The 10 members of the panel, brows furrowed and some furiously taking notes, squared off against the Wall Street chiefs in Washington over the billions in bonuses, and who was really to blame for bringing the financial system to its knees.
But the hearing shifted to new ground when Phil Angelides, chairman of the group, the Financial Crisis Inquiry Commission, bore in on Lloyd C. Blankfein, Goldman Sachs’s chairman.
He asked Mr. Blankfein to explain how his firm could have sold bundles of troubled mortgages at the same time it placed bets with Goldman’s own money that their value would fall.
Mr. Blankfein tried a variation of the tagline used by the Syms clothing chain: “An educated consumer is our best customer.” He said that Goldman’s clients knew what they were buying and that his firm was simply providing a customer service.
“These are professional investors who want this exposure,” Mr. Blankfein said.
But Mr. Angelides had his comeback: “It sounds to me a little bit like selling a car with faulty brakes and then buying an insurance policy on the buyer of those cars.”
The exchange was particularly revealing because it laid bare an essential truth about the Wall Street ethos: if there’s a buyer — no matter how sophisticated — there’s always a seller.
Maybe that’s fine within the confines of Wall Street. But it didn’t work so well when people wanted to buy homes they clearly could not afford and banks were quick to provide them with mortgages.
And it didn’t work so well when companies sought to finance enormous takeovers by leveraging their balance sheets to dizzying heights and banks were happy to provide them with the debt.
Mr. Angelides also dismissed Mr. Blankfein’s line about “professional investors” by saying that those same investors represented the savings of teachers and police officers.
After the hearing, Mr. Angelides said he was frustrated with Mr. Blankfein’s answer. “Mr. Blankfein himself never admitted that there was any responsibility of Goldman Sachs to make sure the products themselves were good products,” he said. “That’s very troublesome.”
Mr. Blankfein took the brunt of other lines of questioning, and when the hearing shifted to more predictable exchanges, he was clearly more comfortable. The executives, for the most part, had figured out how to avoid directly apologizing, despite the commission’s best efforts to pry some admission of guilt out of them.
“Whatever we did, it didn’t work out well,” Mr. Blankfein said. “We regret the consequence that people have lost money.” (John J. Mack, Morgan Stanley’s chairman, who has been the most outspoken about the need for regulation, had apologized at a Congressional hearing last year.)
All of them suggested that reform was necessary, including detailed explanations of how they might put into effect changes to compensation plans and making the sale of derivatives more transparent.
But it was unclear whether it was just lip service. “If the leaders of Wall Street believe regulation is needed, as they stated today before the Financial Crisis Inquiry Commission, then they should tell their lobbyists because they are fighting every serious regulatory change and improvement being considered by Congress,” John Taylor, president of the National Community Reinvestment Coalition, said in a statement after the hearing.
Mr. Taylor also said the banks should be held more accountable for what they sell.
“If the leaders of Wall Street did not consider the possibility of housing prices dropping in their own stress tests and due diligence,” he added, “if they did not know that the F.B.I. had been raising red flags about mortgage fraud since 2004, and if they did not know that high-cost, no-doc, interest-only loans were being made right and left to anyone, then their spirited defense of their employees falls flat.”
“Based on what we heard today,” he added, “they should be firing people, not giving them bonuses.”
To be sure, Mr. Blankfein was correct in saying that his firm had sold the bundles of mortgages, or synthetic collateralized debt obligations, only to sophisticated professional investors who managed large amounts of money and had an appetite for the securities.
He was trying to distinguish them from individual retail investors. And those investors probably should have known better. But, of course, those investors also relied on rating agencies to evaluate these securities — and as it turns out, the ratings were often way off.
For years, most financial regulation has been focused on protecting the individual investor (though its effectiveness is obviously questionable), leaving professionals and wealthy investors to take whatever risks they choose.
But if we learned anything in this crisis, it is that most of the sophisticated financial professionals in the world were no better at predicting the market than some amateur investors. Even Mr. Blankfein highlighted that he did not see the crisis coming.
“I remember being teased at a shareholders meeting in ’07 and being asked what inning we were at in the crisis,” said Mr. Blankfein. “I said we were in the seventh inning of the crisis. As it turned out, we were in the second inning.”
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