Do we really want to know the root causes of the 2008 financial collapse? I wonder.
The bipartisan Financial Crisis Inquiry Commission last week began high-profile hearings on Capitol Hill with that precise mission. So far, the spotlight is on the wrong people.
First up was a panel of four big and popularly reviled Wall Street chiefs. They got the first-day's media attention, especially when inquiry commission chairman Phil Angelides zinged Goldman Sachs CEO Lloyd Blankfein for his investment firm's soulless strategy of selling customers financial products, then profiting by betting against them. Angelides said it was like "selling a car with faulty brakes and then buying an insurance policy on the buyer of those cars."
Good sound bite. But little insight into the '08 meltdown.
The second day focused on the Securities and Exchange Commission and Federal Deposit Insurance Corp., whose heads insisted the days of laissez-faire, lackadaisical oversight are over.
But SEC chair Mary Schapiro was not even running the regulatory agency when it missed the signs of the coming 2008 collapse (not to mention missing Bernie Madoff's immense Ponzi scheme). And FDIC chair Sheila Bair blamed the Federal Reserve for many of the bad decisions behind the market disaster.
Nobody — neither Wall Street nor Main Street banks nor regulators nor rating agencies nor elected politicians flush with campaign contributions nor consumers — saw any good reason to interrupt what looked like a wildly successful financial era.
Boy, were we dupes.
To me, the in-the-trenches witnesses most ignored by mainstream media last week possessed the most enlightening comments.
Veteran bank analyst Mike Mayo testified that banking became an "industry on steroids" by prodigious and reckless lending with "little skin in the game." Flush with so many new loans to package into exotic securities, Wall Street concocted arcane investments like CDOs (collateralized debt obligations) and even "CDO-squared" that "amplified leverage in untested forms."
Amazingly, the FDIC stopped charging banks for deposit insurance back then because everybody felt so flush. And consumers, Mayo says, went right along on the easy-money ride by borrowing more heavily than ever.
To Julia Gordon, Center for Responsible Lending policy counsel, the sad joke was that "subprime lending" did not even increase homeownership. The only reason to mass market such loans to consumers, she testified, was for Wall Street and mortgage companies to push basic lending aside and make quick money by selling (and flipping) large numbers of loans with minimal underwriting.
Says Gordon: "Never have so many toxic loan products been aggressively marketed on such a large scale with such loose lending rules."
And where were the financial police? After the attacks of Sept. 11, 2001, many were reassigned to anti-terror duty, leaving a skeletal law enforcement crew too thin to deal with financial scams.
The FBI is now working more than 2,800 mortgage fraud investigations. Of those, 1,842 are classified as major cases, which means each involves over $1 million in losses. In 2004, just as the housing frenzy grew so intense, the FBI's investigations in this arena numbered only 534.
So, do we really want to know the root causes of the 2008 financial collapse? None of this financial free-for-all would have happened without blessings bestowed by White House administrations, the Congress and an American public only too eager to ride the gravy train of cheap, abundant and unsupervised money for sale.
We're barely scratching the surface so far.
Robert Trigaux can be reached at [email protected]