Pecora Weeps

Originally posted on January 15 at Dirt Diggers Digest.

After J.P. Morgan was questioned by Congressional investigator
Ferdinand Pecora during a 1930s investigation of the causes of the
Great Crash, the legendary financier complained
that Pecora (photo) had "the manners of a prosecuting attorney who is
trying to convict a horse thief." Morgan was also embarrassed when a
Ringling Bros. publicity agent placed a diminutive circus performer on
his lap in the middle of the proceedings.

At this week's public hearing of the Financial Crisis Inquiry
Commission, the nation's most powerful bankers were, unfortunately,
treated with a lot more deference. Sure, there was one satisfying
exchange between FCIC Chairman Phil Angelides and Goldman Sachs CEO
Lloyd Blankfein in which Angelides likened the firm's practice of
betting against the very securities it was peddling to clients to that
of selling someone a car with faulty brakes and then buying an
insurance policy on the buyer.

But those moments were rare. For the most part, the bankers came
away unscathed. Most of the ten commissioners treated them not as
suspected criminals whose misdeeds needed to be probed, but rather as
experts whose opinions on the causes of the crisis were being
solicited. This gave the bankers abundant opportunities to pontificate
about industry and regulatory practices while avoiding any
incriminating admissions about their own firm's behavior.

For example, Commissioner Heather Murren, CEO of the Nevada Cancer
Institute, asked Blankfein whether there should be "more supervision of
the kinds of activities that are undertaken by investment banks?" This
allowed him to babble on about the "sociology...of our regulation before
and after becoming a bank holding company."

The bankers seemed to have expected tougher questioning. Their
opening statements sought to soften the interrogation by conceding some
general culpability, though it was done in a mostly generic way. Jamie
Dimon of JP Morgan Chase admitted that "new and poorly underwritten
mortgage products helped fuel housing price appreciation, excessive
speculation and core higher credit losses." John Mack of Morgan Stanley
acknowledged that "there is no doubt that we as an industry made
mistakes." And Brian Moynihan, the new CEO of Bank of America, noted:
"Over the course of the crisis, we, as an industry, caused a lot of
damage."

But much too little time was spent by the commissioners exploring
how the giant firms represented on the panel contributed to that
damage. A search of the transcript of the hearing produced by CQ
Transcriptions and posted on the database service Factiva indicates
that the word "predatory" was not used once during the time the four
top bankers were testifying.

The commissioners failed to challenge most of the self-serving
statements made by the bankers to give the impression that, despite
whatever vague transgressions were going on in the industry, their own
firms were squeaky clean. Even Angelides failed to pin them down. When
he asked Blankfein to state "the two most significant instances of
negligent, improper and bad behavior in which your firm engaged and for
which you would apologize" the Goldman CEO admitted only to
contributing to "elements of froth in the market." Angelides asked
whether that included anything "negligent or improper." Blankfein again
evaded the question and the Chairman gave up.

The bankers also went unchallenged in making statements that were
incomplete if not outright erroneous. When Blankfein, for example,
claimed that Goldman deals only with institutional investors and
"high-net-worth individuals," no one pointed out the firm's ties to Litton Loan Servicing, which has handled large numbers of subprime and often predatory home mortgages.

The Goldman chief also made much of the fact that he and other top
executives of the firm took no bonuses in 2008. That's true, but he
failed to mention that, according to Goldman's proxy statement, he alone became more than $25 million richer that year when previously granted stock awards vested.

The bankers were at their slipperiest when it came to the few
questions about the issue of being too big to fail. They would not, of
course, admit to being too big, but in spite of every indication that
the federal government would never allow another Lehman Brothers-type
collapse to occur, they labored mightily to argue that they could
conceivably go under. This notwithstanding the fact that a couple of
them had just thanked U.S. taxpayers for the financial assistance their
firms had received.

I suppose it's possible that the Commission is saving its best shots
for later stages of the investigation and its final report, but its
handling of the banker hearing deprived the public of a chance to see
some of the prime villains of the current crisis get a much-deserved
tongue-lashing.

• 208 Regulation