Bankers Walking a Fine Line at Hearing
WASHINGTON — The bipartisan commission established by Congress to examine the causes of the financial crisis summoned the heads of four large Wall Street banks on Wednesday to defend their lending, risk management and pay practices and explain their companies’ role in the biggest economic downturn since the Depression.
The 10-member commission, with a budget of just $8 million, is charged with delivering a comprehensive report to President Obama by Dec. 15 on 22 factors associated with the crisis, from mortgage fraud to regulatory failings.
Long before the 9 a.m. start of the hearing, throngs of journalists surrounded the hearing room of the House Ways and Means Committee, hoping to catch the four bank leaders: 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.
The panel is being led by two Californians. The chairman is Phil Angelides, a Democrat and a former state treasurer; the vice chairman is Bill Thomas, a Republican and a past chairman of the House Ways and Means Committee.
It was not long before Mr. Angelides had begun intense questioning of the bankers. He pushed Mr. Blankfein to identify two instances of “negligent and improper behavior.” Mr. Blankfein stopped short of adopting Mr. Angelides’ language, but he acknowledged there had been “too much leverage” in mergers and acquisitions transactions.
“I think those were very typical behaviors in the context that we were in,” Mr. Blankfein said.
Mr. Blankfein said that while the financial crisis began in the mortgage market, “three broad underlying factors” were also to blame: huge growth in pools of foreign capital, “nearly 10 low long-term interest rates,” and federal policies to promote homeownership.
Of the four executives, Mr. Mack in some ways seemed the most supportive of expanded federal regulation. He called for scaling back of proprietary trading, the establishment of a systemic risk regulator and the creation of a federally regulated clearinghouse of derivatives.
“Regulators simply didn’t have the visibility, tools or authority to protect the stability of the financial system as a whole,” Mr. Mack said, adding “we did not do everything right.”
In their remarks, the bank executives tried to balance a fine line between accepting responsibility and pushing back against regulatory reforms they consider too drastic.
Mr. Blankfein, for example, said in his prepared testimony that he was not “trying to shed one bit of our industry’s accountability” and that “there is enough blame to go around,” but he also urged defended Goldman’s risk management and compensation practices, and urged Congress not to go too far in cracking down on derivatives trading.
“After the shocks of recent months and the associated economic pain, there is a natural and appropriate desire for wholesale reform,” he said. “We should resist a response, however, that is solely designed around protecting us from the 100-year storm.”
Jamie Dimon, the head of JPMorgan Chase, urged lawmakers to re-examine the role of regulators in the system, though he noted “the responsibility for a company’s actions rests with the company’s management.”
“No institution including our own should be too big to fail,” Mr. Dimon said in his opening remarks.
In his opening remarks, Mr. Angelides laid out the cost of the economic downturn to the American people. Nearly seven million Americans have lost their jobs in the downturn, he said while nearly 25 million — over 16 percent of work force — are unemployed or underemployed. More than two million families have lost homes to foreclosure in the last three years and households have seen $13 trillion in wealth evaporate.
“People are angry,” Mr. Angelides said in his opening remarks. “They have a right to be. The fact that Wall Street is enjoying record profits and bonuses in the wake of receiving trillions of dollars in government assistance — while so many families are struggling to stay afloat — has only heightened the sense of confusion.”
Javier C. Hernandez contributed reporting from New York.