Heads of Wall Street firms admit errors but deflect blame for crisis
They admitted making mistakes and they regretted the economic devastation their decisions wrought, but the heads of four major financial firms wouldn’t take direct blame for the massive meltdown in some tough questioning today by a government panel investigating the causes of the financial crisis.
“We did eat our own cooking, and we choked on it,” John Mack, chairman of Morgan Stanley, said about the large bets his industry made on the continued rise in housing prices.
The high-profile appearance Wednesday of Mack and other Wall Street titans at the first public hearing of the Financial Crisis Inquiry Commission came as President Obama prepared to announce Thursday a new levy on banks to help recoup expected losses from the $700-billion bailout fund.
The White House move to assess what it is calling the “financial crisis responsibility fee” reflects the public anger aboutthe return of big profits and large bonuses to the financial industry while average Americans continue to struggle.
That outrage also has prompted Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, to schedule hearings this month on excessive executive compensation and on possibly increasing taxes on large bonuses.
“The question of compensation for people in the financial industry is a legitimate cause of concern in the country as a whole, and we are going to address it,” Frank told reporters Wednesday.
“There may be, in some of these financial institutions, people capable of playing Major League Baseball. I’m not aware of any,” he said. “But absent that, I don’t know where they would go to get comparable forms of compensation.”
The Wall Street executives largely defended their compensation practices and deflected suggestions they triggered the crisis. They described themselves as among the many players, from major financial firms to average consumers, who took on too much risk during the boom of the last decade, believing the good times would not end.
“Somehow we just missed that home prices don’t go up forever,” Jamie Dimon, chief executive of JPMorgan Chase & Co., told the panel in admitting his company never tested its exposure to a 40% drop in home prices even though it tested almost every other market scenario.
Goldman Sachs Group Inc. Chief Executive Lloyd Blankfein and Brian Moynihan, the new chief executive of Bank of America Corp., were the other initial witnesses as the congressionally appointed commission began the public portion of its yearlong investigation.
“We’re after the truth, the hard facts,” Phil Angelides, the commission’s chairman, said in kicking off the first two days of hearings. “People are angry. . . . They have a right to be. If we ignore history, we’re doomed to bail it out again.”
Angelides, a former California state treasurer and 2006 Democratic nominee for governor, swore in the four executives and told them the commission would use its subpoena power when necessary -- unneeded Wednesday because the witnesses testified voluntarily -- and refer any wrongdoing it uncovers to the authorities.
The questioning was contentious at times, and Angelides was the most aggressive of the 10 panel members. He wondered whether the crisis was “purely a perfect storm” or “a man-made perfect storm in which the clouds were seeded.”
The answers, which the commission must provide to Congress by Dec. 15, will be difficult to determine, Peter J. Solomon, a New York investment banker, told the panel in a second session later in the day.
“There’s no silver bullet here,” he said of the cause of the crisis. “If you listed all the villains in this tale, you wouldn’t get to the plot.”
Angelides focused his questioning on Blankfein, whose firm has been criticized for selling securities containing subprime mortgages and then shorting those same investments to hedge the firm’s risk.
Blankfein said the practice was “improper” and that “we regret the consequence that people may have lost money.” But he also defended the actions, saying they were what “market maker” firms such as Goldman do in creating a mechanism to trade shares and in minimizing the risks.
“I’m just going to be blunt with you,” Angelides responded. “It sounds to me a little bit like selling a car with faulty brakes and then buying an insurance policy” on the person who buys the car.
The sparring between the two was the most contentious part of the first three-hour session. Blankfein said it was difficult to look at risk in hindsight after a major crisis. He noted that a person’s assessment of the risk of a hurricane was greater after a season in which four major hurricanes hit.
“Acts of God are exempt,” Angelides shot back. “These were acts of men and women.”
Blankfein, Mack and Dimon -- all of whom headed major companies as the financial crisis approached -- testified on Capitol Hill for just the second time since the crisis began.
They said Wednesday that poor government regulation played a role in the crisis and pressed for changes, including new oversight of risk in the broader financial system and a way for large firms to fail without seriously damaging the economy. The Obama administration has proposed such changes in an overhaul of the financial regulatory system now moving through Congress.
“We cannot and should not take risk out of the system; that’s what drives the engine of our capitalist economy,” Mack said. “But no firm should be too big to fail.”
Dimon said he wanted to be clear that he was not blaming regulators, but the companies, for their problems.
“I blame the management teams 100% and no one else,” he said.
JPMorgan Chase should have been more diligent about its lending standards and about financial firms becoming over-reliant on short-term financing, Dimon said. In addition, “excessive leverage, even from consumers, pervaded the system” leading up to the crisis, he said.
Moynihan, who took over Bank of America this year, said he understood the public anger and was grateful for the $45 billion in taxpayer bailout money the company had received. He noted the firm had repaid the entire amount, along with $3 billion in dividends and other payments. The other three companies also have repaid their bailout money.
Still, Moynihan said: “We as managers need to run our companies so this never happens again.”
Blankfein credited government support as being critical in stabilizing the financial system -- “and we benefited from it.” But he did not agree with Angelides that Goldman only survived because of the aid.
“I can’t stand here and tell you what would have happened . . . but we were going to bed every night with more risk than any responsible manager should want to have either for your business or for the system as a whole,” he said.
The commission was created by Congress last year and patterned on the bipartisan panel that investigated the causes of the Sept. 11, 2001, terrorist attacks. Congress also launched a similar inquiry, known as the Pecora Commission, after the Great Depression, and those findings led to major financial reforms.
Angelides was appointed by congressional Democratic leaders to head the commission. Republicans chose former Central Valley Rep. Bill Thomas, a onetime chairman of the House Ways and Means Committee, as the vice chair. The panel has six Democratic appointees and four Republicans.