Pecora in Perspective: The Season Opener
The new Pecora Commission, headed by Phil Angelides, kicked off its testimony phase yesterday. The first panel consisted of Lloyd Blankfein, Chairman and CEO, The Goldman Sachs Group, Inc., Jamie Dimon, Chairman and CEO, JPMorgan Chase & Co., John J. Mack, Chairman of Morgan Stanley, and Brian T. Moynihan, Chief Executive Officer and President, Bank of America.
There were some good moments. Lloyd Blankfein of Goldman Sachs admitted under questioning that the investment bank behaved improperly when it bet on a housing downturn while peddling more than $40 billion in securities backed by risky U.S. home loans, which through the magic of a broken financial ratings system somehow obtained an investment grade rating.
McClatchy, as per usual, does a great job of covering the hearing.
Commission Chairman Phil Angelides, a former California state treasurer, warned Blankfein that he’d be “brutally honest” in his questioning. He asked why Goldman thought it was necessary to take out protection against investment-grade mortgage securities it was selling by purchasing insurance-like contracts known as credit-default swaps. Angelides likened it to selling a car with knowledge it had faulty brakes and then taking out an insurance policy on the buyer.
“I do think the behavior is improper, and we regret . . . the consequence that people have lost money in it,” Blankfein told Angelides.
Until Wednesday, Goldman had insisted that it was merely managing its risks when it placed “hedges,” in the form of wagers against the housing market, various venues including in secret offshore deals, with insurance giant American International Group and on a private London exchange.
And when Mr. Blankfein said that buyers of mortgage-backed securities were primarily professional investors, Mr. Angelides interrupted to point out that those investors were “representing pension funds who have the life savings of police officers, teachers.”
This is big stuff, people. It’s admissions like this that set up a climate for regulatory reform. I cannot even begin to guess how much backroom work it took to force Goldman into the corner where they were forced to admit this.
You don’t ask a question like that, and get an answer like that, unless both sides already know that the witness is going to go for his own lungs. Here’s a big CAK shout out to the commissioners and staffers who were able to force that break in the case.
Some thoughts about regulatory approaches were put forth yesterday, during the second panel:
Kyle Bass, whose Dallas-based hedge fund cashed in by betting on a housing downturn beginning in 2006, told the panel that AIG and other insurers could never have taken on such risk if they had been required to put up initial cash, or collateral, whenever they wrote protection via a swap contract.
Look: a simple straight forward idea! Easy to write into law, common sense to implement. Then there was this:
Michael Mayo, a managing director and financial services analyst for the U.S. branch of French bank Calyon Securities, rattled off 10 causes of the financial crisis, including excessive investment in real estate, the surge in exotic bets such as credit-default swaps, and the fact that U.S. investment banks allowed leverage — the ratio to which their risks outstripped capital — to approach 40-to-1.
“I’m shocked and amazed more changes have not taken place,” Mayo said. “There seems an unwritten premise that Wall Street, exactly how it exists today, is necessary for the economy to work. That’s not true. … Wall Street has done an incredible job at pulling the wool over the eyes of the American people.”
And a bombshell!
Every member of Congress should post that quote on their bathroom mirror where they can see it every morning when they brush their teeth.
There is no excuse for allowing banks to have debts that are 40 times the amount of their assets. And there is no excuse for believing that we cannot regulate Wall Street back into a stable and sane economic engine instead of casino full of out of control spending drunks it acts like today.
Testimony was scheduled to continue today, I’m looking forward to Shelia Bair’s testimony.