Is the Angelides Commission Structurally Flawed?

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.

Print Friendly, PDF & Email


  1. RPB


    I agree. The hearings were an absolute farce and should be referred to as financial Kabuki. Are we to expect anything else but theater from a Congress under the influence of a roughly 400 million dollar lobby?

    What about Fannie and Freddie? When will we examine their role in using trillions of dollars (and billions lost) mispricing housing? What about more inquiry into the Fed’s role?

    The financial system needs to be reformed – but as you noted, the bankers played the rules afforded to them by a lax regulatory regime and a heavy handed government trying to make housing affordable and assets appreciate rather than seeking structural changes to help grow median wage, increase employment or make trade fair.

    We can complain all we want about health care reform or financial reform; but until we the people demand the demolition of K-Street and force real campaign finance reform we will get nothing but hot air.

    1. DownSouth

      Agreed. It’s an absolute farce. A big sham.

      Where is the discovery?

      Where are the forensics?

      This is little more than providing the liars and cheats a forum so that they can make exculpatory statements regarding information that is already in the public domain.

    2. Doug Terpstra

      “…until we the people demand the demolition of K-Street and force real campaign finance reform we will get nothing but hot air.”

      Agreed, bare naked bribery is at the root of these crimes, and the hearings are pure theater that lets all the conspirators put on an exculpatory distraction.

      That’s why I don’t see much point in diving “deep into the arcane parts of the market where … outsiders have not penetrated.” When not even torture or war crimes are investigated or prosecuted, how will slogging through the weeds like Mr. Magoo make the slightest difference? Whatever miniscule infraction might be discovered will simply be ignored and then papered over in the next 20,000-page bill of lobbyist sausage.

      “Goldman had not only sold used cars with bad brakes, but then bought insurance on the driver.” (“Yes but it’sperfectly legal and we do it all the time, everbody does it. Why the hell not, when someone else pays the insurance claims?”)

      The fact is our representatives are “legalizing” massive larceny, aggressive war, torture, and virtual slavery, and there’s not a damn thing we can do about it.

  2. attempter

    When we say “no crimes were committed”, or few of them, in the technical sense, this highlights

    1. how the legal system has been rigged to legalize the highest levels of theft and fraud;

    2. how conventional law just isn’t set up to deal with this level of crime in the first place.

    That’s why Nuremburg is, in that very precise sense, the precedent we need to be looking at.

    1. velobabe

      Lyrics by Bob Dylan, Sweetheart like you –
      They say that patriotism is the last refuge
      To which a scoundrel clings.
      Steal a little and they throw you in jail,
      Steal a lot and they make you king.

  3. Brick

    That a portion of the public is interested, and engaged shows to me that many politicians are misjudging the general population and are tending to whitewash over complicated issues. I suspect that these issues are not explored in public because it requires a bit of a rethink on policy and rethinking policy for dogmatic politicians is very difficult. My view is that the next US government will be far more radical in its actions, because thats the way the population will vote. It would have been far better for banks and financial institutions to have cleaned up their act than to face what will eventually be coming their way.

    1. DownSouth

      Brick, you say: “It would have been far better for banks and financial institutions to have cleaned up their act than to face what will eventually be coming their way.”

      That requires someone with a brain, however, like FDR or Keynes, not these brain-dead morons like Dimon, Blankfield, Mack and Moynihan.

      The guillotine would be too good for these simpletons.

      1. Doug Terpstra

        I’ve often wondered about those bloody public execution scenes of the French revolution, where throngs of les miserables cheered raucously as aristocratic heads rolled into baskets. People could not really be so bloodthirsty, I thought, it’s just Hollywood theater.

        1. EmilianoZ

          This is indeed a cliche of the French Revolution. You should ask yourself why this image has been engraved in collective memory and by whom. Remember that history is written by the victors.

          The French Revolution was not the people vs the aristocrats. The French Revolution was a 3-way struggle between:
          3)the poor

          The bourgeois had the money but not the political power. Ideally they would have much preferred strike a deal with the aristos and together rule the poor. The aristos would have none of this. So the bourgeois used the poor to fight them. But of course they didn’t the poor to rule either. So they were fighting each other too.

          The Terror, where most of the guillotinning was done, was the only period of the Revolution where the poor had the upper hand.

          But in the end the bourgeois won (money always wins). So they started depicting The Terror as very very bad. What few people know is that there was also a counter Terror (or white terror) during the Thermidorian reaction that followed the Terror. You won’t find this in the movies because that was the bourgeois killing the poor.

  4. constantnormal

    Of course it is — these things are always designed to be for show only, and never for results. The Pecora commission in the 1930s was an accident, the fourth in a series of commissions designed to fool the sheeple into believing that the Congress was trying to get to the bottom of things (then, as now, the Congress would find itself, pockets stuffed full of lobbyist money and wearing a silly grin, at the “bottom of things”).

  5. Gerald Muller

    I have already mentioned this book by Charles Gave, “Libéral mais non coupable” unfortunately written in French. The main argument of Gave is that, in a final analysis, the politicians that govern us are the primary culprits.
    Since ancient Greece, everyone knows that any human with the possibility to loot will do so if no consequence is to be feared. The Greeks, 2500 years ago have explained that government is needed to refrain the “bad” impulses of men. And that, basically, is the role of political leaders.
    Expecting W not to loot out of some high moral principles is quite naïve. They must be contrained. And the body to organize this constrainment is called government. The moment they fail and, in the case of the US, are associates in crime, you get the present crisis.

    1. Anonymous Jones

      I think this is an excellent point. The only subtle shading I would add is that I don’t think “any human” with the potential to loot will do so. I do believe some will/would resist the impulse. But regardless, there are always *enough* who cannot resist that they will assume the positions of power that allow for such looting. I only say this because someone will try to come at you with a counterexample of a “saint” who works tirelessly only for others, but my point is that this is not really a counterexample that affects your underlying analysis. You only need a few (not all) with the inability to resist looting in order to ruin it for everyone. Great comment.

      1. DownSouth

        Paul J. Zak, director of the Center for Neuroeconomics Studies, says that the subjects they have tested exhibit a broad range of behaviors, but about 2% of the subjects are unconditional non-reciprocators. These are people who never share, who are congenitally selfish. “What do we call these people in our labs?” he queries. “We call them bastards.”

        They are characterized by highly disregulated oxytocin levels, Zak says. Also, high stress inhibits oxytocin release, so a high stress environment leads to more of the pathologically selfish behavior. He identifies environments like Enron and Nazi Germany as being a couple of the environments that would result in more of this behavior.

        To think of our country in terms of Nazi Germany is mentally difficult, but the mental distance between Enron and Goldman Sachs is not that great.

        1. Skippy

          Bad apple laid out bare, sociopath action equals © 1993 by Robert D. Hare, PhD. Reprinted by permission of The Guilford Press.
          Interpersonal traits

          • Glib and superficial
          • Egocentric and grandiose
          • Lack of remorse or guilt
          • Lack of empathy
          • Deceitful and manipulative
          • Shallow emotions

          Antisocial lifestyle

          • Impulsive
          • Poor behavior controls
          • Need for excitement
          • Lack of responsibility
          • Early behavior problems
          • Adult antisocial behavior
          • The complete picture

          Glib and superficial

          Psychopaths are often witty and articulate. They can be amusing and entertaining conversationalists, ready with a quick and clever comeback, and can tell unlikely but convincing stories that cast themselves in a good light. They can be very effective in presenting themselves well and are often very likable and charming.

          Typically, psychopaths attempt to appear experts in sociology, psychiatry, medicine, psychology, philosophy, poetry, literature, art or law. A signpost to this trait is often a smooth lack of concern at being found out that they are not.

          Egocentric and grandiose

          Psychopaths have a narcissistic and grossly inflated view of their self-worth and importance, a truly astounding egocentricity and sense of entitlement. They see themselves as the center of the universe, as superior beings who are justified in living according to their own rules.

          Psychopaths are seldom embarrassed about their legal, financial or personal problems. Rather, they see them as temporary setbacks, the results of bad luck, unfaithful friends or an unfair and incompetent system.

          Psychopaths feel that their abilities will enable them to become anything they want to be. Given the right circumstances—opportunity, luck, willing victims—their grandiosity can pay off spectacularly. For example, the psychopathic entrepreneur “thinks big,” but it’s usually with someone else’s money.

          For a good times see in plain English on a plain web site:

          Gee its like a cockroach once the torch spotlights them in their nocturnal activities, sound like any one we know?

          Yes I know NC regulars have been down this road many times before, but it seem a good time to refresh…eh.

          Skippy…Disclamer ME/WE all have various degrees of these
          Traits, although its the totality, sums of them, that define our what is the Psychopaths term for self reflective personality….self hater! Can you see it, do you get it, the insidiousness of it…

          PS The complete picture

          Psychopaths are not the only ones who lead socially deviant lifestyles. For example, many criminals have some of the characteristics described above, but because they are capable of feeling guilt, remorse, empathy and strong emotions, they are not considered psychopaths. A diagnosis of psychopathy is made only when there is solid evidence that the individual matches the complete profile—that is, has most of the above symptoms.

          1. DownSouth

            When I look at Blankfield, Dimon, Mack and Moynihan, and the fact that they were able to enthrall an entire nation with their sociopathic mimics, I am always reminded of what Eric Hoffer wrote about Adolph Hitler in The True Believer:

            It colors my thinking and shapes my attitude toward events. I can never forget that one of the most gifted, best educated nations in the world, of its own free will, surrendered its fate into the hands of a maniac.

          1. Skippy

            Thanks for the link CrocodileChuck and will bang on a few doors with this for responce, incoming Whiteford.

            Skippy…hay Vinny chime in.

  6. Cullpepper

    Will the subpoena power of the commission include the ability to audit the Fed directly?

    If not, why not?

  7. Ishmael

    The commission started with a flawed Chairman. Angelides was the CEO of a home builder and State Treasurer for California when it ran up all of the debt. I have never heard him speak up on too much spending or any other issues. He is not an attorney and does not have any experience at really drilling down to get the truth.

    The whole commission and the Chairman are jokes.

  8. WB

    So yesterday Lloyd Blankfein dissembles by saying, in effect, that because GS clients insisted on gambling in the big casino, GS was more than happy to provide the venue and the gaming tables. It’s just the GS business model. So what if GS helped blow up the economy?!

    My comment is: why was this legal and when will accountability be exacted against the players and their regulatory enablers? American citizens are boiling mad.

  9. Michael M. Thomas

    In connection with the Angelides hearings,there are frequent allusions to the Pecora hearings. People need to get their history straight. Pecora only came in at the end, in 1933 after FDR had replaced Hoover, and was granted subpoena powers, which his predecessors s committee counsel had either not asked for or been denied. Prior to that, in 1932, before the election, the same Senate Commttee conducted an ineffectual show trial. It was in that segment that Goldman Sachs, as culpable as any in the misdeeds of 1927-29, was called to testify. They were not invited back by Pecora and you will not find Goldman anywhere mentioned in Pecora’s 1938 book, Wall Street Under Oath. Could this have anything to do with the fact that Sidney Weinberg was FDR’s largest Wall St. fundraiser? Incidentally, you will find the name “Pecora” only once – out of context – in Chas. Ellis’ authorized hagiography of GS.

    Here’s the relevant Wikipedia entry:

    “The investigation was launched by a majority-Republican Senate, under the Banking Committee’s chairman, Senator Peter Norbeck. Hearings began on April 11, 1932, but were criticized by Democratic Party members and their supporters as being little more than an attempt by the Republicans to appease the growing demands of an angry American public suffering through the Great Depression. Two chief counsels were fired for ineffectiveness, and a third resigned after the committee refused to give him broad subpoena power. In January 1933, Ferdinand Pecora, an assistant district attorney for New York County was hired to write the final report. Discovering that the investigation was incomplete, Pecora requested permission to hold an additional month of hearings. His exposé of the National City Bank (now Citibank) made banner headlines and caused the bank’s president to resign. Democrats had won the majority in the Senate, and the new President, Franklin D. Roosevelt, urged the new Democratic chairman of the Banking Committee, Senator Duncan U. Fletcher, to let Pecora continue the probe. So actively did Pecora pursue the investigation that his name became publicly identified with it, rather than the committee’s chairman.”

  10. bob

    Just watching again today. Thomas is testifying, not questioning.

    I vote for two rules.

    1. One witness at a time.

    2. The witness is required to issue more words than the panel.

  11. Siggy

    I watched part of the second round of inquiry and thought the questions to be soft. The first round appears to have been a mea culpa show for the major players. As to picking on Blankfein, he has been over paid and if you stay away from what the GS internal communications say about the contracts that were sold and bot and what ever happened to the GS Balance Sheet for December, it’s a walk in the park for him. His premier talent as a public figure appears to be dissembly raised to high art.

    What this commission has to get to is the fact that at the least a massive tort has been committed and quite probably a fraud. Subpoenas are in order and they should be forth coming in very short order. The bailot of AIG would be a very good focus point. Without subpoenas this commission will have failed and there will then develop a growing population that sees this mess for what it is. A massive fraud that has been underwritten with taxpayer monies to the absolute detriment of the public. Revolutions are seeded by this sort of hubris.

    It may well be that a horrendus financial collapse has been averted; but no one is talking about the root causes of the national profligacy and the abetting performance of the Congress, the Administration, the Fed and the Treasury.

    This is a debacle that is all about money, its present and future worth. It’s about the rational expectation that there will be a persistent loss of purchasing power such that spending now is preferable to saving for future consumption. This is an economic circumstance that arises out of the disparity between US manufacturing wages and the wage rates in Asia. This is about the labor rate arbitrage that has been exploited at least as much by US corporations as by mercantilist nations.

    I did not hear questions that probed to root causes. I heard questions that covered well plowed ground and which avoided inquiry into the patently foul behaviour so many of the financial institutions.

  12. jdmckay

    Yves said:

    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.

    Not sure exactly what you mean by “sample bias” (eg: NPR vs. MSM, or odd confluence of smart listeners for this particular show, or ???), but NPR (morning addition, fresh air) has had (at least compared to rest of media) some reasonably introspective discussions on all this stuff of late. Beyond that, at least amongst folks I know, NPR audience is not primarily CATO/neo-con/K-Street type war mongering conservatives if you know what I mean.

    I wonder, as a % of population which takes in some type of daily news (evening network/local newspaper/WSJ etc.) I would think (non scientific, just a wobbly notion) that NPR listeners are in a diminutive minority not well represented by US policy. Wouldn’t surprise me if NPR listeners as a whole watch a lot more C-SPAN than, say, Katie Couric or Fox News audience.

    I’d also point out, amidst this hearing & Haiti disaster,
    Glenn Beck’s Palin interview drew some +/- 4m viewers. I wonder how many intelligent questions you would have gotten from that crowd? :)

  13. john

    The issue of what thirty years of “money is protected political speech” has made legal will never be addressed until the fact that money is protected political speech is addressed.

    Money can represent anything. When we accept that money represents political speech we allow that well funded interests will have their way with our politics and through that with the law. Low and behold this is what has happened. It was almost all legal, as Yves said the only crooks were very unsophisticated foot soldiers.

    We will not get our day in court on this one, political money saw to it that looting was legal before it began ransacking the place. Bummer, but that’s the way it is. The ballot box is the only tool we have to fight this and to fight this we must stigmatize “campaign finance’ for what it is: bribery. Please lets start calling it by its normal ten thousand year old name!

    1. alex

      Hear, hear!

      The more I see of this “fuck the voters” sham of financial investigation and reform the more convinced I am that it’s pointless to talk about any real change until we have serious campaign finance reform.

      With the finance industry “contributing” around $500M in 2008 alone, it would be a miracle if the government wasn’t thoroughly corrupt.

      The #2 contributing industry? Health care, with $167M. That explains our health care “reform”.

      “The ballot box is the only tool we have to fight this and to fight this we must stigmatize ‘campaign finance’ for what it is: bribery. Please lets start calling it by its normal ten thousand year old name!”

      I completely agree with your use of the plain English word bribe. That should become the standard word we use for “campaign contributions”, as euphemisms make me ill.

      An etymological quibble: “bribe” in its current meaning dates from the 1530’s, but the last 480 years are more than enough for English speakers to understand what it means.

      As for the Supreme Court’s absurd “money = speech” notion (does that mean the 1st amendment gives me the right to hand a politician a briefcase full of unmarked bills?) there are ways around it. States like Arizona and Maine have publicly financed campaigns.

    2. Dave Raithel

      “The issue of what thirty years of “money is protected political speech” has made legal will never be addressed until the fact that money is protected political speech is addressed.”


  14. lambert strether

    All you really need to know is that the Commission took a year to get going and won’t deliver anything until after the mid-terms this fall. All this for a catastrophe that’s far worse than 9/11 — and left the terrorists in charge of the country.

  15. Blurtman

    “Here, it is not clear that crimes were committed. In fact, I will hazard to say comparatively few crimes were committed,..”

    How can anyone seriously say this?? I cannot believe that I am reading this on this blog.

    Recall the statements from the Moody’s employees who knew that the ratings they were issuing on MBS were complete garbage.

    Does anyone honestly believe that the men and women at Goldman Sachs who were selling this toxic junk did not know what crap it was?

    It is simple fraud to misrepresent the risk of securities that you sell.

    Let’s have an investigation that examines the e-mails.

    Look at the scope of this fraud and its results. How much more serious does it have to get in order for a criminal investigation to occur?

    1. Yves Smith Post author

      Saying something ought to be criminal is quite a different matter than what is criminal under current law.

      Re the rating agencies, it has been found repeatedly by courts that they enjoy First Amendment protection. They are considered to be publishing mere journalistic opinion. Hence no liability. One judge has ruled otherwise with the respect to structured products like these (not stuff like corporate bonds or munis) because the audience for the ratings is small. But I doubt that opinion will stand. Ratings agencies are considered necessary, and a ruling like this puts them out of business. I agree they SHOULD be put out of business, but no one would step into their shoes. A private firm can’t charge enough for this type service to cover the liability. And the Roberts Supreme Court has consistently made politically expedient rulings.

      Re Goldman, you can sell any toxic garbage as long as the selling documents make adequate disclosures. You’d have to establish that the documents excluded material information. Sadly, I have no reason to believe that they did. The contents of every one of those CDOs was fully disclosed in the deals where the assets were assembled in advanced. A lot of the deals, however, were “managed” meaning investors would commit, and a manager, a third party, would assemble assets that fit certain parameters.

      And it was boilerplate in these deals that the packager/underwriter might be taking the short side of these deals.

      As I indicated elsewhere, this is analogous to selling radium drinks in the 1920s. Some people died horrid deaths, but it was perfectly legal since they were told, in fact wanted to buy, radium drinks. They were considered a tonic.

  16. Hugh

    I would disagree with Yves on the subject of criminality. I think there was an ocean of fraud you could drown a financial system, and a world economy, in. There was massive fraud at all levels. Control fraud as Bill Black has often noted that directly attaches to the CEOs and other senior management. There are material misrepresentations everywhere you look. Violations of fiduciary trusts. It was all one vast Ponzi scheme.

    As for the commission, when its membership was first announced, many of us pointed out that with the exception of Brooksley Born, the remaining members seemed expressly chosen for their Establishment creds, no muckrakers or reformers need apply. The lack of subpoenas goes right along with this. As for forensic audits, that is what that idiot handmaiden of Wall Street Timothy Geithner should have been doing anytime since his confirmation.

    Also for anyone who has listened to various hearings in the past, they will know they come in different flavors. The least informative are those where the principals bloviate and the witnesses obfuscate. The most effective are where you have a counsel able to conduct sustained detailed lines of questioning of a single witness. Panels are by and large worse than useless.

    But again can any of us be surprised? This is a case of our elites investigating themselves, which means there will be no real investigation at all.

    1. Yves Smith Post author


      The one area where there may be bona fide fraud would be accounting, but consider the Level 3 accounting classification. You can say the complicated crap is worth whatever you say it is worth. So no fraud if you limit your indefensible marks to that. Lehman clearly didn’t, the commercial real estate valuations were not credible, which says other stuff was bogus. AIG appears to have played games with its inter-subsidiary relationships, but we will never get to the bottom of that.

      And control at these banks is very diffuse. They push responsibility down deep into the ranks. So this does not fit Bill Black’s CEO-driven control fraud model.

      People do not want to hear the message, and are shooting the messenger: the lack of any regulation in CDS means you can sell toxic product and get away with it and it is NOT illegal, ergo not criminal. It was legal in the 1920s to sell products that literally killed people (radiation tonics) because people were told what they were (radiation tonics).

      These relationships were also not fiduciary relationships. The bad product was sold to institutional investors. This is not like selling auction rate securities to retail investors (another area of chicanery, but that was dealt with).

      They were often sold to chumps, but technically they were sophisticated investors, they’d have to meet certain criteria to even get the offering documents.

      1. Blurtman

        If a salesperson at Goldman Sachs (GS) sold AAA rated MBS to a buyer at Morgan Stanley (MS), and the GS salesperson believed the MBS were really CCC or worse, and had communicated this belief to GS colleagues, is this not fraud? And is the argument that as the MS buyer was an instituional investor, he/she should have known better?

        Can you think of any other industry where a salesperson can knowingly sell a faulty product, and not have broken the law? AAA that is really CCC is a bit of a misrepresentation, no?

        1. Yves Smith Post author

          In the case of Morgan Stanley, no contest. It’s no different than Goldman selling oil futures thinking oil will go down when Morgan thinks it will go up. They are professional counterparties.

          Even in the case of investors, the buyer is given the documents that describe the deal. Unless the documents misrepresented the deal, there is no basis for arguing the deal was fraudulent. Dishonest, duplicitous, destructive, yes, but fraud, pretty unlikely. The only argument might be if the seller had privileged information (ie, it was putting stuff into the deals out of its mortgage warehouse it knew was bad). But the liability would sit with the manager who actually picked the instruments. That was usually a third party.

          Moreover, all these documents, just like normal contracts, have language that says, basically, that the only thing that counts is what is in the contract. It has the effect of excluding verbal representations made by the salesman.

          The case is different with dot-com stocks. First, the managers are presumed to have done sufficient due diligence on the issuer. Second, many of the investors are retail, so the underwriters (and their brokers) have a fiduciary duty. Third, in areas regulated by the SEC (and synthetic CDOs are not one of them) the omission of a material fact is a violation.

          1. Blurtman

            Considering that investment banks that created MBS also owned mortgage servicers, and had early access to mortgage data including default data, it would be very possible to misuse this data for profit. For example, one could misrepresent a deal involving the sale of MBS, for example.

            Considering the scope and ramifications of the alleged fraud, should there not be ongoing criminal investigations?

            What does it take? Sex with an intern?

          2. Yves Smith Post author


            Moody’s and Standard and Poors publish very detailed analyses of mortgage delinquencies and defaults. Pretty much everyone in the business gets these reports. They also project “pipeline losses” based on current delinquencies. There is not much of a lag between the servicers having this info and it being crunched and made available by the agencies. And it is disaggregated, these are data reports, not like equity analyst stuff that expresses a point of view.

            Similarly, both at the end of 2006, and after the Bear meltdown (April-June 2007), many people in the industry, INCLUDING MOST OF THE IBANKS THEMSELVES, were convinced the downdraft in subprime was temporary. Merrill bought First Franklin, a subprime originator, in January 2007. Others were considering buying some of the originators that hit the wall. BofA considered Countrywide to be a coup.

            The really bad product was not the RMBS. Believe it or not, many AAA subprime BONDS will still pay out in full or close to that. It is the CDOs, that were made from the lower tranches of RMBS, that were the toxic product. And CDOs were too diversified for having data from a single servicer give you any advantage. You have 100-200 exposures in a CDO, 80% of those subprime RMBS. So say 150 exposures, 120 of those RMBS. Each RMBS contains on average over 5000 mortgages. So the CDO has 600,000 mortgage from a bunch of different deals. Think knowing what is happening with specific mortgages from one servicer tells you anything?

            The smart guys understood that these instruments were basically different flavors of levered, risky subprime indexes. You are losing the plot with focusing on the servicers. The origination practices got horrifically bad suddenly, as of 3Q 2005. You did not have to have a servicer to know that, all you had to do was do some real due diligence. In fact, if you relied on a servicer, you would arguably find out late, since the origination standards went to hell first, the deliquencies and defaults showed up later.

            All 2006-2007 subprime CDOs are worth zero or very close to it. No advantage to be gained by inside information. All you had to do was short the crappy vintages. Anything originated in that period was dreck. None of the really successful shorts had it, neither Paulson and some others I discuss in my book. You needed detachment and common sense.

      2. Ishmael

        Yves — I do not disagree with you, but in the war crime trials of Nuremberg, the so called war criminals were tried on for breaking of laws that did not exist a couple of months before. When extraordinary times occur extraordinary measures need to be applied.

        Of course this generates lots of problems going forward because if laws are passed retroactively no one ever knows when they are not breaking the law. Of course following a few simple rules which are usually considered being honest in most societies would protect you.

        More than once, when talking to bankers I have wondered just how strongly do I need to promote the disclaimers. I think surely these people must know that I have no window to the future and lots of things could change these projections. That is why I like to have a range or projections to speak from.

        1. alex

          Ishmael: “in the war crime trials of Nuremberg, the so called war criminals were tried on for breaking of laws that did not exist a couple of months before”

          Godwin’s Law. Let me know when banksters start building death camps.

          “Of course this generates lots of problems going forward because if laws are passed retroactively no one ever knows when they are not breaking the law.”

          Which is why ex post facto laws are unconstitutional. The Nuremberg trials were useful as protracted public interrogations, but they were hardly legitimate criminal trials. Not that I have any grief over that, any more than I would have had any grief over them lining up the lot of them against a wall and shooting them. At worst they would have been killing fewer people than one stray bomb.

          “When extraordinary times occur extraordinary measures need to be applied.”

          Which is why we need an FDR instead of a BHO.

        2. Siggy


          The CDOs were constructed from revenue streams attributable to those tranches lower than B, Mezzanine pieces and CDS whose notional income streams were B or a lower. As these notional income streams are all subordinate, the probablity of loss for any tranche of the CDO is extremely high. In fact the conservative assement of a CDO is that any tranche has an expected value of zero! Now that fact typically appears on the term sheet and any offering memoranda.

          Constructing an offering that is intended to fail so that the offering can be insured with a CDS, even if so noted on the offering materials is extraordinarily unethical.

          Now let us go a bit further. There are a fair number of players in this market for CDO and CDS. Each is gaming the trade to serve what they perceive as being the best interest. This is rank speculation with next to zero hedging. In fact most of this trading is really of the form of a straddle with positions long and short with the payoff being on the realization of the of the CDS.

          This speculative character indicates that what should have occured is that the Fed, the Treasury and the Congress should have acted to assist these players to the bankruptcy court. As far as I am concerned the bailout of AIG was crime in two parts. The Fed failed to write a referral to the Justice Department regarding AIG’s fraudulent execution of of contracts that it wittingly knew it could not honor. The Fed and the Treasury are liable for their individual failure to use the bankruptcy court to resolve the problem.

          1. Yves Smith Post author


            With all due respect, you are way way wrong re ABS CDOs (the kind made from asset backed securities, typically mortgages).

            First, the lowest rated tranche in any ABS at the time of issue is typically BBB-. You seldom see a BB, and certainly not a B, tranche. What sits below BBB- is usually equity. A B tranche these days was a higher-rated tranche when the deal was issued that was subsequently downgraded.

            So called “mezz” CDOs were composed heavily of the BBB tranches of subprime bonds. Those BBB tranches had both the equity tranche AND overcollateralization beneath them to take first losses. So you had to see 8-12% defaults on the entire pool to see the BBB tranche wiped out. Before things got stupid, you simply never ever saw those kinds of losses on more than the occasional mortgage pool. So the problem really was not the structure, it was the inattention to how badly and quickly the quality of the loans deteriorated (underwriting standards) and how out of line housing prices got to be. As much as it is easy to decry it now, it is also easy to see how people lulled themselves into complacency.

            There were also ABS CDOs called “high grade” made of AA, A, tranches, sometimes with junior AAA tranches thrown in too.

            Please, if you are going to attack these products, you need to get your facts right, I am the first to say they are dubious, but what you are saying is just plain inaccurate.

    2. Doug Terpstra

      When aggressive war crimes and torture are not investigated or prosecuted, why worry about a “little” fraud?

    3. alex

      Hugh: “I would disagree with Yves on the subject of criminality.”

      The real bottom line is that whether or not it was technically criminal is not the most important thing. I’d enjoy seeing some banksters do a perp walk as much as anyone, but even if what they did isn’t technically criminal (or can’t be proven) they blew up the world economy in utterly reckless and unethical ways. Avoiding a repeat is more important than a few indictments.

      1. Hugh

        Unfortunately, it doesn’t work that way. Nixon resigned knowing there was a pardon waiting for him, rather than being impeached. Ford justified it by saying that he had spared the nation added turmoil. The problem was that ghouls like Rumsfeld, Cheney, and even Paulson might have been stopped back then instead of infecting our public life for decades to come. If Nixon had been convicted it might have discredited everyone in his Administration. Same with Iran-Contra, that one might have nailed our current SecDef Gates. When we do not cleanse the system of the dregs, they come back later with a vengeance. This is what we are seeing in the finance industry. The banksters were not expunged and they are coming back full force and as corrupt as ever.

        Now IANAL, but, even in the highly deregulated atmosphere that banksters created and exploited I think there was huge fraud. The banksters would love us to buy into this “Caveat emptor” defense but the very concept of fraudis fundamentally opposed to it. So yes, I think fraud remains viable, and prosecution necessary for the health of the financial system. But perhaps I should be clearer in my approach. I would seize the emails and the books, turn some of the lower and mid-level managers and proceed up the foodchain, and while fraud would be an important element of this, what I would really be going for is criminal conspiracy and I would RICO the banksters to death.

  17. MichaelC

    From NYT Dealbook live blogging coverage yesterday:

    Mr. Thomas asked the question that has been asked about a thousand times already: “If you knew then what you know now, what would you have done differently?”

    He also asked the four bankers on the panel to answer the questions, in writing, that appeared in Andrew Ross Sorkin’s DealBook column in The New York Times on Tuesday. He also referred to the questions on the Op-Ed page of The Times on Wednesday.

    Yves, since you’re an interested party here, can you comment?
    Is Thomas request mandatory, and if so does it include the questions from the OpEd page?

    If written answers are required, at least Sorkin’s and the OpEd contributors questions provide a decent starting point for a substantive investigation, which was one of your objectives.

  18. Francois T

    Anything short of the equivalent of a Special Prosecutor (in this case a Speical Investigator) means a flawed structure.

    C’mon! The political leaders get to pick the members of the Commission?

    Does that smells rose and lavender to you?

    1. alex

      Special prosecutors are only used to investigate government officials. Of course that may be your point. If so I certainly agree with you.

  19. Ben Fisher

    I really hope this gets passed: HR 4426 – Wall Street Bonus Tax Act. A successful FCIC, the bank fee, and the bonus tax would mean we would have won.

  20. Skippy

    Unfortunately it seems we have to wait X-amount of years after said crimes/fraud/doing what the market requests aka fault not I/WE, but THEM excuse. Before they throw one of their own to the lions, for the crowds delights, slack the mobs primal thirst.

    This is such rudimentary theater and shows their contempt for the common person, they feel can be swayed by grandiose brow beating gestures on live TV (like live in stereo lol) followed by arcane dissemination of events on the varied tree of information flows or sports like recap on MSM.

    Yves your foot solider comment was right on the money as that is where the real risk management occurs and I would add the larger the business the more pronounced this practice becomes.

    I’ve been aware of this fraudulent business for over 20 years and their still at it. I liken it to the financial sector.

    For an examples see:


    Yet this guy pops up here:

    Where did the fraud go?

    Skippy…The most perverse incentive of them all is buyer beware…it should in a rational world be seller beware…change that and we might stand a chance.

    1. Skippy

      Forgot to add that in my opinion they are just Door to Door Scamster Vacuum Cleaner Salesmen with better pay and suits.

      Once people get that simple observation/perspective stuck in their heads things will change, strip them of their Chimera, reduce them to what they really are, and what they do for a living, pray upon the weak, uninformed, vulnerable, brain washed, powerless, meek, fearful citizens of this Country.

      They know they are getting away cheaply before these commissions for they could be here turned upon them selves see:

      Skippy…we need to turn the tables on them, use their own mechanisms against them, let them feed upon themselves for once and not us. Take back what is ours and not theirs, a Country inadvisable with liberty and justice for all or did you trade it for a promise of sudo wealth, rights and liberty for feel good trinkets whilst they increasingly suck the life out of every one else.

      PS Americans need to rediscover the definition of brave, me thinks.

  21. alex

    Is the Angelides Commission Structurally Flawed?

    Yes – it’s questioning the wrong people. There will always be gamblers, con artists and sociopaths, especially around large sums of money. The people who need to be questioned are Geithner, Paulson, Summers, Bernanke, Schumer, Franks, and yes, Clinton, Bush and Obama. How much money did you accept from Wall Street? How blind were you? Have you ever read a history book? Decent regulation is the only chance we have of returning to a reasonably stable, honest, non-parasitic and non-destructive financial system. In other words, we’re screwed.

  22. erichwwk

    “But here, the process seems to be that the Commission will issue subpoenas only if they think they are warranted”

    My understanding is that ONLY director Greene has the power to unilaterally issue subpoenas. Commission subpoenas can be blocked by the opposing party refusing to give consent, ie any subpoena request must have the support of at least one commissioner of the opposing party to be issued.

    So yes, a structural flaw.

  23. Ina Pickle

    I am always impressed with the level of knowledge of callers on NPR. It is the last place that I go for “news,” and I suspect that there are a lot of other people with some idea of the situation that have reached the same conclusion.

    As for the hearings, I got entirely too frustrated and quit listening. They are not going to prosecute. They are probably not even going to make meaningful changes to the system. Considering that I have minimal court experience, and even I could have cross examined Blankfein into a dustbin, I am not impressed with our law makers.

  24. Alex Cook

    The commission = show trial. It does nothing to address the four main causes of the crisis, which are 1) the fed, 2) mortgage brokers, 3) credit ratings agencies not doing their job, and 4) a cultural disposition that we have to spend instead of saving. Here’s my take on it on my site:

Comments are closed.