Drill, Baby, Drill: Reviewing The Advice To The Financial Crisis Inquiry Commission

The NYT has a collection of potential questions for the Financial Crisis Inquiry Commission (FCIC) to ask four of the country’s leading bankers today.

Some of the proposed questions are technical or even philosophical.  These are interesting, but hardly likely to be effective.

I like where Yves Smith is going: what kind of bonuses were paid for trades on which firms ultimately lost money?  Bill Cohan and David Walker, coming from very different perspectives, are also pushing on issues related to compensation structure in general and bonuses in particular.

The real issue, of course, is the nature of the risk system itself.  But this is a big abstract question – and not suited to these kind of hearings.  The Commission needs to find concrete issues that people can relate to much more broadly, and bonuses are very much in the line of fire.  The fact that the 2009 bonuses are already in the works – and eerily, but not coincidentally, parallel to the 2007 bonuses – is going to make this hard for the bankers to spin.

Serious debate is just beginning – drill down into how bankers at Too Big To Fail firms really pay themselves, and you will be amazed at what you start to see more clearly.

By Simon Johnson

23 thoughts on “Drill, Baby, Drill: Reviewing The Advice To The Financial Crisis Inquiry Commission

  1. Did anyone read Liar’s Poker by Michael Lewis? Published 20 years ago? He paints a portrait of a “risk system” focused primarily on screwing the customer so the “risk manager” can profit. And our government certainly has acted as the enabler to this.

    The bonuses for anyone in a firm that accepted federal TARP money and/or still taps into the fed’s line of credit should be minimal.

    What bonus would these people be getting without the vast infusion of federal funds? Nothing, right? That’s what they should get this year, and they should be grateful their company exists, thanks solely to a massive federal bailout, no thanks to their brilliance.

  2. My questions would be something like:

    1. Why have Wall Street’s activities failed to create good middle class jobs?

    2. Why have Wall Street’s activities failed to prevent the destruction of middle class jobs?

    3. Since Wall Street failed completely in its social and economic rationales, why would any of you deserve “bonuses”?

    4. Since Wall Street failed completely in its social and economic rationales, why should it be allowed to continue to exist at all?

    5. Since Wall Street not only failed completely to produce anything of social value, but done nothing but steal and destroy, up to the crash and a deepening Depression, why should any of you not go to prison for the rest of your lives?

  3. Simon, keep up the good work, keep beating the drums. Many of the MSM sites seem to be mentioning the FCIC in passing, with a few such as the NYT going so far as to suggest questions for the bankers to answer. Unfortunately, the public isn’t listening anymore as they are too easily distracted by shiny objects making the questions irrelevant. Perhaps our window of opportunity has already closed? In Case You Missed It

  4. I wonder if it will be carried on C-Span? I would think so. I imagine it will be mildly entertaining with the congressmen’s phony grandstanding. Simulated outrage is the best, eh??? A waved fist, pointing, some story of someone in their district who is suffering and “what am I going to tell them??” Maybe we’ll get a Saturday Night Live spoof AT LEAST. Then we can all say we got a good chuckle watching democracy lose to the bank lobbyists.

    Maybe someone like Melissa Bean could just ask them directly for a raise. Save some lobbyist having to walk from K Street.

  5. Those are outstanding Q’s, Russ. The only modification I would suggest is that “prison for the rest of [their] lives” is WAY too good for them (and keeps us taxpayers “on the hook”)! Instead, either “disappear them” to Bagram and treat them the way we treat all “terrorists” or, better yet, strip them of all their personal wealth and belongings, surgically remove their tongues and “mangle” their hands (so they can’t lie to and cheat anyone ever again) then turn them loose in Darfur or Somalia. That goes for their wives, mistresses, children, grand-kids, parents, aunts, uncles, cousins, etc. For the life of me I don’t understand why the citizens of this country don’t realize that what these banksters have done is MORE heinous and condemnable than the events of 9/11!

  6. “The Commission needs to find concrete issues that people can relate to much more broadly, and bonuses are very much in the line of fire.”

    I’m all for drilling down into TBTF incentive packages, etc. I do hope that this narrative does not displace the real policy issues that need to be addressed. There is a risk to focusing exclusively on the populist angle of attack… Apparently, I’m not the first to identify this.

    Marginal Revolution saw this as well:


    The question is whether exec compensation is the root cause, or mostly a symptom (though I’m sure it’s a bit of both). If you fix exec compensation without making real structural changes, we’ll just get those compensation rules lifted at the next presidential change (or simply evaded).

    Good luck. As you well know, you are playing with fire. It may work. I hope it does. Certainly, the less confrontational approach has not shown great results.

  7. Far-fetched that this needs repeating…

    So many have become disillusioned with who to trust or what to believe. This holds true for congress and the banks. The very nature of major campaigns led by the Banking sector and their lobbyist has shaken to the core; trust, along with the spin coming out of Washington, seems to re-direct the populist thoughts on real reforms. These reforms still seem way off in the far distance. This also is causing what are thought as other proposals such as the proposed tax upon the financial banking sector.

    It is in this very trust issue that collapses are born. Can we trust China or China trusts us? Many countries are faced with this survival of the economic fittest trust issue; “We all must co-exist for us to actually survive”.

    Do the tax proposals unveiled through the White House Administration seem to send an informational message of lack of trust, or even more so, the banks are not truly coming to the table of reasonable compromise with true banking reforms? From what I am watching and listening today by the heads of the major banks are the spin of appoligies, but life must go on messages.

    True reform does not come from placing economic hardships upon the backs of a working capitalistic system as the proposed tax being called for by the current administration.

    It certainly does not assist to bring jobs or solve the massive unemployment issue affecting the poor and/or middle class folks being displaced in this current environment of hostile survival of Corporate America and the Global emerging countries.

    It was once said, “Who Moved My Cheese”; which, by the way–is a good read that calls for the ability to adapt to change. I think all need to watch the video to get this point accross:

    The problem with change–most will fight to keep what they only know or can perceive in place. This was stated in prior posts.

    The banks should embrace the fact that they need to accept change and split/spin off their operations. Separate their banking interests from their investment brokerage side has been the most reasonable solution along with risk management reforms. The calls sounded by many notable economists agree with the basis of this principal. The looming abyss theme of the current crises equation is still echoed even louder today from Paul Volker and/or the concepts conveyed by John Taylor, an economics professor of Stanford University.

    The markets and global recoveries are sensitive to the theory of information movement that can cause either sustainable mending and/or further collapse to extend the crises deeper if not carefully applied and understood. Joseph E. Stiglitz conveyed his thoughts on this theory that are well followed by many economists and written in prior posts by this writer.

    We have this as the cross road of having the posturing of information affect not only the markets long-term wellbeing, but also the delicate metric of global recoveries.

    The recent statement coming out of the U.S. Government and China are drawing an affect cooling off the current bull markets. This same cooling off is causing a reverse affect in maintaining an sustainable recovery based upon status quo or the possibility of over burdening the systems with tax laws to snuff out true intrinsic growths. It is the beliefs by the folks that place their bets for or against market increase or falls that have all check themselves against one another.

    Call it the psychology factor of a market that is off their Lithium med that causes the irrational bouts of severe swings. They all talk their game throughout the media and or actually placing their bet as Warren Buffet is known for. Many check thier market gut by seeing if they are the last or first one in on what seems like a sure profit method theory.

    The sad part to the story comes with the raw facts of greed and fear. These folks make money on when the common investor should fear and catch them when they are greedy. The facts are straight forward as the Carry Trade has introduced an extremely dangerous condition within the global markets. Markets go up or they come down, as we have learned from “To Big Too Fail”.

    Time for change that can be accepted and brought as embraced by the banking and financial sectors…

    James Gornick continued Far-fetched Theme for true reforms…

    : banking Crisis Collapse Blackrock Blackstone RBS Goldman Sachs Bank of America BAC GS MS JPM C CIT James Gornick Far-fetched Warren Buffett Atheist God Greed Crisis Ethics Morals Jamie Dimon Simon Johnson Paul Volker Robert Reich Ben Bernanke Federal Rese

  8. colinc,
    Because there’re “us” – not dark skinned people speaking strange languages and practicing a funny and supposedly mystical religion. Add to that the fact that they have achieved wealth that our national myths tell us is available to all – evidence to the contrary not withstanding – and its a wonder they haven’t been knighted yet (or whatever the American equivalent is these days).

  9. “drill down into how bankers at Too Big To Fail firms really pay themselves, and you will be amazed at what you start to see more clearly.”

    Can someone recommend an approach for accomplishing this?

  10. RickC

    This is why the answer still remains true real reforms in the separation of the banks from the investment brokerage and high risk identified areas. We have the smoking guns fully identfied by more than a few of the brighest minds within our collective world. We might even include the folks that sit on the House and Senate financial committees.

    even though we know the lobbyist are at full court press. The times of sweeping under the carpet are meeting their match…

    Just continued thoughts on real needs for the ones that can make the laws for change in our nations ability to move forward…

    James Gornick Far-fetched Theme For The Call to Banking Reforms…

  11. “All the world’s a stage..”

    This Commission is nothing but another attempt at perception management, to make it appear the Federal government gives a rat’s a## about the crisis, and will make useful changes.

    Either our representatives in Washington are morons or they are complicit – or perhaps both.

    Nothing is going to change the “highway robbery” except a natural disaster or a violent uprising.

    The US is fast becoming the old USSR (as noted by a friend who is a 60+ yo emigree from the USSR) – a country whose operations are a mixture of State Capitalism, Communism, and Fascism.

    Corruption and Cronyism are running rampant, and what we can continue to observe for years to come.

    We can look forward to a lower standard of living, much more bureaucracy (the process of turning usable resources into solid waste), and more lies and deception.

  12. Well, apparently the public is off the hook, now all morphed into “victims.” A pox on those:

    a. Who bought houses they couldn’t afford, expecting rising prices to bail them out,
    b. Who used their houses as piggybanks and pulled out (and frittered away) their equity,
    c. Who felt entitled to a 2nd (and sometimes third) house they couldn’t afford,
    d. Who saw it done on TV so decided they would get rich themselves by ‘flipping’ houses,
    e. Who committed fraud by lying about income, etc. but now blame the banks for allowing them to do it,
    f. Who felt entitled to get rich, not by dint of effort or the sweat of their brows but by rising prices,
    … and in general all those who gambled… then lost.

    Yeah, I hear you, it was only “Wall Street greed”… Pff!

    P.S. Yes, i know there were a few hard cases (people getting sick or losing jobs, etc.)
    P.P.S. Don’t get me started on the politicians!

  13. IMO there must be global cooperation in regulating and taxing TBTF institutions. Anyone else notice the recent Reuters article reporting that GS is threatening to pull their operations out of London if tax legislation is passed that would limit their bonus system? Unless there is cooperation between the US and EU on new regulations and taxes the TBTF financial institutions will simply move from country to country chasing the most beneficial regulatory and tax environment.

  14. I have been thinking more along the lines of stripping them of everything, including their clothes and dropping them in the middle of Detroit.

  15. Honestly, would you lend that kind of money to someone without seeing any documentation, proof of employment, tax returns, etc.? If the answer is no, remember, the loan is secured by property that will continue to go up in price forever. If the answer is yes, I could use a few bucks.

  16. The first guy, James Grant, is the only person who brings up anything slightly meaningful. He had two questions about the FED.

    Banks get money for free. For every dollar they borrow at 0%, they can turn it into $10. They have no risk. The FED has made it clear, as lender of last resort, that banks are secured against bankruptcy. The tax payers pay the brunt of Bank’s insurance via the FDIC.

    Give any industry free capital, free insurance, and mitigate bankruptcy risk and what do you think will happen?

  17. Tosk, I concur completely but would suggest that your list suffers a few omissions. What about all the people who were “flipping” houses for absurd profits and helping create unwarranted “value” in the housing market? It’s also been well documented on Frontline, Dateline and elsewhere that “many” mortgage lenders who were “fabricating” income and employment data on “behalf” of the sucker, er, customer, sitting across the desk. The list can go on and on and on and, yea, don’t get me started on the politicians, either.

    FYI, my earlier comment was partially “tongue-in-cheek.” The part about “wives, mistresses,…” was a bit facetious. However, if these “masters of the universe” are the “best and brightest,” as they’ve been touted, then they KNEW there was better than even-money that their bets would bring down the system and they didn’t care. If that’s not heinous in the extreme, please, give me a better example.

    Regardless, you’re probably also correct that I “need therapy.” :D However, I haven’t even heard of anyone, or any organization, that is astute, aware or competent enough to administer such “therapy.”

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