William Cohan has a damning account in the Sunday New York Times, “Was This Whistle-Blower Muzzled?” on how the Financial Crisis Inquiry Commission actively suppressed information that would inconvenience America’s favorite zombie bank, Citigroup. Recall that Sheila Bair’s book Bull by the Horns depicted in riveting detail how she engaged in a protracted battle with pretty much all the other regulators, with the Treasury leading the charge, to try to resolve or at least seriously clean up Citigroup, which by all the metrics the FDIC had (and even some OCC measures) was far and away the sickest big bank. Even though Bair could have put down the US depositary on her own authority, the other financial regulators withheld information about the operations not under the FDIC’s purview, which was almost half the bank. As much as she felt Citi needed to be put down, she felt she could not do so when she both had all the bank supervisors opposed to her and she was at an information disadvantage (that is, they’d pillory her even if their data confirmed what she was seeing, and because it was confidential supervisory information, she would be unable to get it divulged).
At least Bair put up a tenacious fight about Citi, even though Geithner, an acolyte of its board member Bob Rubin, used every bureaucratic device he could find to stymie her (Neil Barofsky has separately described how underhanded and persistent Geithner is, frequently working through cat’s paws). By contrast, another person who tried exposing the extent of the rot at Citi when it should have been safe to do so, long after the worst of the crisis was over, found himself blocked by people who were supposedly tasked with getting to the bottom of the crisis.
Richard Bowen III, a Citi executive who was chief underwriter of consumer lending, started warning the board in early 2006 that the bank was making way too many bad and fraudulent loans and could eventually face large losses. Increasingly desperate, he wrote Rubin in November 2007, which looks to have signed his death warrant at the global bank. Bowen demanded an outside investigation, which confirmed his allegation that mortgage lending controls had broken down in 2005. Nevertheless, CEO Chuck Prince signed the Sarbanes Oxley certification stating that the bank’s controls were sound (star NC pupils know that Sarbanes Oxley violations can serve as the basis for criminal prosecutions).
Fast forward to the Financial Crisis Inquiry Commission in 2010. Bowen was contacted early on. He gave a four hour taped interview which led to him being asked to testify in public. Here is the germane section of Cohen’s article:
On March 22, J. Thomas Greene, the commission’s executive director, gave Mr. Bowen a week to write a statement to accompany his April 7 oral testimony. Mr. Bowen says he was told he could have 30 pages….
On March 30, one of Mr. Bowen’s attorneys, Steve Kardell, a partner at the Dallas law firm Clouse Dunn, told Mr. Bowen, in an e-mail, that the F.C.I.C.’s Mr. Bondi suggested “some substantial changes” to his testimony and “thinks that the way it’s written now, Citi will declare war on both you and the F.C.I.C., and it will primarily consist of an effort to discredit you.” While Mr. Kardell noted that the F.C.I.C. investigators said they didn’t want to influence his testimony, he said that Mr. Bondi suggested trimming it by 10 pages. Peeved, Mr. Bowen instructed him to find out what changes the F.C.I.C. staff wanted to make. The next day, Mr. Kardell e-mailed Mr. Bowen, “I get the impression that the revisions are non-negotiable.”
Mr. Bowen says the F.C.I.C. wanted him to delete his concern that Citi may have materially misrepresented its certifications of internal controls, which require corporate officers to certify the accuracy of their financial statements under Sarbanes-Oxley.
Remove the names of people at Citi, he says he was told. Take out his post-Rubin denouement, his conversations with the bank’s internal lawyers and the fact that Citigroup’s outside attorneys at Paul, Weiss, Rifkind, Wharton & Garrison LLP were conducting an investigation of his charges.
Mr. Kardell also said he thought the F.C.I.C. was “catching some serious, serious heat this morning.”
“Who are they catching heat from?” Mr. Bowen asked, according to a transcript of the call provided by Mr. Bowen.
“Umm, Citi,” Mr. Kardell replied, adding, “It’s just a complete all battle stations with Citi about you testifying.” He then dropped the bombshell that Brad S. Karp, managing partner of the law firm Paul, Weiss, had “gotten involved” and that “our guys” on the F.C.I.C. staff, “who are still extremely pro Dick Bowen — although I think there’s pressure to yank Dick Bowen — our guys want to see something plain vanilla pretty fast.” A stunned Mr. Bowen told Mr. Kardell, “So much for an independent Congressional commission.”
One of the appalling facts of modern life is when the head of a heavyweight white shoe firm throws his weight behind protecting a big client, he is pretty much assured of getting cooperation. That’s just how things work in
corrupt elite America.
The fact that the FCIC was a whitewash is hardly news. Bowen’s four hour taped interview was not among those made available in the FCIC archives. Perversely, some but not all the ones of small fry like yours truly were. But this was just a part of their pattern of covering up for the powerful. We had noted in 2010 that the FCIC had planned to release the audios of all the interviews but then reversed themselves. We asked in early 2011 Why are Half of the FCIC Interviews Being Withheld?:
Another mystery is why so many interviews are being withheld. When they interviewed me in November (and yes, sports fans, my interview is up on the FCIC site), I was informed that 600 interviews would be released. I’m told by people close to the investigation that not all interviews were recorded; this was an oversight early in the process, but starting in July, all were apparently taped.
Now we already know that interviews of Certain Big Kahunas are being withheld, most notably that of Ben Bernanke (which was conducted in 2009 and thus illustrates that at least some of the pre-July sessions were recorded).
But that is not a sufficient explanation. The FCIC’s press release indicates that the staff met with over 700 witnesses; only “more than 300” are to be made public, with 213 released initially and the rest added by now, since the FCIC is now officially no more.
Our Tom Adams was interviewed in December and his conversation was not posted. Why would this be? His position is contrary to the report’s narrative; is that why he was excluded? Or is there a less nefarious reason why he and many others were left on the cutting room floor: that they weren’t name brands? For my taste, far too many of the well known individuals included in the roster were economists who were simply not close enough to what happened to provide much in the way of new perspective.
And if you want to point fingers at why the commission turned out to be a well-packaged regurgitation of conventional wisdom which conveniently blamed everyone except specific executives at major financial firms (if everyone is to blame, then no one can be held to account), look no further than Phil Angelides and Brooksley Born. Yes, the commission was hamstrung by design; for instance, Congress subjected it to having to get approval of commissioners from both parties to issue a subpoena, which pretty much vitiated that power. But if Angelides and Born had been serious, they could have stared down the likes of Brad Karp. Recall that what brought Nixon down was the Saturday Night Massacre, when he ordered special prosecutor Archibald Cox be fired. Attorney General Elliot Richardson and Deputy Attorney General William Ruckelshaus resigned in protest. It would not have created that level of turmoil, but if Angelides and Born resigned rather than be bullied by banksters and their law firm hired guns, the media consternation would have had more impact than the commission report ever did.
And it was obvious at the time that both had been compromised. We sat in on the press call when the report was released, and wrote it up in FCIC Insider: “I Can’t Believe They Suborned Brooksley Born”:
I participated in a blogger conference call with FCIC commissioners Phil Angelides and Brooksley Born. I’m clearly not cut out for public life. It was disconcerting to hear them thumping their talking points. For instance, Angelides began by saying that the purpose of the report was to explain why we faced the choice in 2008 of spending billions of dollars to bail out the financial system or let it fail.
That’s a false dichotomy that serves to justify the unprecedented rescues. It implies that the only way the crisis could have been addressed was the course of action taken. We pointed out as the crisis was unfolding that some of the early interventions made matters worse. Even at the peak of the crisis, a range of other actions were possible but were not taken. The bias throughout the crisis was to throw money at the problem with virtually no strings attached, and even in the cold light of day, to take far too little in the way of corrective and punitive measures.
But the stunning part were Angelides’ and Born’s answers to my questions. I’ve been in communication with several disaffected insiders. And contrary to the efforts of Born and Angelides to depict critics as the dissenters (meaning the Republicans), these observers feel the investigation was inadequate and the report excluded critical drivers of the crisis. They have told me in some detail about how the staff performed its work in a vacuum. They reported that the commissioners spent virtually no time with the team leaders, did not provide input into the thinking process or interviews. They also complained of poor resource allocation decisions: that nearly 2/3 of the staff time was taken up with arranging and preparing for the public hearings, which were not terribly productive. And to add insult to injury, the staff prepared questions for the hearings only to find the commissioners ignoring them.
Another problem area was the difficulty in getting subpoenas issued…Here, with the commission having a very tight schedule to begin with, stonewalling would be a rational strategy, and my sources tell me that happened on a widespread basis, particularly after the firms under the spotlight began to see that subpoenas were unlikely to be issued….
Born stressed how many pages were produced (ahem , quantity is not tantamount to relevance), how this undertaking was even larger than the complex litigations she had overseen, and how much staff effort went into analyzing the material. I then asked how much time the commissioners spent with the lead investigators and staff. Angelides said “a ton” and that it varied by commissioner, but that he and Born “dove in”. But if you listened carefully, they did NOT discuss how they worked with staff, but that they read memos, listened to interviews, and so on.
I called one of my contacts immediately afterwards and played back the exchange. The reaction: “I can’t believe they suborned Brooksley Born”. The insider disputed the account, saying that the commissioners did not give the staff any insight into their thinking nor did they participate in the interview process (either providing questions or participating in any interviews to get a feel for the process; listening to them afterwards or reading transcripts is just not the same). Others close to the investigation confirmed his report.
While Born was brave enough in 1996 to engage in a pitched battle with much more powerful figures in Washington to regulate credit default swaps and suffer a humiliating loss, she has not bucked the system in a more fundamental way. Her participation in the FCIC gave it an aura of respectability and seriousness. To see her defend a flawed process and product shows either a lack of discernment or a misguided sense of loyalty to a diseased system.
It is unpleasant to face up to the fact that quite a few of the people who are lauded as courageous were not as brave as their PR would lead you to believe. Yes, Born as the new head of the CFTC posed the question of whether credit default swaps should be regulated, faced unified opposition from the other financial regulators, and was embarrassed before Congress by having it vote to exclude her from even studying CDS and putting the matter in the hand of “senior regulators” meaning bank cronies. She left office with her tail between her legs and didn’t speak up until it was safe to, after CDS blew up. It’s the people like Bowen who put their careers on the line who deserve public approval, not the ones who buck the system a bit, get slapped, and then go back to being complaint. Unfortunately, we have way too many Potemkin heros presented as the real thing in order to preserve the legitimacy of a corrupt ruling class.