Bill Moyers asked me to join his conversation this week with Michael Perino – a law professor and expert on securities law – who is working on a detailed history of the 1932-33 “Pecora Hearings,” which uncovered wrongdoing on Wall Street and laid the foundation for major legislation that reformed banking and the stock market.
My role was to talk about potential parallels betweeen the situation in the early 1930s and today, and together we argued out whether the Pecora Hearings could or should be considered a model for today.
Bill has a great sense of timing. On Wednesday night the Senate passed, by a vote of 92-4, a measure that would create an independent commission to investigate the causes of our current economic crisis; we taped our discussion on Thursday morning. In the usual format of Bill’s show, a segment of this kind would be 20+ minutes, but I believe that tonight our conversation will occupy the full hour (airs at 9pm in most markets; available on the web from about 10pm).
Speaker Pelosi has also come out in favor of some sort of commission, so there is momentum (and detailed negotiations). But many big questions are still on the table, including: what should be the scope of an enquiry, will it have subpeona powers, and who will run it? And how exactly should we consider benchmarking this against the Pecora Hearings?
Popular anger during a major crisis is completely standard – I can’t think of a country that has avoided this. Not many countries can control that emotion and channel it into a productive conversation. Even fewer can figure out how to turn that into meaningful legislation – let alone enforcement of new rules that make sense.
The US has the kind of democracy that could do this. But, as Michael Perino emphasized effectively, given the power of the big finance lobby (now and in the early 1930s), even we need to get lucky.
Perhaps we can tilt the odds slightly in our favor using one edge that was not available in 1932. Write up your suggestions for how to organize the hearings, questions to ask, witnesses to call, and more. Even better, provide the details – substantiated – of what went wrong, and make specific suggestions about the lines of enquiry to pursue. Put these in a comment here or, if you prefer, The Hearing on WashingtonPost.com – this is already starting to get the right kind of attention on Capitol Hill.
This is not a call to populism. This is a call for ideas that can constructively rebuild financial services in this country and, much more broadly, restructure our economy in sensible and sustainable ways. Ultimately, the Pecora Hearings had impact because they affected the country’s debate – and because top leaders paid attention. Surely, we should aim for the same.
By Simon Johnson
The Baseline Scenario 
The Pecora Hearings demonized the bankers and resulted in 3-6-3 banking (Take deposits at 3%; lend them out at 6%; and be on the golf course by 3 p.m.).
It took 40 years to begin getting out of that straight jacket. We were fortunate that for most of that time there were few international competitors to take advantage of our self-imposed, financial modesty.
And yet, without Pecora’s bulldogging which resulted in Americans becoming angry at the Wall Street bankers citizens would have learned nothing about the bankers’ role in causing (contributing to?) the Depression.
Anger fertilizes demagoguery. How do we balance the anger which will arise as a result of the hearings against the need for information?
Is this a classic problem? Who knows enough to be relevant yet is somehow trustworthy? For instance, Warren Buffett described Tarp as paying market prices while Treasury planned to pay above market. Was he ignorant or shilling?
Andy Beal seems smart, and untainted.
I’m sure there is a long list of former bank executives that were fired for not following the party line. That be a great list to start with.
Good to have bipartisan support. We must insure our regulators are as smart as those they regulate; I like the idea of a government-based rating bureau to value complex derivatives. We must insist that any large financial transaction trigger intensive oversight, and at the same time that a single large transaction is not concealed as many small ones. We must hold policymakers responsible. We must track the public interest and scrutinize any transaction where there is a risk of public harm. We must prevent prohibited transactions from jumping to offshore havens. We must overcome the cowboy culture of the trading room and insure that risk managers are rewarded as well as dealmakers. We must express a clear legislative intent to maintain stability in financial markets. We must tax dividends and interest less than capital gains. We must rely on a holding period in determining capital gains tax, and factor in inflation, only taxing real gains, while penalizing high gains over short periods of time. We must recognize that all large accumulations of capital require public scrutiny, even when not directly held by the public. We must limit what information is subject to protection as proprietary, and avoid the effect of misleading public statements regarding financial instruments. In short, we must shift the purpose of the financial community from gambling to stewardship.
Last year it struck me that this crisis could not have occurred without massive amounts of fraud. Since then we have learned that there was so much fraud that only a very small amount of it will ever be prosecuted. Americans are tolerant of businesses bending the rules — regulations are often petty and onerous –, but we do not want them to commit serious breaches of the law. The hearings should uncover some fraud and fraudulent practices on the one hand, and also reveal the failures of the regulators to discover and deal with it. (Apparently auditors can advise clients to break the law without being prosecuted as accomplices or conspirators!) To what extent was the failure of regulation the result of human error, understaffing, or lack of authority to investigate? It is said that good regulators get enticed away by the industry being regulated. To what extent did that happen here, and to what extent did it play a role in the financial crisis?
Over the past generation there has been a good deal of financial deregulation. What specific financial practices and policies resulted from particular deregulation, and what role did these practices and policies play in the current crisis? It is obvious that there was too much deregulation, but it would be good to study the deregulation and its specific effects in some detail.
One comment about new financial instruments: Like designer drugs, they should come under regulation from the moment of creation, for essentially the same reasons.
Put Frank Cohouet and Anthony Terracciano in charge of resolving the final crisis. They did a great job with getting Mellon Bank out of its mess in the 1980s; let’s see what they can do with today’s issues. For additional insight into this, and other financial matters, see http://www.bobgreenfest.wordpress.com.
well, that is a … bold … position. I assume you must be an investment banker, and a well payed top-of-the-heap one at that. After the complete collapse of the “system” of deregulation in the last year, it is fairly impressive anyone has the gall to so forthrightly express the party line for the last 30 years in so open a forum.
You, madame, clearly have no fear of ridicule…I’m not sure if that, in itself, doesn’t tell us everything we need to know about why and how modern banking systems are broken.
have fun in ‘warshington’ with mr. moyers… will be listening on my ipod tomorrow. nice work on the panel the other day…
I have no worthwhile suggestions to offer, but wanted to take this opportunity to thank you for your efforts and to wish you great success. “We the people…” sorely need the truth (or something that may approximate it). I’ve got to believe that there are enough powerful individuals and institutions that have been screwed by the bungling and malfeasance of people in high and mighty places and I trust that they will pursue their own self-interests by insisting upon a fairly thorough inquiry. How do you “call them out”?
Again,… many thanks.
It seems that at least 2 flaws in the securitization model contributed to their ultimate collapse and consequent financial market turmoil. 1. The interests of the originators, investment banks, and credit agencies were misaligned with the ultimate security owners. 2. In the event of a downturn there was no efficient mechanism to unwind the securities and mediate between interests of the different tranches so that the value of the underlying asset could be best preserved.
It now seems that the Fed and Treasury are trying to reignite the securitization market. How have these problems with the securitization model been addressed? Incredibly and with all of the turmoil and devastation that has transpired, and with the incredibly enormous sums of taxpayer funds allocated to try and stabilize the markets, are we just repeating the same mistakes again – but this time with explicit government guarantees? Are we doing anything differently?
Also, I wonder, given human nature, whether the first problem can ever truly be addressed if originators end up carrying zero exposure from their originations.
I don’t understand why 3-6-3 represents a straight jacket. My understanding is there are some financial companies which do not rely on government guaranteed deposits. They should feel free to innovate.
Hopefully one of the early “findings” of any hearings will be in regards to what constitutes “too big to fail”. If we can allow small and regional banks to peacefully die, we need to define the edges of “too big” and immediately demand that “too big” be divided into smaller entities.
this cartoon about covers it:
http://www.blamemymom.com/2009/04/21/cartoon-2/
the key is “independent.” I keep thinking about the 9/11 commission…that was just a papering over of one of the worst tragedies this country has ever seen.
Right now I wish the bankers went golfing at 3 – they could do a lot less harm. Sometimes you feed the wolves so they don’t eat the sheep.
I would like to hear whether it’s true or not whether Wallstreet essentially put the trillions from the Fed and TARP essentially into the stock market, calling that “trading profits”.
As false stock market gains are nothing more than mispricings that would mean that the banks, the fed and the government are hailing the oligarchs in a collaborative ponzi scheme, with taxpayer money, ‘defacing’ the less informed market participants, and the stock-owning taxpayer himsef, of course.
I don’t know whether this is an allowed question, of course (“in what way has or has not the surplus liquidity had an effect on the stock market or not, in what assets did all this money go…”).
Best wishes
Claus
I am going to toss in something most will consider heretical: we need to consider whether the very idea of growth is sustainable, and what an economics of zero-growth would look like.
It is trivial to show that Earth’s human population growth is not sustainable[1]. Imagine population growth stops; that eliminates one pillar of economic growth. Now let’s ask whether economic growth can continue even without population growth. I would start with Garrett Hardin’s 1963 essay The Cybernetics of Competition where he proposes the following gedanken:
Of course the reason the hypothetical investment wouldn’t have so accumulated is the existence of wars, depressions, and Dark Ages, which serve to wipe out capital accumulation. Without those, the above gedanken suggests that simple compound interest is not sustainable in the long run. Does our current economics depend upon Dark Ages for a periodic reset?
It seems to me we need to invent economics that does not depend upon growth. Are there any economists up to the task?
[1] At 2%/year population growth, the mass of humans on Earth would exceed the mass of the Earth (seems like a hard upper limit) 1537 years from now. We would exceed the mass of the oceans (a problem, since we are mostly water) in 1114 years. In 607 years we reach the limit at which the sun’s insolation reaching Earth, converted at 100% efficiency to food, would be insufficient to supply 2500 kCal per day per person, and in 440 years we’re down to just 4 m^2 of land area per person. The human mind has a hard time comprehending the exponential function, but it interacts with the finite with all the subtlety of a race car impacting a concrete wall at high speed.
I don’t mind companies becoming too big to fail, provided that they then enter a new regime of rigorous regulation and payment of insurance premiums to the government. I guess that’s another parallel with the 1930s; see FDIC.
When you first wrote “using one edge that was not available in 1932”, I thought you meant RICO. But I see now that you are talking about blogs and such…
Why not a call to populism–apart from the inconvenient fact that the term has been so bandied about as to lose clear significance? One of its many definitions notes its concern with the views of ordinary people. If this may be extended to include their experience, as reported by themselves, I would submit that there can be no useful economic policy that does not include it in some degree. You cannot “constructively rebuild financial services” unless you understand the world most people live in, and the laws and policies that got us into this situation are strong evidence that most economists and legislators do not.
I think the basic approach go like this. Bankers, GSEs and others apparently used a model where house prices never went down in spite of the fact that average incomes had been flat. This is only sustainable if interest rates continue to drop. There were warnings that this could not go on forever. My guess is that those in charge had a very short time horizon of, at most, a few years. This is because in that time frame it was possible to make a great deal of money and retire rich, as many did. In other words, it was possible to make a quick buck and get out before the whole thing collapsed. The compensation system seems to be based on paying bonuses for profitable deals (or quarters), but there is no clawback when things go sour. It is like playing in a casino with other people’s money. When you win, you get a percentage. When you lose, you don’t lose anything. Obviously, you should make big bets until the client notices and then leave town. The question is, how to prevent this in the future?
During my time of unemployment, I have paid close attention to this financial crises. After educating myself with websites, blogs, newspapers and cable news, I don’t know how anyone can say crimes of corruption, coercion, manipulation, fraud, etc., have not been committed against the U.S. citizens. No one is above the law. There is no entitled class of U.S. citizens.
Those who have committed these crimes are being rewarded. The victims are being punished. What did these bankers, brokers, credit rating agencies, and others receiving TARP, TALF, PPIP, and other government subsidies do to justify these rewards. If anything, the victims should have due process for reimbursements to their pensions, 401k’s, IRA’s, etc. These are the largest investors in America.
The only way to do this is with a government appointed prosecutor with full subpeona powers. Enact all mandates of the Prompt Corrective Action Law. Lawsuits against corporations and individuals. It was done before with over 1000 successful prosecutions.
To prevent this in the future, all financial investments and speculations should be regulated with commissions or clearinghouses. All derivatives should be regulated. No more casino’s with naked CDS bets. CDS’s should be only for hedging, not naked bets. Those who made these bets should lose their money. When your bookie is arrested, no one pays your winning bet.
Finally, all government officials (appointed or elected) should comply to their oath of office. They swore to uphold the laws and Constitution of the U.S. Enforce the laws, no one or no entity is too big to fail. If they upheld their oaths, we the innocent U.S. taxpayer would not have to worry about the possible losses of our tax money.
This is the key in my mind. The commission, or what every you want to call it must be made up of and driven by by outsiders. The idea that industry can regulate itself is thoroughly discredited at this point, anyone that championed that idea is also similarly discredited. If Phil Gramm or Bob Rubin wind up on the commission we all know what the results will be.
No investigation can hope to achieve anything if it is conducted by the people who caused or facilitated the catastrophe in the first place. Unless people like Simon, Elizabeth Warren, Paul Krugman, Bill Black or Ron Paul are involved the whole thing will be a farce.
Jeff that is the problem right there, the powerful elites in this country in both the public and private sectors believe they are above the law. This extends to all areas of our society, the government, financial, and media elites have claimed this law breaking power for themselves and are loath to give it up. You say that no on in this country is above the law because that is what we all learned as children, but it hasn’t been the case in reality for a generation.
Great societies collapse under the weight of their own internal corruption, I prey that we the people can still save this thing, but I know it gets later by the minute.
Unfortunately jeff, the fox is guarding the henhouse. Look at who is “leading” us out of this mess and then check their pedigrees. Many members of Congress are also on the receiving end from Big Finance.
I think the bottom line over the next few years is that a chosen few unlucky CEO’s will get scape-goated and most will get richer. But mainly, the taxpayer will get saddled with massive bills and a higher cost of living.
“This is not a call to populism.”
Why the bleep not? Why does everyone feel that they have to deny being a populist at a time when elitism has driven the country into a ditch?
Simon, thanks for the opportunity to provide input, as well as for the fine writing that provides us with better insights and education about what’s really happening.
Having been in banking compliance for about 10 years, mostly working on operational questions, it’s become very clear to me that there has been a vast underinvestment in the nuts and bolts of how things actually happen, and that there is a huge gap between what executive management thinks they know and what is really happening.
This made the initial panic much worse than it needed to be, as executives came to realize that neither they nor the managers reporting to them knew how the sausage got made – in fact, the uncertainty persists even today about where the real toxicity lies. One example of this that has made the main street media is the growing reluctance among bankruptcy judges to allow foreclosures to occur without the documentary proof that the foreclosing party owns the underlying note. There are many more.
My suggestion is that any commission, or at least the commission’s staff, needs to take the time and effort to explore these operational failures and not simply rely on information coming from executive policymakers. The folks at the operational level, if they can be persuaded to speak, will have many excellent examples of relatively simple policy failures and are likely to offer the most effective solutions.
Eric,
I agree wholeheartedly on nuts an bolts. Without an understanidng of the defects on the operational level, it will be impossible to fix going forward.
Can you be persuaded to speak?
Simon asked us for our input on how Congress should proceed. Is it a populist desire that laws be adhered to and prosecutions be forthcoming?
After yesterday’s news of Ken Lewis, Hank Paulson and Ben Bernanke, doesn’t this show coercion at the highest government levels? Prove that Tim Geithner was not aware of this with his position as chair of the New York Federal Reserve and the involvement of a Wall Street investment bank. May we also demand resignations? The question is this a country of the people or a country of the corporations? Laws must be enforced. Demand it.
Populist is a bogeyman word the media, who’s stars consider themselves members of the same elite class as the politicians and princes of finance who are empowered with the right to break the law. Only non-elites; the little people, have to follow the laws. To suggest otherwise is to engage in irresponsible, un-serious debate, only the populists or members of the hard left do that.
Jeff has it right, except that it was all driven by the Bonus Culture and that’s why the Frauds were so blatant. They have lost all sense of what is right and wrong.
What needs to be realised is that the entire banking system has been corrupted by insane greed, backed up by what was an unwritten taxpayer guarantee, now honored.
A new Glass Steagall needs to be brought in, so that depositors are not exposed to Investemnt bank punting. Deposit takeing banks can then be limited to money management and Investment banks can do what they like, but under strict supervision and NO taxpayer cover.
Bonuses should be paid in company shares, only redeamable at the official retirement age.
How about the law against conspiracy to commit fraud? Stockholders of Bank of America (and taxpayers) were defrauded out of 15 billion bucks when, and if, Bernanke, Paulson and Lewis conspired to hide the losses at Merrill and overpay for Merrill shares. I guess when you are talking in terms of hundreds of billions, and trillions, $15billion must seem like peanuts!
Simon talks about the oligarchs in the private banking world, but fails to mention the oligarchs in the public sector which, for my money, include Barney Frank, Chris Dodd along with Paulson, etc. Why let the likes of Frank, Dodd trumpet, posture and cover their derrieres by conducting hearings, commissions etc.?
Thanks Simon!
One very focused question would be to look at the behavior of Mr. Paulson and Mr. Bernake as Lehman was stonewalled on their request for bankholding status, and that Lehman was refused a 6billion loan immediately prior to their demise.
Anyone watching Goldman and Morgan at the time was watching those stocks go down just like Lehman, but, with Lehman out, a win for all of their affiliates on the Lehman bet ( shorts and CDS’s) and an additional win for Goldman (and we have yet to have a total on the affiliates of Goldman that benefited from the AIG save) ostensibly would have been enough with the ban on short selling, to keep Goldman (and Morgan) alive til the secret treasury meeting the weekend after TARP was passed.
On the Frontline essay covering the situation in the fall, they sugggested that at the last minute, Mr. Dodd and Mr Frank took some suggestion by Mr. Paulson to put a ONE SENTENCE line in the package, to give him power to pass out the money as an infusion. With the last minute way this was done, prior to the passage of the bill, Mr. Paulson had to know what he really wanted to do with this money, so why was it OK not to make that public? (IT WAS NOT OK)
We have all heard the why’s and the where fores of the paulson / bernake team. Will this incury bring together any accounting of the real result of letting Lehman fail and how it benefited, immediately via the immediate save on AIG, Goldman and all affiliates and possibly Morgan?
The whole idea of nationalization was used as a way to pass money to the black hole of other parties that would benefit from this passage of money. There is no justification for this approach since clearly, with the help of congress, if a company needed to be taken into receivership, a bank holding company or any other too big to fail, could have been unwound.
I am most concerned about today’s news that the fed is requiring higher capital requirements–this may be another back door way of driving out the little banks when this whole plan should have been to break down the broken big banks, and let the smaller banks become strengthened by the purchase of the broken up monsters.
with the fact that there is no way that either of these gentleman didnt understand the ongoing credit default swap bet on Lehman and the big win it would be if they went down,
I would like to hear the ratings agencies explain their process of granting AAA ratings to loans that turned out to be junk.
I would like the Wall Street CEOs to take us through the last few years and explain just how they piled up a tower of debt on their books – and what business standards they used to enable them to think this was okay.
I would like to know where payment for the contractually obligated bonuses would have come from had the companies not had the US government chipped in billions of dollars to pay for them.
Since some of these leaders have admitted that “self-regulation” isn’t really effective, I’d like to know what regulations they feel could have prevented a crash of this magnitude.
I would very much like to ask the CEOs to characterize their role in this debacle – it would be interesting to see what kind of self-reflection (if any) these men would provide.
I would like them to provide a detailed analysis of why they should retain their jobs – what value have they added to their firm as they stupidly/greedily (take your pick) clogged up the toilets with garbage no one wants.
I would like them to explain how they came up with and believed wholeheartedly in analytical tools that did not account for any dip in cost of real estate – despite the fact that people had been buzzing about the real estate bubble for some time.
What made mortgage companies decide to take down the firewall between the dreams of borrowers and the realities of their income?
Who thought it was a good idea to give loans to people who couldn’t afford them? And why?
I would like them to explain in their own words why their pay should continue to bear no relation to the performance of the company they lead – and I’d like to hear them explain how this disconnect between compensation and performance has helped/hindered their company’s profitability.
I’d like to hear them defend the indefensible.
I admit that I know much less about economics than most or even all the posters on this web site, so forgive me if this is naive, but one thing has occurred to me before now, so I post it here.
After the Great Depression laws were passed that restricted margin borrowing for stock market investments to an initial factor of two… in the hope of preventing a repeat of the stock market bubble that caused the crash. It seems to me that perhaps we should consider similar legislation to restrict borrowing for the purchase of houses. Probably not a 50% margin requirement, or nobody would ever be able to buy a house, but 20% or 25%.
Such a requirement would help prevent a bubble, help protect the banks from a market downturn, and likely ensure that loans were made to people more likely to be able to repay them.
Stocks, real estate… what is next? I’d go further and say that high margin requirements should be used to control borrowing to purchase any future class of assets which are limited in number and are being chased by large numbers of people. Bubbles tend to burst… and therefore need to be prevented.
(sorry, this is the rest of my post)
it needs to be investigated how much the complete goldman and affiliates system won (and maybe the morgan and affiliate system too) in order to make a decision if the decision to deny Lehman a 6billion loan, and stonewalling their request for bank holding status was not motivated by self dealing. If our country is to have integrity, this needs to be seen–our currency is our integrity, and with all the money printing, if this isn’t reviewed properly, our currency will suffer because our country will be considered corrupt. Too many people have voiced worry over these obvious connections and anything but a serious, fair, complete investigation will leave our country with a legacy of perceived corruption. If the actions of the two responsible for the decision to let lehman fail, and give AIG without taking it into receivership didn’t unfairly benefit Goldman and ALL OF THEIR AFFILIATES, or Morgan and ALL OF THEIR AFFIATES, the case should be considered closed, and those concerned will be satisfied.
number one suggestion: Don’t throw out securitization, but regulate it so that it cannot happen without:
1. standardized definitions of a limited set of asset backed bonds
2. well regulated, transparent exchanges
3. clawbacks/escrow mechanisms integrated into the structures of the bonds themselves
4. strict forums and mechanisms for dispute resolution when they fail
Beautifully stated!
You might want to read work from Herman Daly.
http://en.wikipedia.org/wiki/Herman_Daly
I coudln’t issue many call/put options on my trading account before I run out of cash to cover them. Why on earth was AIG allowed to issue such a massive amount of puts without the same harsh restrictions as I’m forced to abide by? That is what is at heart here when it comes to the CDS scandal.
As for the rest, maintaining a 2-3% interest rate for long periods and at the same time calling it “the great moderation” is just laughable, how can a person doing that and another saying that be allowed to be FED chiefs? The USA is a strange place sometimes.
There you are, the two main culprits of this crisis. Letting AIG insure the whole world from default and having silly FED rates points to the two basic problems, not Wall Street bankers if they were not in fact influencing the FED and regulators, then we shouldn’t have a hearing, we should have a trial.
And a provision that the original lender retains the power to re-negotiate the loan with the borrower, if need be, except with the consent of the borrower. Otherwise you can have a coalition against the borrower.
Thank you, eak, for bringing this up. The upper classes, those guardians of the status-quo, will never reexamine the foundational concepts of our economy. Contrary to what Mr. Johnson thinks, we could use a heaping helping of populism right about now.
We will need a few Erics on the Commission to fill in the gaps while they’re cleaning the guillotine.
And the intellectuals should listen to the practical folks who must run the system.
Re: Commission to Investigate The Meltdown
Structure is important – make sure that the members of the Commission are knowledgeable about the national and international banking and finance, that they don’t have an axe to grind, a book to sell or other hidden self-serving agenda. Make sure ex-regulators are on the Commission and limit the number of politicians.
One important question: How do you insure that regulators are insulated from political pressure (from both the Executive and Legislative Branches) and are not too cozy with the regulated?
Whats wrong with RICO? We should bring RICO charges against the bankers, policy makers, and economists.
A suggestion:
Citizens by the thousands sending hearing aids (old ones) to the White House !
accompanied by the famous phrase,”I’m mad as Hell and I’m not going to take it anymore”
The Minsky Moment
Twenty-five years ago, when most economists were extolling the virtues of financial deregulation and innovation, a maverick named Hyman P. Minsky maintained a more negative view of Wall Street; in fact, he noted that bankers, traders, and other financiers periodically played the role of arsonists, setting the entire economy ablaze. Wall Street encouraged businesses and individuals to take on too much risk, he believed, generating ruinous boom-and-bust cycles. The only way to break this pattern was for the government to step in and regulate the moneymen.
http://www.newyorker.com/talk/comment/2008/02/04/080204taco_talk_cassidy
SLAM, Shareholder Limited Authorised Margin
Anyone taking a dispassionate look at the achievements of deregulated finance can see that the damage far exceeds any benefit. It is high time we made some changes. Nor is there any shortage of good ideas. The Tobin tax (on cross-border currency trading) would be a good start, though it has already fallen into oblivion. There is also the shareholder limited authorised margin (SLAM). Limiting the amount shareholders can cream off in profits, reduces the incentive for unsustainable year after year growth.
Frédéric Lordon economist
Preliminary Thoughts on Hearing
I. History
A. First Witnesses
1. O’Neil
2. Weil
3. Paulson
4. Hank Greenberg
B. Topics for Questioning
1. When did you first securitize mortgages or sell CDS? Your role taking positions in that market.
2. Rating Process? How did you get positions rated and sold?
3. How did regulatory changes make that possible?
4. How did leverage change over time from first securitization to 2007.
C. Second set of Witnesses
1. Former Senator Phil Graham
2. Robert Ruben
3. Committee staff to answer Q1 below
4. Someone who was short mid-2008.
D. Regulatory History Questions
1. What relevant laws were changed from 1990 to 2005? How are they relevant?
2. Why / how were those laws changed?
3. What would you change in light of subsequent events? Why or why not?
4. Why do you think that the risks were not recognized in practice?
II. Current Status / Size of Problem
A. Witnesses
1. Ruobini
2. Geithner
3. Dimon
4. Shiller
5. Buffet
B. Questions
1. How big is the problem TODAY?
2. How do you define the problem?
3. What impact would changes in the value of housing stock have on your perception of the problem? Quantify.
4. How can current inventory of derivatives be defused. Should they be?
III. Current Programs at Treasury and Fed and their potential impact on the integrity of the dollar. (no sense in avoiding the topic)
A. Witnesses
1. Under Sec of Treasury
2. CFO of GE
3. AIG witness
5. Simon Johnson
6. Hussman
7. Isaac
8. Comptroller of the Currency
B. Questions
1. Simplify explanation of the programs – what are they / who runs them / how is it decided who gets what and under what terms.
2. Do you think they are working? Why or why not.
3. What programs should we have but don’t?
4. Monetization, Sterlization and Currency / Bond Pricing Risks?
5. What would you change and why.
IV. Stress Testing US Economy
A. Witnesses
1. Comptroller of the Currency
2. FDIC
3. Heads of several corporations
4. Bernanke
B. Questions
1. Any reasonable methods for stress testing economy? Useful results? What response?
2. Expectations for next 2 – 4 years / changes in strategies
3. Persistent Changes in Economy Resulting from Crisis
V. Regulatory and Taxation Changes
A. Witnesses
1. Volker
2. Administration Witness
3. Financial Industry Witness
VI. Futures and Summary
A. Witnesses
1. Niall Ferguson
2. TBD
B. Questions
1. What risks do we face as a society and how do we improve our fate? Tangible steps.
I am just someone out in the country. Don’t know enough to keep up with too much detailed talk. But, everyone here knows that the bankers of five or six major banks are crooked and that they got a crooked game going. We want the game ended. Now. Fair warning for those who are allergic to pitchfork infection. Ms. Banker, your time has run out.
I think what we need is rational populism as opposed to angry populism. If the banks had been nationalized in the beginning and everyone at the top been canned the American people would have had a clearer target for their anger. That didn’t happen and now the rage is directed everywhere-Obama, Congress, Geithner, and the banks. Maybe some heads need to drop before Americans can look at this thing as rationally as they should.
One question I’ve not heard clearly answered is this: Under the new Tarp plan the public is taking on most of the risk. If these legacy( toxic) assets turn out to be worth less than the treasury and the banks think they are will that mean another collapse on top of this one?
This is hardly demagoguery. Even other bankers are seeing the obvious inequity involved in the current state of affairs:
http://www.forbes.com/2009/04/25/robert-wilmer-banks-tarp-personal-finance-croesus.html?partner=yahootix
Robert Wilmers, chairman and CEO of M&T Bank, is hardly a populist whiner. But he does go after GS, C and their ilk. And he does call a spade a G*d-damned shovel when the need arises. He’s on the inside, don’t forget. He runs his bank in a sensible manner. Yet, he’s getting whacked when FDIC premiums go up to fund the more well-connected casino-banks.
Think about it. What’s his pay-out for doing the right thing by shareholders, customers and the general public. He’s worse off after the dust settles, while those that cause the harm and brought the system to its knees make out like bandits. Oh … wait a second.
The most important issue is breaking all the political influence of the big banks- period.
This isn’t related, but my gut tells me the straw that broke the camel’s back was $4 plus a gallon gasoline at the pump- when then was never any real shortage. Our economy simple can run and prosper on $4 plus gasoline.
My guess is that off-shore unregulated hedge funds leveraged 35+ times were trading in oil futures. And it will happen again when the recession bottoms and kill any recovery.
This has to stop!
Simon, you are indeed doing much good work at this time. Thank you! Yes, we need a commission. This commission needs to be independent of Congress. It needs to complete its work quickly, i.e. within the next three months. Congress’s actions or inactions seem to be at the root of this mess. Of course agencies of the executive branch and financial corporations must be included in this investigation. Of course a great deal of the information is already public, which theoretically should allow for a quick conclusion of this commission’s work. Considering the concept of moral hazard, this commission must be empowered otherwise Congress will continue to do what it has done for the last 25 years. This call for a commission is pointing to a much larger issue than this financial mess. It is actually pointing to the problem of members of Congress not representing the people who sent them to Congress. It is pointing to what many people have known or suspected for a very long time, which is that Congress by-and-large represents the corporate world. In essence we are facing a crisis in representative government. What is interesting to note is that many U.S. states have the Initiative process, while the federal government does not. One recommended reform that could come out of this commission’s work would be a national Initiative process. Just having the Initiative process available to the American people might be enough of a hammer to convince Congress that their first responsibility is to the citizens of the United States and not the corporations, financial or otherwise.
I’m beginning to think the appropriate metaphor is not mental illness (what with the “straight jacket” allusion and all) but virology. Read this first:
http://seekingalpha.com/article/133159-could-the-government-s-view-of-capitalization-shift-again?source=article_lb_articles
Felix Salmon posts a piece on Seeking Alpha reporting “Goldman Sachs (GS) traded over 1 billion shares for its own account last week — more than half the principal program trading from NYSE member firms, and more than 20% of all program trading on the exchange. My feeling is that this is a function of the decline of big liquid hedge funds with essentially unlimited funding capacity: Goldman is stepping in to take advantage of the lack of liquidity in the non-bank financial sector.
“But how can Goldman take advantage of that lack of liquidity in the hedge-fund world? Just because it has access to unlimited government liquidity itself. Essentially, the US taxpayer is lending at extremely low rates to the world’s largest hedge fund, even as the world’s largest hedge fund is trying to extricate itself from any responsibility to the US taxpayer by repaying TARP funds.”
Goldman’s evolution is extraordinary. Essentially, the competitive advantage here is the ability to weave your way into the double-helix structure of US federal subsidies and programs with rules so arcane that even the Treasury and Fed “overseers” cannot understand them, and feed on that system. Not unlike a virus that’s able to destroy its host (i.e., its customers), prompting an evolutionary change that develops into another host (i.e., a vastly expanded government bailout), and resume its existence as a more virulent survivor organism.
The next GS evolution probably is a reversion to private partnership, after these various and sundry federal programs are completely exhausted, but before any meaningful examination and remediation (i.e., disgorgement of funds, new legislation and new rules) can be done by a Pecora-style inquiry and Congress. A retreat back into the post Goldman Sachs Trading Company of 1929 is the most probable last evolution.
Great Job Simon. I watched it this morning.
Simon: Excellent job… I just watched the interview on public television. You do an excellent job of staying on point, using examples to which the average Joe can relate, while not yielding to the populism of the witch hunt. One tecnical, presentation piece of advice – at one point in the interview you said “Let me be honest”…. when you say this phrase, it intones that there are other times where you are not being honest (which is not my impression of you)… try “Let me candid” or “let me be frank”…. although the former is probably better than the latter intonation of alingment towards the congressman from Mass….(couldn’t resist the political twist)
Keep up the great work!
A question for the economists out there… Are we convinced that the continuous trading model of the stock market is actually the best way to allocate capital to businesses? Do the fortunes of a business really change that much during the day? Does all of the money chasing high-frequency quant trades actually help US businesses get capital? Can another kind of market be envisioned that could be less subject to the HF gambling/gaming that is arguably irrelevent to the underlying purpose of allocating capital? Perhaps a daily auction of some kind. Has there been any thought put into this?