“We’ve gotten our sea legs,” said Phil Angelides.
One witness questioned on derivatives was Joseph J. Cassano, whose unit at A.I.G. contributed to the parent company's crisis.
Phil Angelides speaking on Thursday during a hearing of the Financial Crisis Inquiry Commission.
It was late Thursday afternoon, and Mr. Angelides, the chairman of the Financial Crisis Inquiry Commission, was calling from Washington. He sounded tired but energized. The commission, formed last year to investigate the root causes of the financial crisis, had just finished two very long days of hearings. They had been devoted to — drum roll, please — “The Role of Derivatives in the Financial Crisis.”
Sure enough, the hearings had been book-ended by a handful of regulators and academics who did indeed testify about The Role of Derivatives in the Financial Crisis. But the bulk of the commission’s time was focused on a real-world example of the havoc wrought by derivatives: the unrelenting demand for additional collateral that Goldman sought from the American International Group beginning in the summer of 2007. Those collateral calls, which have been the subject of a series of articles by Gretchen Morgenson and Louise Story in The New York Times, didn’t let up until that fateful weekend in September 2008, when A.I.G., on the brink of collapse, had to be rescued by the federal government. And, of course, Goldman Sachs no longer had to fight for collateral: it was paid off at 100 cents on the dollar.
Were the collateral demands the work of a ruthless predator, acting, as Mr. Angelides suggested in the hearing, like a “cheetah chasing down a weak member of the herd”? Or were they, as Goldman insists, an example of Goldman Sachs’s willingness to look unblinkingly at the deteriorating market for subprime securities — even as its counterparty, A.I.G., remained in denial?
Were A.I.G.’s credit-default swaps — which were supposed to be insuring billions of dollars worth of AAA subprime securities — fatally flawed? Did the collateralized debt obligations — those infamous C.D.O.’s — that Goldman was creating and A.I.G. was insuring offer anything of value to the larger society, or were they simply a means by which Wall Street made giant, useless, bets? Given that the taxpayers have put out $185 billion to prop up A.I.G., these are certainly questions worth asking.
There were no big “gotcha” moments during the hearings. As a result, perhaps, the hearings didn’t get the big treatment on CNBC. (I watched them on the F.C.I.C. Web site.) Nor was the country riveted the way it had been a few months ago, when Senator Carl Levin waved around a Goldman e-mail message that used vulgar language to describe one of its own deals.
What these hearings offered instead were intelligent questions, a refusal to be snookered by witnesses, and a kind of understated pointedness that was more effective than a dozen angry diatribes. The commissioners may not have gotten all the answers they sought, but they were genuinely trying to get answers, instead of preening for the cameras. There was a seriousness of purpose about their effort that has been lacking in most of the hearings in Washington that have tackled the financial crisis.
Will wonders ever cease?
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Let’s be honest: the record of Congressional hearings seeking answers about the financial crisis has been pretty awful. How many hearings were spent “investigating” the government’s efforts to push Bank of America to complete its acquisition of Merrill Lynch? Three? There was plenty of heat, but very little light. Angelo Mozilo, who founded Countrywide, and E. Stanley O’Neal, the former chief executive of Merrill Lynch, were berated for their gaudy compensation, rather than their mismanagement. Richard Fuld, who led Lehman Brothers into the abyss, was batted around like a piñata — a cathartic exercise, but not an illuminating one.
Then there was the most gruesome hearing of all, the one in which Ed Liddy, then the chief executive of A.I.G., was called on the carpet because A.I.G.’s traders were due to get big bonuses that had been negotiated before he arrived. Mr. Liddy, whom the Treasury Department had asked to take over A.I.G. — and whose salary was $1 — never recovered from the trauma of that hearing. He retired a few months later.
Mr. Angelides’s commission didn’t exactly get off to a roaring start either. Its first day of hearings, in January, included helpings of self-serving pablum from the usual suspects, including Lloyd Blankfein of Goldman and Jamie Dimon, the head of JPMorgan, which commission members lapped up uncritically.
But then, as Mr. Angelides put it, the commission got its sea legs. It sharpened its investigative focus, and to a remarkable extent, it has shined its light on the darkest, most difficult-to-understand corners of finance. In recent months, it has heard testimony from whistle-blowers who worked at the rating agencies and saw firsthand how the agencies sold their credibility for market share. It has explored the interconnection between corrupt subprime originators like New Century and an eager Wall Street, which bought its loans no matter how bad they were. It has explored the failure of risk management at institutions like Citicorp.
It helps that there are only 10 commissioners — instead of the 50 or more lawmakers who populate the important Congressional committees. It also helps that none of them are sitting members of Congress, and don’t view their time on stage as a re-election tool. (Most of the time, they even remain in the hearing room when it’s not their turn to ask questions!) Most of all, though, it helps that they actually understand what the witnesses are talking about.
This was never more evident than in their questioning of the A.I.G. witnesses on the first day of this week’s hearing, including Joseph J. Cassano, the former head of A.I.G.’s Financial Products, the unit whose derivative business helped bring down the parent company. Mr. Cassano, who was speaking publicly about A.I.G. for the first time since the crisis began, kept insisting that his division had carefully studied the underlying collateral and even now argued that the AAA securities A.I.G.’s credit-default swaps insured would ultimately retain their value. (The government now owns the securities.)
But the flaw in this argument was obvious — and the commissioners quickly saw through it. It didn’t matter how good the underlying collateral ultimately was. Because Mr. Cassano had agreed to collateral triggers, all that mattered was what the securities did on a day-to-day basis. And he simply had not prepared the company for the possibility that they might decline — and that A.I.G. would have to pay its counterparties billions of dollars as they did.
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