Financial crisis inquiry begins
On Wednesday, January 13, the CEOs of the United States’ four largest banks went under oath to answer questions about their role in the financial crisis of 2008. It marked the opening day of a new government inquiry into the causes of the financial crisis. The inquiry has the power to subpoena for information and recommend criminal investigations, but will it put these tools to work?
PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay, coming to you from Washington. And today we’re going to talk about the Financial Crisis Inquiry Commission. And joining us to help us unravel it is Tom Ferguson, who joins us from Boston. He teaches political science at the University of Massachusetts, Boston. He’s a senior fellow at the Roosevelt Institute. And also here in the studio with me is Kevin Hall. He’s the national economics correspondent for McClatchy Newspapers. Thank you, gentlemen; thanks for joining me. So, Kevin, start us off. The mafia goes to church on Sundays, does a mea culpa; it goes back to business as usual. We’ve seen Tony Soprano goes to his therapist and has some catharsis. Is this Financial Crisis Inquiry Commission more than public catharsis? And any highlights for you today? And what’s the significance of all this?
KEVIN G. HALL, ECON. CORRESPONDENT, MCCLATCHY NEWSPAPERS: Well, the mea culpa by the mafia in the Sunday church has already happened—they’ve already been before the Senate and the House. So this is a little bit of a different entity. They were sworn under oath. It’s a commission charged with getting to the bottom of what caused this crisis. We know a lot of it, but the chairman and the cochairman of this panel insist they’re going to add to what we know about this crisis and will unveil new things as it goes along. They have to report back by December, the end of December, I believe, a full report and their recommendations as to where to go forward. It does have subpoena power, unlike much of the Congressional action.
JAY: So what’s your take about today? Blankfein came and said it’s like the weather, it’s like hurricanes.
LLOYD BLANKFEIN, CEO, GOLDMAN SACHS: Look, how would you look at the risk of a hurricane? The season after we had four hurricanes on the East Coast, which was absolutely extraordinary, versus the year before, rates got very low for risk premia on the East Coast of the United States. That year after four hurricanes, everyone’s nerves were such rates went up spectacularly. They are lower again. Is the risk of four hurricanes any different any of those times?
PHIL ANGELIDES, CHAIR, FINANCIAL CRISIS INQUIRY COMMISSION: Mr. Blankfein, I’ll say this, having sat on the board of the California Earthquake Authority, acts of God we’ll exempt. These were acts of men and women.
HALL: Goldman Sachs’ CEO took most of the heat, Lloyd Blankfein. He was joined by the chairman of Morgan Stanley, John Mack; Bank of America’s new president, Brian Moynahan; and the fourth person was JP Morgan’s CEO and chairman, Jamie Diamond. The big takeaway today, I think, that most of the wire reports and most of the reporting has shown was the acknowledgment that they were betting against the very products they were selling. They were selling about $40 billion in securities, mortgage-backed securities that are pools of mortgages that are then sold to investors. At the very time that they were selling this stuff, they were taking out an insurance-like bet called a credit default swap, betting against where that would go.
ANGELIDES: Well, I’m just going to be blunt with you. It sounds to me a little bit like selling a car with faulty brakes and then buying an insurance policy on the buyer of those cars. It doesn’t seem to me that that’s a practice that inspires confidence in the markets. I’m not talking about your [inaudible] I’m talking about betting against [inaudible] securities.
FEINSTEIN: Every purchaser of an asset here is an institution, probably professional-only investors, dedicated in most cases to this business.
ANGELIDES: Representing pension funds who have the life savings of police officers, teachers.
BLANKFEIN: These are the professional investors who want this exposure.
JAY: Tom, what’s your take on what happened today?
TOM FERGUSON, PROF. POLITICAL SCIENCE, UNIV. OF MASS.: Well, look, you know, I have to say my heart didn’t leap like a fawn, nor did my pulse race. But on the other hand, there’s something slightly refreshing about this. We’re having a discussion of the financial crisis that doesn’t begin with ACORN or with Fannie and Freddie. You know, we are finally getting to a discussion of—. And what did the private bankers, the folks who paid the lobbyists and who make the political contributions, you know, all for the last 20—and for that matter, 120 years, what did those folks—you know, what was their role in this crisis? I guess another way of putting it is, hey, you know, we’re in geology class, and we’re finally discussing the Earth. Alright? So that’s got to be a step forward.
JAY: Did the critical questions get asked today?
HALL: Jamie Diamond of JPMorgan and Lloyd Blankfein both acknowledged that cheap money, the Fed policy of keeping interest rates low for a real long time, was a big factor in inflating this bubble, not only the housing bubble, but this idea that money is a commodity that is not scarce. And that was the root of a lot of bad decisions. And that’s an important concession, because think about for the last year now we’ve had interest rates at effectively zero percent from the Fed, and it’s going to stay that way going forward this year as well, it looks. So that raises the question of, if it happened, if it created a bubble then, seems like a pretty good bet it’s going to be creating a bubble now. So there’s some real-world implications for what came out of today, too.
FERGUSON: I think what’s really crucial here is you’re not going to ever see it on TV, and it won’t come out in the hearings. I mean, what made the Pecora Commission great was the vast amount of documents it dug out of the banking committees, you know, the things like the Morgan preferred list, the list of politicians that they had paid off in various stock participations and things like that. That stuff all needs to be dug out. The public pressure and the demand from reporters has got to focus not on things like interest rates, which—you know, it really doesn’t matter whether Lloyd Blankfein or somebody acknowledges interest rates. We’ll settle that with some decent econometrics. But what we need to see is the stuff you can’t easily get at with statistics. We need those memoranda, the email. We need to know what happened with AIG and Goldman. We need to know what happened with then Treasury Secretary Hank Paulson’s ethics waiver, you know, when we know that he asked for one, we know that he didn’t wait for it, to get it, to start talking to Blankfein. We should not have to listen to sort of Goldman saying we—well, you know, making noises like we weren’t really going to be affected by this. I mean, you just take for a second the way folks are reacting to, like, California’s effort to get help from the feds. They’re basically being told to just chop your state budget, chop everything. The plea that, say, you want to have a competitive state university or K-12, nobody cares about that. But banks are somehow able to get a ton of money from the government, not just in the TARP [Troubled Asset Relief Program] money, but especially in the FDIC guarantees, and then they are able to sort of [inaudible] "Well, it doesn’t matter. We thank you for all this taxpayer dough, but we’re handing this stuff out in bonus." You know, there were times in October 2008 when Morgan Stanley’s bonus pool was worth more than the entire value of the firm. I mean, this is crazy. And this stuff, we need to see the entire documentary record laid out.
JAY: Let me ask you both, just finally. So much of these transactions seems to have been done to inflate transactions. In other words, keep turning stuff over, ’cause every time you turn it over, you’re earning more bonus. Some of it’s just a pure gambling scheme, where they’re just betting on a set of securities nobody even owns. They’re just betting whether that set of securities goes up or down. And one of the experts quoted in the McClatchy piece says this is pure Ponzi scheme. So if what’s going on here is Ponzi schemes to inflate bonuses, the intent is to inflate bonuses, if that proves to be true, then why isn’t that criminal? And is that really going to be the measure whether this commission is any good or not, Tom?
FERGUSON: Where I think one wants to sort of focus on here—I mean, you’re right to focus on the amount of sort of churning that goes on in the portfolio. You’ve got to [remember that] most of this stuff has almost no relation to a sensible economy. That is to say, in the end, an awful lot of what these folks are doing is trying to be the first to guess what the Fed or somebody is going to do. And if you guess right, you know, you of it ahead and you make hundreds of millions of dollars that hour. Well, when you find out what they do, everybody else adjusts to that. Essentially, that’s a slightly crazy way to run an economy, when the net economic impact of all that stuff on the real economy is just very small. I mean, folks need to directly address this point about the vast amount of speculation. You know, you can see in the earnings reports of the banks in the last six months or so the way these folks are making money off trading. They’re not doing a lot making business loans. It’s the business loans that truly matter for a large chunk of the real economy. You can hoke up some rationale for the trading, but in general, trading assets that are already out there, that’s just a lot of secondary stuff. I mean, this is becoming crazy, becoming crazy.
HALL: I think, going forward, as we debate as a nation the financial reform—. You know, the capital markets used to be about ways in which companies funded themselves, whether it was through commercial paper, different mechanisms of doing that. We seem to have gone from that and morphed into a kind of a casino-type atmosphere, where the financial markets, the huge sums that are being made aren’t being made on any productive lending towards the economy or providing liquidity in the markets, but outright speculation and dark markets and parallel markets and flash trading and things that don’t add value to anyone other than these handful of intermediaries or broker-dealers.
JAY: So we’ll see whether the commission actually makes recommendations to stop that or this is a year-long public mea culpa catharsis, at the end of which it will all fade away into the next elections.
FERGUSON: After the election, Paul. Yeah, after the—that’s why they’re reporting after the election: to make sure it doesn’t get in the way of politicians’ reelection efforts.
JAY: Thanks very much for joining us. And thank you for joining us on The Real News Network.
Please note that TRNN transcripts are typed from a recording of the program; The Real News Network cannot guarantee complete accuracy.