Top Bankers Tell Financial Crisis Commission They're Not to Blame

This morning, the leaders of four large banks - Lloyd Blankfein, chairman and CEO of Goldman Sachs; Jamie Dimon, chairman and CEO of J.P. Morgan Chase; John Mack, chairman of Morgan Stanley; and Bank of America's new CEO Brian Moynihan - are testifying before the Financial Crisis Inquiry Commission, a group that will spend this year investigating what caused the financial crisis of 2007-2009 and produce a report in December.Although there weren't many surprises in the bankers' testimony, Dimon, Mack and Moynihan conceded banks had a role in the financial crisis, just not their banks. Blankfein's remarks didn't reflect any sense of responsibility.

In his opening comments, commission chairman Phil Angelides compared his group's work to that of the 9/11 Commission, which conducted over 1,200 interviews, reviewed 2.5 million pages of documents and held 12 days of public hearings. "We should be similarly thorough," Angelides said.

Blankfein, the first to testify, said that Goldman stayed out of mortgage lending and prudently managed risk. He chalked up the crisis to the growth of foreign capital, ten years of low long-term interest rates and "the official policy of promoting, supporting and subsidizing homeownership in the U.S."

Dimon, next up, addressed the issue more directly. "To be sure, there are a number of things we could have done better: the underwriting standards in our mortgage business, for example, should have been higher, and we wish we had done an even better job in managing our leveraged lending and mortgage-backed securities exposures," he said. His view on the underlying causes of the crisis: "the creation and ultimately the bursting of the housing bubble; excessive leverage that pervaded the system; the dramatic growth of structural risks and the unanticipated damage they could cause; regulatory lapses and mistakes; the pro-cyclical nature of policies, actions and events; and the impact of huge trade and financing imbalances on interest rates, consumption and speculation."

Morgan Stanley's Mack also expressed a bit of contrition. "In retrospect, many firms were too highly leveraged, took on too much risk and did not have sufficient resources to manage those risks effectively in a rapidly changing environment," he told the commission. "The financial crisis has also made it clear that regulators simply didn't have the visibility, tools or authority to protect the stability of the financial system as a whole."

Moynihan, the last to speak, gave a thorough analysis of many causes of the financial crisis, including the mortgage fiasco -mortgages made to people with poor credit histories, with small down payments, adjustable rate mortgages that would reset to higher rates, low-documentation loans and an overreliance on mortgage brokers that were given incentives to "get the borrower through" and then sell the loans. He reviewed the CDO and SIV issues that arose in the capital markets, as well as the role of credit default swaps and mark-to-market accounting. Moynihan's statement, which can be found on the FCIC website, would be useful reading for any student of the financial crisis.

P.S. One banker who wrote in to critique this blog said, "I am not sure how anyone seriously covering this financial crisis can exclude the continuing role of Fannie Mae, Freddie Mac and Congress's failure to provide greater oversight over the government guaranteed agencies when there were many indications of fraud, and the systemic risk posed by separating risk and reward."