Posted on 13 Jan 2010
The heads of Wall Street's largest banks faced skeptical questions on Wednesday about executive pay and the failures of regulation from the bipartisan commission established to examine the causes of the biggest downturn since the Depression.
Tensions flared as commission members retraced the events leading to the near-collapse of the financial system in 2008 and pressed bankers on whether they or their employees had behaved unethically.
Phil Angelides, a Democrat and a former California treasurer who is chairman of the commission, focused his questioning on Lloyd C. Blankfein, chief executive of Goldman Sachs. At one point, after Mr. Blankfein likened aspects of the financial crisis to an “earthquake” and similar “acts of God,” Mr. Angelides cut in to say, “These were acts of men and women.”
Critics have accused Goldman Sachs and other Wall Street firms of deliberately packaging troubled mortgage and passing the bonds off as sound investments, a point on which Mr. Angelides pressed Mr. Blankfein.
“I’m going to be blunt with you,” Mr. Angelides said. “It sounds to me like selling a car with faulty brakes, and then selling an insurance policy on those cars.”
When Mr. Blankfein suggested that some complex investment products had been intended primarily for professional investors, Mr. Angelides interjected that the group included “pension funds representing the life savings of police officers.”
Mr. Blankfein said in his prepared testimony that he was not “trying to shed one bit of our industry’s accountability” and that “there is enough blame to go around.” But he also defended Goldman’s risk management and compensation practices, and urged Congress not to go too far in cracking down on trading of exotic instruments like derivatives.
“After the shocks of recent months and the associated economic pain, there is a natural and appropriate desire for wholesale reform,” he said. “We should resist a response, however, that is solely designed around protecting us from the 100-year storm.”
Mr. Blankfein was joined in the hearing room of the House Ways and Means Committee by three other Wall Street financiers: Jamie Dimon of JPMorgan Chase, John J. Mack of Morgan Stanley and Brian T. Moynihan of Bank of America.
Of the four executives, Mr. Mack in some ways seemed the most supportive of expanded federal regulation. He called for scaling back of proprietary trading, the establishment of a systemic risk regulator and the creation of a federally regulated clearinghouse of derivatives.
“Regulators simply didn’t have the visibility, tools or authority to protect the stability of the financial system as a whole,” Mr. Mack said, adding “we did not do everything right.”
Heather Murren, a former managing director at Merrill Lynch and one of six Democratic appointments to the commission, pressed Mr. Blankfein on whether he supported greater government regulation. After Mr. Blankfein went on for a bit, she cut in and asked, “Is there a yes in there?”
That prompted Mr. Blankfein — whose bank used to be regulated by the Securities and Exchange Commission but is now primarily overseen by the Federal Reserve — to respond: “I can’t assert that it’s not enough. It feels like a lot of regulation — and appropriately a lot.”
In their remarks, the bank executives tried to balance a fine line between accepting responsibility and pushing back against regulatory reforms they consider too drastic.
Mr. Dimon urged lawmakers to re-examine the role of regulators in the system, though he noted “the responsibility for a company’s actions rests with the company’s management.”
“No institution including our own should be too big to fail,” Mr. Dimon said in his opening remarks.
In his remarks, Mr. Angelides laid out the cost of the economic downturn to the American people. Nearly seven million Americans have lost their jobs in the downturn, he said while nearly 25 million — more than 16 percent of the work force — are unemployed or underemployed. More than two million families have lost homes to foreclosure in the last three years and households have seen $13 trillion in wealth evaporate.
“People are angry,” Mr. Angelides said in his opening remarks. “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.”
The 10-member commission, with a budget of just $8 million, is charged with delivering a comprehensive report to President Obama by Dec. 15 on 22 factors associated with the crisis, from mortgage fraud to regulatory failings. The vice chairman of the panel is Bill Thomas, a Republican and a past chairman of the House Ways and Means Committee.