FINANCIAL CRISIS INQUIRY COMMISSION UPDATES:
The Financial Crisis Inquiry Commission held its first hearing in Washington today; with another session scheduled for tomorrow. (Watch the hearing live here.) Today's witnesses included Goldman Sachs CEO; Lloyd Blankfein; Bank Of America CEO Brian Moynihan; Morgan Stanley Chairman John Mack; and JPMorgan Chase CEO Jamie Dimon. The afternoon portion of the hearing features several prominent banking experts.
If there was any doubt that Wall Street thinks the government will step in to save "too big to fail" firms, Goldman Sachs CEO Lloyd Blankfein dispelled it on Wednesday morning.
In response to a question about whether the federal government would prevent one of his three counterparts at today's hearing -- Bank of America, JPMorgan Chase and Morgan Stanley -- from failing, Blankfein essentially said that the government would in fact step in.
"I think tomorrow in the context of this environment, at some level the government would intervene." "Because of the fragility of the system," Blankfein said, the government would be forced to step in.
In other words, 'too big to fail' is real. And Wall Street knows it.
Blankfein qualified his answer by stating that perhaps the government wouldn't have stepped in a year and a half ago, nor would they perhaps step in a year from now.
WATCH the video below:
UPDATE: 2:30 P.M. - JPMorgan CEO Pans Obama Bank Tax Plan
The head of the country's second-biggest bank dismissed a new Obama administration tax plan aimed at getting back some of the money taxpayers spent bailing out Wall Street.
Jaime Dimon, CEO of JPMorgan Chase -- and perhaps the nation's most powerful banker -- told reporters after this morning's first hearing of the Financial Crisis Inquiry Commission that "using tax policy to punish...is a bad idea." Furthermore, he said, "all businesses tend to pass costs onto customers."
Administration officials told the Huffington Post Tuesday that the administration will propose assessing a tax over the next 10 years to recoup about $120 million owed taxpayers from the bailout and other public subsidies.
The proposed tax would attempt to target those banks that the markets consider to be "too big to fail." Banks that investors expect the federal government will bail out, should they ever be in danger of failing, benefit from lower borrowing costs, for example.
Separately, Dimon repeated his defense of federal bank and securities regulators, who many critics argue allowed or even encouraged the kind of high-risk behavior that led to the near-collapse of the financial system.
"I have been completely clear throughout that regulators should not be blamed," Dimon said.
Dimon also said banks weren't to blame for the crisis. Rather, he argued, fingers should be pointed at investment firms, finance companies, mortgage brokers, and thrifts. And if banks aren't to blame, then neither are their regulators, he said.
UPDATE, 1:30 P.M. - Analyst SLAMS Bank Leverage Levels
After a short break, the commission opened its afternoon session by speaking with financial industry analysts and experts, including J. Kyle Bass, the managing director of Hayman Advisors. In his prepared testimony, Bass tore into the amount of leverage in the financial system before -- and after -- the financial crisis. Here's Bass:
"Depository institutions like Citibank were able to parlay their deposits into large levered bets in the derivatives marketplace. In fact, at fiscal year‐end 2007, Citigroup was 68.4X levered to its tangible common equity, including off‐balance sheet exposures."
Bass was particularly harsh on the mortgage giants Fannie Mae and Freddie Mac, which, the Treasury Department announced last month, would have blank check support from the U.S. government:
These organizations have been some of the single largest political contributors in the world over the past decade with $200 million being given to 354 lawmakers in the last 10 years or so. Yes, the United States needs low cost mortgages, but why should organizations created by Congress have to lobby Congress? Fannie and Freddie used the most leverage of any institution that issued mortgages or held mortgage backed bonds. At one point in 2007, Fannie was over 95X levered to its statutory minimum capital with just 18 basis points set aside for losses. That's right, 18 one hundredths of one percent set aside for potential losses. They must not be able to put humpty dumpty back together again. If they are to exist going forward, Fannie and Freddie should be 100% government‐owned, and the government should simply issue mortgages to the population of the United States directly since this is essentially what is already happening today, with the added burden of supporting a privately‐funded, and arguably insolvent, capital structure.
Interestingly, Bass also added that Bear Stearns would have suffered up to a 10 percent loss on its portfolio of securitized mortgages if housing prices simply remained flat, instead falling precipitously after the housing bubble collapsed.
Bass told commissioners that leverage was so out of whack on Wall Street -- firms were taking and making bets without cash to back them up -- and housing prices so artificially built up that even a plateaued housing market would make Bear Stearns's debt service costs particularly onerous.
Read Bass's full testimony here.
UPDATE, 12:22 P.M. - John Mack's Colorful Mortgage Language
Morgan Stanley CEO John Mack delivered probably the most colorful line of the afternoon when he was questioned by commission member Byron Georgiu about the bank's mortgage holdings.
"We did eat our own cooking, and we choked on it," said Mack.
UPDATE, 12:20 P.M. - JPMorgan CEO: 'We Shouldn't Be Surprised'
Jamie Dimon, the CEO of JPMorgan delivered this odd, off-putting quip, referencing his own daughter in college, about the financial crisis and it's seeming predictability. According to Dimon, there was simply no single regulator watching for any systemic risk posed by large financial companies.
"A lot the things we all talked about mortgages, SIVs, they were all known. They were not a secret... It's not a surprise that we know we have crises every 5-10 years. My daughter called me from school one day and said 'Dad what's a financial crisis' and without trying to be funny, I said, 'It's the kind of thing that happens every 5-7 years.' And she said, 'Then, why is everybody so surprised?'"
UPDATE, 11:30 A.M. - Analyst SLAMS Bank Leverage Levels
The investigative commission's top Republican passed on his first opportunity to ask four of Wall Street's top chief executives about their role in the financial crisis -- but he did invite the public to contact the commission (www.fcic.gov) and submit questions they'd like to see Wall Street CEOs answer
Bill Thomas, a former chairman of the House Ways and Means Committee who spent 28 years in Congress, elected not to ask any direct questions to the heads of Goldman Sachs, JPMorgan Chase, Bank of America or Morgan Stanley.
Thomas also submitted into the record 23 questions, posed by financial experts and journalists and printed in the New York Times, that he wants the four banks to answer in writing.
Congress asked the commission to get to the root of what happened, Thomas said, "but most importantly to explain it in a way the American people can understand."
This is the commission's first hearing. The heads of the top two retail banks and Wall Street banks are here to answer questions not only about their own firms' activities, but about what was going on in the market and economy. At the very least, they're here to guide the ten commissioners and their investigators how to proceed. A final report is due in 11 months.
UPDATE, 11:18 A.M.:
Goldman CEO Lloyd Blankfein and commission chairman Phil Angelides'a latest back-and-forth focused on risk-taking on Wall Street and, well, the dangers associated with hurricanes. Blankfein seemed to argued that Wall Street risk was based on a period of relative calm in the financial markets -- a claim that reveals an incredibly short memory. He compared banks' risk management procedures to those assumed by insurers.
"Everything is context-driven. After ten benign years in the context of where we were... How would you look at the risk of a hurricane? The season after we had four hurricanes on the East Coast, which was actually extraordinary versus the year before, rates got very low... that year after 4 hurricanes... rates went up spectacularly... Is the risk of hurricanes any different any of those times?
Angelides quickly interrupted: "Having sat on the board of the California Earthquake Authority, acts of God were exempt. These were acts of men and women. These were controllable"
UPDATE, 10:38 A.M.:
The head of the bipartisan commission created to investigate the causes behind the financial crisis challenged the chief executive of Goldman Sachs on his firm's practice of packaging securities, securing top ratings from the credit-rating agencies, selling them to investors -- and then taking the contrary position with the firm's money.
Wall Street's top firm has been accused of essentially selling cars with bad brakes and then taking out insurance on them -- a "heads I win, tails you lose" practice that runs afoul of basic securities laws, not to mention generally-recognized business ethics.
In a combative exchange, Phil Angelides questioned Goldman CEO Lloyd Blankfein on his firm's practice of selling securities to investors -- which in doing so means the seller should not knowingly be selling the investor a pile of garbage that's sure to sour -- and then taking the opposite position, betting that the prices on those securities -- like mortgage-backed securities -- will drop.
Despite the persistent questioning, Blankfein's basic answer is that this practice is standard on Wall Street. It's part of a firm's risk management. Asked if Goldman disclosed its contrary bets to its clients, Blankfein dodged.
In essence, everyone was doing it...
UPDATE, 10:15 A.M.:
Goldman Sachs CEO Lloyd Blankfein said Wednesday that among the three underlying factors behind the housing market's boom and bust were the Federal Reserve's interest rate policies -- a direct rebuke to Fed Chairman Ben Bernanke.
The nation's central banker, who is fighting a skeptical Senate for a second term, has argued that the Fed's policy of extremely low interest rates for the better part of the decade was not responsible for the housing bubble. Rather, he's argued that lax regulation and poor underwriting standards by lenders are to blame -- an argument that largely passes the buck to others.
Economists disagree. The Wall Street Journal recently reported that it conducted two surveys that found "many economists believe low rates did contribute to the bubble."
Add Blankfein to the list.
Testifying before the Financial Crisis Inquiry Commission, Blankfein said that "nearly 10 years of low long-term interest rates" was among the three main structural causes of the housing boom and bust.
The Fed, by controlling short-term rates, has a direct control over long-term interest rates, some economists -- including Fed research -- argue.
Blankfein is among those linking interest rates with the boom and bust. Fighting for his job, and defending the Fed, Bernanke argues the opposite position.
"Regulatory and supervisory policies, rather than monetary policies, would have been more effective means of addressing the run-up in house prices," he said earlier this month at an economics conference in Atlanta.
UPDATE, 10:00 A.M.:
Here's Goldman Sachs CEO Lloyd Blankfein's prepared testimony. A highlight from Blankfein's words about the bank's risk management practices:
"As I look back prior to the beginning and throughout the course of the crisis, we never knew at any moment if asset prices would deteriorate further, or had declined too much and would snap back...After the fact, it is easy to be convinced that the signs were visible and compelling. In hindsight events not only look predictable, but look like they were obvious or known."
9:00 A.M.: Seated across from the heads of four of the nation's biggest banks, the chairman of the bipartisan commission created to investigate the causes of the financial crisis wasted little time Wednesday in acknowledging the public's rage over the taxpayer-funded bailout for Wall Street.
"People are angry," Phil Angelides said as he called the Financial Crisis Inquiry Commission to order for its first public hearing. "They have a right to be. The fact that Wall Street is enjoying record profits and bonuses in the wake of receiving trillions of dollars in government assistance -- while so many families are struggling to stay afloat -- has only heightened the sense of confusion."
A few minutes later, Angelides asked the chief executives of Bank of America, JPMorgan Chase, Goldman Sachs and Morgan Stanley -- the nation's two biggest banks and two biggest Wall Street firms, which between them control $5.9 trillion in assets, or more than 40 percent of the nation's annual output -- to swear under oath that they'd tell the full truth.
Standing before the commission with their right hands raised, the lords of finance promised to do so, and the hearings began.
First up, the head of Goldman Sachs, Lloyd Blankfein...