Confessions of Financial Crisis Contributors: Life After 2008

I am now on a first name basis with Jamie, Lloyd, John, Vikram, Dick and Ken – or at least I think I should be after completing five books on the financial crisis. My new friends of course are J.P. Morgan Chase CEO Jamie Dimon, Goldman Sachs CEO Lloyd Blankfein, , Morgan Stanley Chairman John Mack, Citigroup CEO Vikram Pandit, Lehman Brothers (bankrupt) CEO Dick Fuld, and Bank of America CEO & Chairman, Ken Lewis (now replaced by Brian Moynihan).

I have not been MIA the last couple of months with my face buried in these books, not exclusively anyway. I am no longer income producing due in part to the misdeeds of my friends listed above, although as a flea-size participant in the creation of the housing bubble, I accept some blame. For 30 years I was hard at work getting as much new housing product as possible on the ground at the highest price the market would bear.

On or about October 31st my own personal bubble burst when I admitted that my five readers simply could not push my modest blog to the heights of revenue generation. So I pouted, threw a pity party, then launched into an extended lesson on credit crisis to find out just how I lost all that money that I made while pushing the housing bubble. I was a small player on the bloody battlefield so I decided to turn to the pros to see how they screwed up the gravy train.

My texts for my self-taught course were as follows (and read in this order):

Street Fighters: The Last 72 Hours of Bear Stearns, the Toughest Firm on Wall Street, by Kate Kelly

Dear Mr. Buffett: What An Investor Learns 1,269 Miles From Wall Street, by Janet Tavakoli

The Sellout, by Charles Gasparino

Too Big to Fail, by Andrew Ross Sorkin (my personal favorite)

The Dollar Meltdown, by Charles Goyette

One of the most consistent traits between all of the men populating these books (women made up about .00000001% of the Wall Street boardrooms – just an observation) was the use of their favorite word, “F**K”. Their second favorite utterance – a distant second – was “call Hank”, followed by “call Buffett.” Caveat: I never read that Bernanke used any expletive.

You can imagine my delight yesterday morning when, on the heels of my recent studies, I tuned into the first Congressional hearing of the Financial Crisis Inquiry Commission. This 10-member nonpartisan 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.” This was going to be my day!

In this first session, of what promises to be thousands of hours of testimony and interviews, four financial rock stars of Wall Street prepared to testify as to their role in the 2008 financial meltdown. The financiers included the heads of J.P Morgan Chase, Goldman Sachs, Morgan Stanley and the new chief of Bank America, Brian Moynihan.

Yesterday’s Congressional hearing ranks as a 10 in my book – at least in comparison to prior “grill sessions” by the banshees on the Hill. This session on the financial crisis, was actually productive in drilling down to the forces behind the meltdown that rocked our economy . The committee members for the most part asked intelligent questions and seemed to be prepared to squeeze the truth out of the crisis. Can Congress bear the truth when part of the blame will be laid on their doorstep?

The financial titans admitted that they did not foresee the potential implosion of the housing market. They never thought home prices would take a precipient dive? Yes, they would do things differently now. Yes, they are deleveraging, somewhat. Yes, clawbacks of some sort are in future compensation plans. Yes, we promise to be good boys from now on. We’ve learned our lessons.

The Commission’s line of questioning, while covering the gamut (except for “did you arrive in Washington on a private jet?”) centered on the problems with the financial products, mortgage backed securities and credit default swaps. Lloyd Blankfein found himself on the hot seat right off the bat. Of course, Goldman Sachs, has suffered scrutiny and raised eyebrows from many corners regarding their success before and after the bailout. Taibbi of The Rolling Stone raked them over the coals to much acclaim.

The attention focused on Goldman was probably encouraged by Rothkin’s (Too Big to Fail fame) New York Times article published the day before the hearings that disclosed an email from a Goldman exec that suggested the firm sold MBS products and then turned around and shorted the stocks of the firms taking receipt. In other words Goldman sold the equivalent of toxic loans under the guise of AAA ratings knowing the poor quality of the loans and then placed bets on the losses from those products.

Last month, the Securities and Exchange Commission and Congress began investigating how Goldman and other firms had created bundles of mortgages known as collateralized debt obligations, or C.D.O.’s, that were sold to investors at the same time that the banks had privately bet against the instruments. Some of these C.D.O.’s later fell in value, creating losses for those clients who bought them — and profits for Goldman. Commission chairman, Phil Angelides, likened the practice to selling a car knowing it has bad brakes and then buying a life insurance policy on the buyer. New York Times

Goldman’s culpability has not been confirmed. Disclosures in small print notified buyers of these products that Goldman may take a contrary position to the MBS. Even if not technically illegal, the ethics of such a practice is certainly questionable. Tangled webs beyond comprehension.

Blankfein admitted that they did not complete in-house due diligence on the underlying mortgages packaged into financial products but rather relied on the rating agencies which slapped AAA ratings on many securities with underlying toxic loans.

The Inquiry Commission’s hearings promise to be some of the best theater of the year. I for one will be tuned in. It’s interesting that the first crises participants to testify were four bank leaders that repaid TARP funds and to a large extent are responsible for the $50 billion profit the government made from TARP funding.

President Obama this morning declared his new Bank Tax Plan and vehemently declared he intended to collect money owed to U.S. taxpayers for TARP from these banks that are making “obscene” profits (that would be our four heroes of yesterday). Interesting posturing Mr. President. No mention of the TARP funds paid to GM and Chrysler, Fannie Mae and Freddie Mac which have a snowball’s chance in hell of being repaid. But I get ahead of myself.

This is going to be an interesting year as Congress chases bank profits from the front porch while those same banks fund the politicians with massive contributions from the back porch. The self righteous shall inherit the world: some things inevitably get turned upside down. This should be the year of the turtle, not the year of the tiger. But I’m learning not to second guess the Chinese who seem to be besting us when it comes to capitalism.

More About the Financial Crisis Inquiry Commission (FCIC):

The bi-partisan 10-member Financial Crisis Inquiry Commission was created by Congress and is charged with examining the causes of the financial meltdown. It is also examining causes of the collapse of major financial institutions that failed or would likely have failed had they not received exceptional government assistance. The Commission is comprised of Chairman Phil Angelides, Vice Chairman Bill Thomas, and Commissioners Brooksley Born, Byron Georgiou, Robert Graham, Keith Hennessey, Doug Holtz-Eakin, Heather Murren, John W. Thompson, and Peter Wallison. Findings and conclusions are to be presented in a formal report to Congress and the President by December 15, 2010. Huffington Post

Here is the testimony by Lloyd Blankfein, Goldman Sachs:

Sources:

Voices That Dominate Wall Street Take a Meeker Tone on Capitol Hill, New York Times

Goldman E-Mail Message Lays Bare Trading Conflicts, New York Times

Panel Rips Wall Street Titans, Wall Street Journal

CNBC