The opening hearings of the Financial Crisis Inquiry Commission was somewhat upstaged by the tragedy in Haiti, but nevertheless compelled Wall Street chieftans to put in an appearance, which is more than President Obama has been able to d.
And while Angelides himself was combative and slapped Lloyd Blankfein around a bit (pretty much every report picked up on his remark that Goldman had not only sold used cars with bad brakes, but then bought insurance on the driver), there many cases where not even terribly artful misdirection got a free pass. For instance, Heather Murren asked whether Goldman’s risk managers, executive committees, auditors, had given warnings. Blankfein pointedly talked only about the auditors. He also effectively ducked a question from Peter Walliston about the increase in the firm’s leverage post 2004.
I was on an NPR radio show later in the day about the hearing, and the listener questions were interesting. First, they were higher caliber, by a considerable margin, than I have had before on talk radio on economic matters, and I don’t think this is sample bias. It seems at least a portion of the public is interested, engaged, and somewhat down the learning curve. The second is they are angry and felt the AM hearings were too soft on the bank CEOs.
Now some of this reaction may be the result of seeing too many screen and stage renditions of trials, where you have a high ratio of “gotcha” moments relative to the court time shown. Real life is not so dramatic.
But here, the process seems to be that the Commission will issue subpoenas only if they think they are warranted. There was no reason to think they have issued any. And any process of this sort that does not get reasonably deeply into the books and records of these firms is bound to come up seriously short.
A commission is a great format for something like Watergate, where a crime clearly was committed; the open question was did the President authorize it? This was a narrow focus, and one where persistent questioning of witnesses could shed light. Here, it is not clear that crimes were committed. In fact, I will hazard to say comparatively few crimes were committed, even though the result was the greatest looting of the public purse in the history of man. The big impediment is that the worst practices took place in the unregulated or barely regulated parts of the market, so conduct that is clearly wrong by any standard of common sense or decency is still permissible. The second is that the obviously criminal activity involved mere foot soldiers (mortgage fraud, which was an originator problem as well as a borrower issue) or are likely to have a veil drawn over them for bad reasons (it seems highly likely that Lehman engaged in accounting fraud; if AIG did have billions of securities sitting around, that would put an enforcement team on high alert).
So that means that what the commission needs to do is dive deep into the arcane parts of the market where journalists and inquisitive outsiders have not penetrated, precisely because they are the areas that are still least well understood and where the most value was destroyed. Those are the areas most in need of reform, so that is where the focus ought to be. The reluctance to use its subpoena powers to do broad-based discovery, particularly basic document and record requests around key issues, means the commission is very likely to engage in drunk under the street light behavior, looking at the areas that are readily accessible but not highly rewarding. Focusing on symptoms like bonuses, while crowd-pleasing, will not reveal root causes.