Page 1 of 3 Crisis probe lacks Pecora edge
By Julian Delasantellis
During the darkest days of the Great Depression of the 1930s, businessmen knew
that they had to go the extra mile to separate customers from their money. For
the movie-theater owner, this frequently involved presenting substantially more
entertainment and information than just the feature film attraction.
One of these might be what came to be known as the "cliffhanger", basically, a
10-20 minute segment of an adventure/science fiction film, one that began with
a resolution of the protagonist's crisis from the previous week, and ended with
him getting into another one (as in, hanging off a cliff) that would hold the
audience's attention and interest until the following week.
But in 1934, competitive programming arose to challenge the presence in the
theaters of buccaneering pirates or dashing
heroes with rocket backpacks. These were filmed excerpts of a subcommittee of
the United States Senate's committee on banking and currency charged with
investigating the financial skullduggery that led to the Great Crash of 1929
and subsequent world Great Depression. Leading the questioning of many of the
captains of Wall Street banking and finance was the committee's chief counsel,
former New York assistant district attorney, Ferdinand J Pecora, giving the
effort the name it has carried through time, the Pecora Commission.
There was wild public interest in the hearings; back then, people actually
seemed to be looking for solutions to their dire economic circumstances rather
than just scapegoats. Both of the two relatively new technological
communications mediums, radio and sound cinema, covered the hearings
extensively; radio through live broadcasts of the hearings; cinema through
newsreels shown in place of the cliffhangers. Many historians credit the public
outrage generated by Pecora as critical in the passage of the market regulation
and stabilization regulations such as the Glass-Steagall Act that protected the
financial markets for the next 50 years.
Now, in response to many demands for an investigation into America's current
economic travails, a new Pecora-type investigative effort has been formed, the
Financial Crisis Investigative Committee, chaired by former California state
treasurer, Philip Angelides. Also, much like the 1930s, the hearings of the
commission, which began last week, were readily available through a new
communications medium, the Internet. In a telling point as to the chances of
this committee spurring real reform, not even the three cable business
networks, CNBC, Fox Business or Bloomberg, carried the full hearings to their
conclusion.
As for the general public, well, for them, the hearings never even approached
the attention status of the shadow of an ephemeral blip on a radar screen. If
there had been a "Rocketeer" type offering of a man setting his pants on fire
with his rocket pack, its ratings would have bested the commission's by huge
numbers - as proof of that, look at all the coverage and attendant ratings
garnered by coverage of the man whose pants were on fire, Tiger Woods.
The committee's first hearings were last week, from Wednesday to Friday, with
the big hitters of the financial industry up first - Lloyd Blankfein, chief
executive officer of Goldman Sachs, Jamie Dimon of JPMorgan Chase, John J Mack
of Morgan Stanley and Brian T Moynihan of Bank of America.
Power breeds arrogance, which breeds hubris, which was most obvious in the case
of the de facto ruling inner party elite of Oceania and Eurasia - Goldman
Sachs. For Blankfein, you could almost taste the bile rising in the throat of
the master, for that day he was forced into a groveling public obeisance to his
slaves, the representatives of the people forever to be held in his 29.99%
credit card interest rate bondage.
Blankfein:
Goldman Sachs is a financial holding company whose principal
businesses are investment banking, market making and investment management. We
provide services to a diverse and significant client base, which is largely
institutional and includes corporations, financial institutions, governments
and high net-worth individuals. Our activities are divided into three general
areas: Our investment banking business provides strategic corporate services,
matching the resources of the firm to specific client needs. This frequently
means combining advisory, financing and co-investment capabilities. We help
clients access equity and debt capital markets in order to grow their
businesses, restructure their balance sheets to improve or to solidify their
financial strength and to manage their assets and liabilities. We also assess
and facilitate strategic options for M&A [mergers and acquisition],
divestitures and corporate defense activities. Through our merchant banking
activities, we create and manage investment funds consisting of both our own
and our clients' money in order to invest in growing businesses. Our market
making or securities sales and trading business facilitates customer
transactions for corporations, financial institutions, governments and
individuals through market making and trading of fixed income, equities,
currencies, commodities and derivatives products. As a market maker, we provide
the necessary liquidity to help ensure that buyers and sellers can complete
their transactions and markets can function efficiently. In dislocated markets,
we are often required to commit capital to hold client positions over a longer
term while a transaction is completed. Our asset management and securities
services businesses help public and private pension funds, corporations,
non-profit organizations and high net-worth individuals plan, manage and invest
their financial assets for the long-term. We also provide these entities as
well as mutual funds and hedge funds with prime brokerage, securities lending
and financing services. You have asked about our business model, major sources
of income (or losses) and any changes made. Before the crisis and since, we
have remained focused on providing advice, allocating capital, making markets,
managing money and investing with and for our clients. We have all witnessed
the consequences of having too narrow a business model. At the same time, we
have resisted becoming a financial supermarket - concerned that being too big
or dispersed would detract from our focus and expertise.
In
other words, if you're looking for the bucking, gunslinging investment banker
who took on so much risk as to almost crash the system, look somewhere else -
like the other guys at the table, maybe?
Angelides asked Blankfein about one of just the more recent of the Goldman
controversies - the reports circulating that the firm had been selling off
suspect mortgage-backed securities to investors unprepared to handle the risk.
Angelides likened this practice to a shady used-car dealer ( "What's a used
car? Blankfein might have wanted to ask an aide. "It's one of those things the
servants drive that leave oil stains in their parking spaces.") selling lemons
with bad brakes to the little old ladies needing a ride to church, and then
having the firm (through credit default swaps) take out a life insurance policy
on their deaths from the subsequent car crashes.
Putting down at least a swatch of the cloak of infallibility with which he had
covered himself and the firm, Blankfein said that "We did not know at any
minute what would happen next ... There were people in the market who thought
it was going down and there were others who thought these prices had gone down
so much they were going to bounce up again."
Finally, in his interpretation of what were the base causes of the financial
crisis, Blankfein said, "Without trying to shed one bit of our industry's
accountability, we would also further our collective interests by recognizing
other contributing causes to the severity of the crisis"; and with this he shed
virtually all of his individual company's accountability by pointing his
well-coiffed fingernails further down the witness table and into the halls of
the US Congress.
Blankfein: "Factors from both Main Street and Wall Street
contributed to today's circumstances. Neither part of our economy acted
completely independently of the other. So, any examination of how we got to
this point must begin with an understanding of some of the global economic and
financial dynamics of the last two decades. Certainly, what started in a
localized part of the US mortgage market spread to virtually every corner of
the global financial markets. But the genesis of the problem wasn't in
sub-prime alone. Instead, the roots of the damage to our financial system are
broad and deep. They coalesced over many years to create a sustained period of
cheap credit and excess liquidity. The resulting under-pricing of risk led to
massive leverage across wide swaths of the economy - from households to the
corporate sector to the public sector. I see at least three broad underlying
factors: "First, there has been enormous growth in the amount of foreign
capital, much of it held in large pools, and a very significant shift in the
balance of payments of many emerging markets;
Second, and linked to this, nearly 10 years of low long-term interest rates;
and
Third, the official policy of promoting, supporting and subsidizing
homeownership in the United States."
Jamie Dimon, chairman and chief executive of JPMorgan Chase, started by blowing
his own horn as well.
Dimon: "Throughout the financial crisis, JPMorgan Chase never
posted a quarterly loss, it served as a safe haven for depositors, worked
closely with the federal government, and remained an active lender to
consumers, small and large businesses, government entities and not-for-profit
organizations. As a result of our steadfast focus on risk management and
prudent lending, and our disciplined approach to capital and liquidity
management, we were able to avoid the worst outcomes experienced by others in
the industry. Throughout the crisis, we maintained capital ratios far in excess
of 'well capitalized standards'. We began 2008 with a Tier 1 capital ratio of
8.4% and ended it at 8.9% (10.9% including Troubled Asset Relief Program (TARP)
funds). At the end of the third quarter of 2009, following our repayment of
TARP, our Tier 1 capital ratio stood at 10.2%. Our Tier 1 common ratio at the
beginning of 2008 was 7.0% and stood at 8.2% at the end of the third quarter of
2009. In addition to our strong capital ratios, we maintained a high level of
liquidity to prepare for unexpected draws and increased our loan loss reserves
to account conservatively for anticipated losses."
There were a few raindrops among the sunbeams, like these, that caused the
company's stock to fall 72% from September 2007 to March of 2009.
Dimon: "To be sure, there are a number of things we could have
done better: the underwriting standards in our mortgage business, for example,
should have been higher, and we wish we had done an even better job in managing
our leveraged lending and mortgage-backed securities exposures, all of which I
discuss later in my testimony. But our entire team - including the firm's
credit officers, risk officers, and legal, finance, audit and compliance teams
- worked diligently to address these issues and minimize the cost to our
company and our customers. I would like to outline a few of the actions we took
leading up to and during the financial crisis."
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