Thursday, Jan. 14
Written 11 a.m. EST
WILLFULLY BLIND: I was busy writing yesterday, so I couldn't devote full attention to the first day of hearings of the Financial Crisis Inquiry Commission. I wish I could have listened more closely, because the news coverage didn't reflect what I thought I heard.
The commission is this year's answer to the Pecora Commission of 1932, which investigated the roots of the 1929 stock market crash. The FCIC is charged with finding out what led to the financial crisis that began in February 2007, peaked in the fall of 2008, and continues.
There are a lot of theories about the origins of the financial crisis. Most people believe that the story begins with the housing bubble. Why did the housing bubble inflate, and why did it burst when it did? In my view, it's a complex story in which investment banks, government policies, Fannie Mae and Freddie Mac, and Federal Reserve monetary policy interacted with human greed and stupidity. There's plenty of blame to go around, but flawed human nature bears some responsibility, too. You can't change human nature, but you can channel it with carrots and sticks.
In its first hearing, the FCIC invited or subpoenaed the heads of four financial titans: Goldman Sachs, JPMorgan Chase, Morgan Stanley and Bank of America. Fred Cannon, an analyst at Keefe, Bruyette & Woods, told Bloomberg TV: "So far this is more of a show trial than an investigation." That seemed a rather odd characterization; a show trial has grave consequences, and this hearing didn't.
The Wall Street Journal's coverage tended to focus on the personal angle, pitching the hearing as a confrontation between angry commission members and defiant bank executives. But then, that's the way most reporters like to portray conflict -- as something personal, rather than a clash between entities with competing interests. That way, reporters don't have to dig into boring details, so instead of explaining, say, the competing interests of Iran and the United States, they can write about how Ahmadinejad hates Obama's guts.
There were two revealing exchanges that I caught. First, a commissioner asked Lloyd Blankfein, CEO of Goldman Sachs, if Goldman ever scrutinized individual subprime mortgage loans that it securitized. No, Blankfein said, because professional investors wanted those subprime mortgage-backed securities.
In other words, it didn't matter to Goldman Sachs whether homeowners would repay their subprime loans, just as it didn't matter to the brokers and lenders who originated those loans. Investors, both here and abroad, wanted subprime and Alt-A loans -- in many cases, the riskier the better. Goldman Sachs and its competitors on Wall Street were giving investors what they wanted.
The other revealing exchange came from J. Kyle Bass, a hedge fund manager in Dallas who made a huge profit by betting that there would be a housing crash. He described a couple of meetings that he had while the housing bubble was inflating, in which he gave a presentation that predicted a collapse in house prices.
First, in September 2006 Bass met with some bigfoots at the now-deceased Bear Stearns and warned them that they were in serious trouble if house prices leveled off, and that the investment bank could go under if house prices fell. Bass says the chief risk manager patronizingly told him, "'Kyle, you worry about your risk management and we'll worry about ours.' That's the last time I spoke with them."
Later, Bass gave the same presentation to some Fed officials. They told him, "Home prices always track income growth and jobs growth," Bass testified. "And they showed me income growth on one chart and jobs growth on another, and said, 'We don't see what you're talking about, because incomes are still growing and jobs are still growing.' And I said, 'Well, you obviously don't realize where the dog is and where the tail is, and what's moving what.' It was my opinion, which they disregarded."
You didn't have to be a genius hedge fund manager to see the bubble. In August 2005, I wrote a series of articles about ordinary people who sold their homes because they believed they were near the top of a bubble. I thought we were in a bubble, based on the disparity of rental rates and house prices. I was right, and I'm not mathematically sophisticated. The bubble was there for anyone to see. But big shots at the investment banks and at the Fed didn't want to see it.
RATES: Mortgage rates fell for the second week in a row (but not by much). In this week's Rate Trend Index, our experts believe that mortgage rates are unlikely to go lower.