economic team that understands government finance. The current team is hopelessly confused, led and misguided by Robert Rubin. …
At The Business Insider website, Henry Blodget gave a four-minute, video presentation, citing five reasons why Geithner should resign. The text version of this discussion appears at The Huffington Post. Nevertheless, at The Business Insider’s Clusterstock blog, John Carney expressed his belief that Geithner would not quit or be forced to leave office until after the mid-term elections in November:
We would like to see Geithner go now.
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But there’s little chance this will happen. The Obama administration cannot afford to show weakness. If it caved to Congressional critics of Geithner, lawmakers would be further emboldened to chip away at the president’s authority. Senate Republicans would likely turn the confirmation hearing of Geithner’s replacement into a brawl — one that would not reflect well on the White House or Democrat Congressional leadership.
There’s also little political upside to getting rid of Geithner now. It will not save Congressional Democrats any seats in the mid-term election. Obama’s popularity ratings won’t rise. None of the administration’s priorities will be furthered by firing Geithner.
All of this changes following the midterm elections, when Democrats will likely lose seats in Congress. At that point, the administration will be looking for a fall guy. Geithner will make an attractive fall guy.
Although there may not be much hope that the hard work of the Financial Crisis Inquiry Commission will result in any significant financial reform legislation, at least we can look forward to the resignations of Turbo Tim and Larry Summers before the commission’s report is due on December 15.
Lev Is The Drug
January 14, 2010
The first day of hearings conducted by the Financial Crisis Inquiry Commission (FCIC) was as entertaining as I expected. The stars of the show: Lloyd Blankfein of Goldman Sachs, John Mack of Morgan Stanley, “The Dimon Dog” of JP Morgan Chase and Brian Moynihan from Bank of America presented themselves as likeable guys. However, in the case of Blankfein, whenever he wasn’t talking he would sit there with that squinting, perplexed look on his face that seemed to mime the question: “WTF?” A large segment of the viewing public has already been primed to view these gentlemen as “The Four Horsemen of The Financial Apocalypse”. Nevertheless, there were four more Horsemen absent from the “stage” on Wednesday: Messrs. Greenspan, Bernanke, Paulson and Geithner. Beyond that, Brian Moynihan didn’t really belong there, since he was not such a significant “player” as the other panel members, in events of 2008. In fact, history may yet view his predecessor, Ken Lewis, as more of a victim in this drama, due to the fact that he was apparently coerced by Hank Paulson and Ben Bernanke into buying Merrill Lynch with instructions to remain silent about Merrill’s shabby financial status. I would have preferred to see Vikram Pandit of Citigroup in that seat.
As I watched the show, I tried to imagine what actors would be cast to play which characters on the panel in a movie about the financial crisis. Mike Myers would be the obvious choice to portray Lloyd Blankfein. Myers could simply don his Dr. Evil regalia and it would be an easy gig. The Dimon Dog should be played by George Clooney because he came off as a “regular guy”, lacking the highly-polished, slick presentation one might expect from someone in that position. Brian Moynihan could be portrayed by Robin Williams, in one of his rare, serious roles. John Mack should be portrayed by Nicholas Cage, if only because Cage needs the money.
Although many reports have described their demeanor as “contrite”, the four members of the first panel gave largely self-serving presentations, characterizing their firms in the most favorable light. Blankfein emphasized that Goldman Sachs still believes in marking its assets to market. As expected, his theme of “if we knew then what we knew now . . .” got heavier rotation than a Donna Summer record at a party for Richard Simmons. John Mack, who was more candid and perhaps the most contrite panel member, made a point of mentioning that some assets cannot be “marked to market” because there really is no market for them. Excuse me . . . but isn’t that the definition of the term, “worthless”?
Throughout the session, the panel discussed the myriad causes that contributed to the onset of the financial crisis. Despite that, nobody seemed interested in implicating the Federal Reserve’s monetary policy as a factor. “Don’t bite the hand that feeds you” was the order of the day. All four panelists described the primary cause of the crisis as excessive leverage. They acted as a chorus, singing “Lev Is The Drug”. Lloyd Blankfein repeatedly expressed pride in the fact that Goldman Sachs has always been leveraged to “only” a 23-to-1 ratio. The Dimon Dog’s theme was something like: “We did everything right . . . except that we were overleveraged”. Dimon went on to make the specious claim that overleveraging by consumers was a contributing element in causing the crisis. Although many commentators whom I respect have made the same point, I just don’t buy it. Why blame people who were led to believe that their homes would continue to print money for them until they died? Dimon himself admitted at the hearing that no consideration was ever given to the possibility that home values would slump. Worse yet, for a producer or purveyor of the so-called “financial weapons of mass-destruction” to implicate overleveraged consumers as sharing a role in precipitating this mess is simply absurd.
The second panel from Wednesday’s hearing was equally, if not more entertaining. Michael Mayo of Calyon Securities seemed awfully proud of himself. After all, he did a great job on his opening statement and he knew it. Later on, he refocused his pride with an homage to his brother, who is currently serving in Iraq. Nevertheless, the star witness from the second panel was Kyle Bass of Hayman Advisors, who gave the most impressive performance of the day. Bass made a point of emphasizing (in so many words) that Lloyd Blankfein’s 23-to-1 leverage ratio was nearly 100 percent higher than what prudence should allow. If you choose to watch the testimony of just one witness from Wednesday’s hearing, make sure it’s Kyle Bass.
I didn’t bother to watch the third panel for much longer than a few minutes. The first two acts were tough to follow. Shortly into the opening statement by Mark Zandy of Moody’s, I decided that I had seen enough for the day. Besides, Thursday’s show would hold the promise of some excitement with the testimony of Sheila Bair of the FDIC. I wondered whether someone might ask her: “Any hints as to what banks are going to fail tomorrow?” On the other hand, I had been expecting the testimony of Attorney General Eric Hold-harmless to help cure me of the insomnia caused by too much Cuban coffee.
The Commissioners themselves have done great work with all of the witnesses. Phil Angelides has a great style, combining a pleasant affect with incisive questioning and good witness control. Doug Holtz-Eakin and Brooksley Born have been batting 1000. Heather Murren is more than a little easy on the eyes, bringing another element of “star quality” to the show.
Who knows? This commission could really end up making a difference in effectuating financial reform. They’re certainly headed in that direction.