Live-Blogging 4 Top Bankers on Capitol Hill

The Financial Crisis Inquiry Commission heard testimony about the financial crisis from four of the nation’s leading bankers: Lloyd C. Blankfein of Goldman Sachs, Jamie Dimon of JPMorgan Chase, John J. Mack of Morgan Stanley and Brian T. Moynihan of Bank of America. (Watch the live video here, via C-Span 2.) DealBook’s Zachery Kouwe live-blogged the hearing, with the most recent entries at the top:

12:15 p.m. | Parting Shot at Blankfein: Before he adjourned the bankers’ panel, Mr. Angelides said he was troubled by Mr. Blankfein’s belief that Goldman would have made it through the crisis without government support. “You weren’t just a market maker, you were packaging and securitizing these products,” Mr. Angelides said. He asked what Goldman’s responsibility was. Mr. Blankfein replied: “We did not know what was going to happen at any minute. There were people in the market that thought the market was going down further” and others who thought it had hit the bottom. Mr. Blankfein said the firm’s responsibility is to accurately explain to sophisticated investors the products they are buying.

12:07 a.m. | Put It in Writing: Ms. Born asks each of the panelists to submit information in writing about their proprietary trading activities.

12:04 p.m. | “Failure of Risk Management”: Mr. Blankfein, responding to a question from Commissioner Brooksley Born, said A.I.G. was bent on taking a lot of credit risk. “It was a failure of risk management of colossal proportion,” he said of A.I.G.’s near-failure. It wasn’t necessarily about derivatives. He called for a central clearinghouse for derivatives and a standardized contract for some derivatives so they can be traded on an exchange.

11:56 a.m. | Proprietary Trading: “What in your view is proprietary trading and was your firm engaged in it?” Mr. Wallison asked Mr. Moynihan. The Bank of America chief executive responded that there is a challenge to define proprietary trading because, in many cases, the firm is offsetting risks associated with selling securities to customers and other market making activities.

11:50 a.m. | A Bearish Turn: “When was Goldman first alerted to the fact there were serious problems with subprime mortgages?” Mr. Wallison asked. Mr. Blankfein didn’t know exactly when the firm became aware of the the crisis, but he said the firm had turned bearish on housing prices in late 2006 and thought problems in the mortgage market would grow out of declining home prices.

11:46 a.m. | A.I.G. and Goldman: Peter J. Wallison, former general counsel at the Treasury Department, asked if A.I.G. had failed in September 2008, what would have happened to Goldman and its business. “They owed us and eventually paid us a lot of money,” Mr. Blankfein said. Goldman had $10 billion of exposure to A.I.G. and the firm had $2.5 billion in coverage against a possible default plus $7 billion in cash on the balance sheet, he said.

11:40 a.m. | The “Too Big to Fail” Issue: Mr. Blankfein said that if one of his competitors were failing tomorrow, he believed the government would step in to prevent the failure, although it would most likely not be to the benefit of equity holders.

11:36 a.m. | “A Wake-Up Call”: Keith Hennessey asks whether investors in the fall of 2008 were buying bank stocks because they believed there was an implicit guarantee from the government. Mr. Moynihan pointed to spreads in Bank of America’s debt during the crisis to explain that most investors were probably pricing in the fact that the institution would fail.

“I think Lehman sent a wake-up call to every investor our there who thought the government was going to rescue everyone,” Mr. Mack said.

11:25 a.m. | Complexity of Risk: Mr. Thompson asked Mr. Mack how firms should manage the risk associated with innovation. “I think our regulators have to focus on complexity because it continues to jump higher and higher,” Mr. Mack said. He added that regulators needed to be consolidated, but praised the Federal Reserve for its scrutiny of his firm’s internal workings.

11:18 a.m. | The Hearing Resumes: John W. Thompson asked Mr. Blankfein what products were created that served no purpose. Mr. Blankfein said that he was talking about off-balance-sheet vehicles that were not reflected in a company’s financial statements and that it was amazing that those investment vehicles were so widespread after Enron collapsed.

11:13 a.m. | More on Banker Bonuses: Mr. Mack was talking to reporters during the break. “What are people supposed to think when they see these bankers taking big bonuses?” one reporter asked. Mr. Mack noted that he did not get a bonus and that a lot of people had left the banking business over the last two years to take other jobs.

11:06 a.m. | Break Time: The hearing takes a quick break.

11:01 a.m. | “Eat Its Own Cooking”: Byron S. Georgiou, a lawyer who was involved in recovering assets from the Enron bankruptcy, wondered whether an investment bank’s fees for selling certain securities should not be in cash, but in a portion of the actual financial instruments they sold. That would make the firm “eat its own cooking.” He asked the panelists whether they believe in doing this.

“We did eat our own cooking and we choked on it,” Mr. Mack said, referring to toxic mortgage securities. He said that he would take payment in the form of stock or securities, but that it might create some issues with investors and could curtail a firm’s ability to lend.

Mr. Blankfein said he thought it would be hard to organize a method to put more onus on the underwriter. But, there should be more skin in the game. Mr. Georgiou asks if the banks have already instituted any of the clawback provisions.

10:53 a.m. | “A Place of Complacency”: Mr. Blankfein said that his firm noticed that lending standards and covenants on large corporate loans were much lower than usual, but that like the rest of the industry, the firm rationalized those looser standards by arguing that the world was getting wealthier and other excuses. “We talked ourselves into a place of complacency,” he said.

10:48 a.m. | Missing Signs of Too Much Risks: Douglas Holtz-Eakin, the former director of the Congressional Budget Office, asked the panel why the traditional structure of an investment bank failed to figure out the excessive risks that were being taken. Mr. Blankfein said there needed to be more stress tests, which tests whether a bank can withhold various stresses to the system. Mr. Dimon said JPMorgan should have run a test that factored in what could have happened if home prices declined, something the bank did not do before the crisis.

Mr. Mack praised the Federal Reserve for its “diligence” in examining the nation’s banks. Mr. Moynihan said he wished Bank of America had better managed its risks on the consumer side of the banking business.

10:37 a.m. | Performance: Bob Graham asked Mr. Moynihan if Bank of America measures someone’s performance, in part, on how much a person contributes to the overall economy. Mr. Moynihan said a person’s performance was not directly correlated to how much benefit he or she would bring to the entire economy.

10:28 a.m. | Stock and Clawbacks: Mr. Thomas asked Mr. Dimon if he had changed JPMorgan’s compensation structure since the downturn. Mr. Dimon said the bank had always paid 50 percent to 75 percent of total compensation in stock. For his part, Mr. Mack said the biggest change in compensation has been the institution of a clawback provision for bonuses to dissuade short-term risk-taking. Mr. Moynihan echoed that statement.

10:25 a.m. | Compensation and Stock: Responding to a question about compensation from Ms. Murren, Mr. Blankfein said overall compensation at the firm was down 40 to 50 percent in 2008 because of the economy. On the pros and cons of being a public company, Mr. Blankfein said the bulk of his compensation is still in company stock.

10:18 a.m. | Increased Scrutiny: Ms. Murren asked Mr. Blankfein if regulators should increase their scrutiny of an investment bank’s activities. Mr. Blankfein said that there should have been more before the financial crisis, but that Goldman has been regulated by the Federal Reserve only since it became a bank holding company.

10:14 a.m. | 100 Cents on the Dollar: Heather M. Murren asked Mr. Blankfein if he ever received any inquiries about getting less than 100 cents on the dollar for securities held by A.I.G. Mr. Blankfein said a subordinate believed there was a suggestion about possibly receiving less than 100 cents for A.I.G.’s assets, but the issue never rose to his level.

10:07 a.m. | Questions, Questions: 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.

10:03 a.m. | “Nervous Position”: Responding to a question about whether Goldman would have survived despite government assistance, Mr. Blankfein said Goldman was in a “more nervous position than we otherwise wanted to be in,” but the firm never relied on the government assistance. “That being said, I don’t know what would have happened and I know for sure that no one else knows either,” Mr. Blankfein said.

9:55 a.m. | Car With Faulty Brakes: “It sounds like you’re selling a car with faulty brakes and then buying an insurance policy on the car,” Mr. Angelides said. Mr. Blankfein emphatically responded that the investors buying these products were sophisticated and some of the biggest institutions in the world. Mr. Angelides points out they represent the pension funds of teachers and firefighters

9:50 a.m. | Subprime Mortgages: Mr. Angelides pressed Mr. Blankfein about selling securities tied to subprime mortgages while at the same time betting against them. Mr. Blankfein said he “really needs to explain this because the press swirling around this. Because the firm was accumulating positions, “we have to go out ourselves and source the other side of the transaction,” he said. He said there was no simultaneous selling of securities and then betting against them.

9:47 a.m. | Negligent Behavior: Mr. Angelides asked Mr. Blankfein what the two most significant instances of negligent behavior by Goldman Sachs. In response, Mr. Blankfein said his firm got caught up in extending more and more leverage to private equity firms and other and, thus contributed to the froth in the market. Mr. Blankfein stops short of saying the firm was negligent.

9:44 a.m. | Defense of Compensation: The vast amount of our employees played no role in the financial crisis, Mr. Moynihan said, in defending the bank’s current compensation structure.

9:39 a.m. | Brian Moynihan’s Statement: Mr. Moynihan, who took the reins of Bank of America on Jan. 1, said one of the lessons of the crisis is that lending standards are important. Lenders need to pay more attention to whether borrowers can actually repay their debt.

He also touched on the third rail of banking right now: compensation.

9:37 a.m. Regulators did not have the ability or the tools to make sure the system did not take on too much risk., Mr. Mack said. He called for a systemic risk regulator and government-sponsored central clearinghouse for financial derivatives including credit default swaps.

9:32 a.m. “We experienced a classic run on the bank after Lehman Brothers collapsed,” Mr. Mack said, with Morgan Stanley’s stock plummeting to nearly $6 a share.

Mr. Mack said he appreciated the support from taxpayers.

The main problem with banks before the financial crisis was too much leverage, he said.

9:27 a.m. | John J. Mack’s Statement: The past two years have been unlike “anything” he’s seen in his entire career on Wall Street.

The financial crisis has also made clear that regulators simply didn’t have the tools or authority to protect the stability of the system as a whole, he says.

9:26 a.m.: Not surprisingly, Mr. Dimon says size alone and the combination of investment and commercial banking did not cause the crisis. That said, Mr. Dimon emphasized that “no institution should be too big to fail” and shareholders and bondholders, not taxpayers should bear the pain.

9:20 a.m. | Jamie Dimon Statement: “I want to be clear, I don’t blame the regulators,” Mr. Dimon of JPMorgan said, reading from his prepared statement, glasses perched on the tip of his nose. But he pointed out that the current system is broken and needs to be examined in order to help prevent another crisis.

9:16 a.m.: We couldn’t anticipate the extent of the financial crisis, Mr. Blankfein said. “Throughout 2007 we were committed to reducing our risk. The truth is that no one knows what it is going to happen” and that’s what we based our risk analysis on, he said.

9:12 a.m. “We lent money too cheaply” and didn’t recognize that a bubble was forming, Mr. Blankfein said. He added that government should have some regulatory function questioning whether “the system clearly needs to be structured so that private capital instead of public capital” comes to the rescue of financial institutions when they get into trouble.

9:09 a.m. | Lloyd Blankfein Statement: The Goldman chief, reading from his prepared statement, says that too many financial firms relied on ratings agencies’ edicts instead of doing their own due diligence. He’s running through other problems of the crisis, including a failure to see losses early enough to head off the crisis.

“We lent money out too cheaply, and with certain loans without the traditional safeguards,” he says, adding that firms were too concentrated in certain areas like leveraged loans.

9 a.m. | Phil Angelides Statement (PDF): Mr. Angelides, the commission’s chairman, opens the hearing by saying that the commission is probably the last hope for uncovering the causes of the financial crisis. The commission intends to fully investigate the causes of the meltdown, and those called up today may be called upon to testify again.

Placing a level of importance on his commission, Mr. Angelides says: “If we ignore history we are doomed to bail it out again.”

Preview: The Financial Crisis Inquiry Commission was established by Congress to examine the root causes of the financial crisis and the near-collapse of the banking system.

The commission’s proceedings are likely to be widely watched. Many have compared the investigation to the Pecora hearings during the Depression that scrutinized the 1929 stock market crash and brought tighter regulation to Wall Street, including the Glass-Steagall Act, which separated commercial and investment banking.

The commission, made up six Democrats and four Republicans, is holding hearings on Wednesday and Thursday. Its chairman is Phil Angelides, a Democrat and a former California state treasurer who unsuccessfully tried to unseat Gov. Arnold Schwarzenegger in 2006. Its vice chairman is Bill Thomas, a fellow Californian and former Republican congressman who was once the chairman of the Ways and Means Committee.

The commission is expected to issue a report by Dec. 15, although there are concerns in Washington that it will arrive too late to influence the debate over regulatory reform. .

Resource: http://dealbook.blogs.nytimes.com/2010/01/13/live-blogging-4-top-bankers-on-capitol-hill/