Financial Crisis Inquiry Commission Hearings

The hearings for the Financial Crisis Inquiry Commission are going on right now. Zachery Kouwe of the New York Times’ blog Dealbook is “live-blogging” the hearing right now (how’s that for an example of compound-transitive-verbing?!).

Meanwhile, today’s NYT op-ed section has a nice survey of questions some experts would like to ask the bankers in the hearings. My favorites are from Simon Johnson of MIT and Yves Smith of Naked Capitalism:

1. Describe in detail the three worst investments your bank made in 2007 and 2008—that is, those transactions on which you lost the most money. How much did the bank lose in each case?

2. What was the total compensation of each manager or executive supervising those three transactions—including yourself—in 2007 and 2008?

3. Are those executives still with your bank? What investments do they supervise today? How much will they be paid for 2009, including their bonuses?

—SIMON JOHNSON, a professor at the M.I.T. Sloan School of Management and a senior fellow at the Peterson Institute for International Economics

Some of your firms received payouts on credit-default swap contracts with American International Group. Most of those guarantees resulted from hedging supposedly safe investments (they had AAA ratings, after all) with A.I.G. or other insurers. This hedging allowed traders to book “profits” that had not yet been earned—profits that would be counted in calculating their bonuses.

However, this insurance was likely to fail, as your risk managers surely knew. It involved so-called wrong-way risk: the guarantor (A.I.G.) was certain to be damaged by the same event (the housing market collapse) that would lead you to seek payment on the insurance. The insurance was effective only because the government stepped in, theoretically on the taxpayers’ behalf, and made payments for A.I.G., an otherwise bankrupt firm. Since employees’ bonuses, and ultimately yours, were based on these fraudulent profits, my questions are these:

1. How much profit did your firm record for bonus purposes on these trades that ultimately delivered huge losses? How much of those bogus profits were paid out in bonuses?

2. Have you made any effort to recover the bonuses? If not, why not?

—YVES SMITH, the head of Aurora Advisors, a management consulting firm, and the author of the blog Naked Capitalism and the forthcoming book “Econned: How Unenlightened Self-Interest Undermined Democracy and Corrupted Capitalism”

Read the full list of questions.

Speaking of Yves Smith, she had some interesting things to say today about something that is looming behind today’s hearings: the Obama administration’s recent talk of levying some kind of tax/fine on the big banks–separate from the tax on transactions that many have been calling for, and from the idea of a special tax on bankers’ bonuses. (A NYT editorial today (? or yesterday–I can’t tell) came out in favor of the new tax/fine, but called for a tax on bonuses on top of that.) But according to Yves, the O. admin. will come out with a more concrete proposal today:

Obama to Announce $120 Billion TARP Fee

Ah, the machinations that Faustian bargains produce!

The Obama Administration is now caught in its own machinations and is having to backpedal fast and hard from its bankster friendly posture, or at least have the public believe it is executing that maneuver.

While I cannot fathom the logic, Team Obama clearly decided to throw in its hat with the industry from the beginning, supporting a whole raft of tricks to keep banks from recognizing losses (heavens, might expose that some were bankrupt and require that incumbents be given the heave ho!). It also assisted in the “talk up the bank stocks” effort, since goosing prices would allow some banks to sell shares and save the new Administration the unpleasant task of figuring out how to resolve and recapitalize the sickest bank. It never seemed to occur to them that the best time for a President to take unpopular but productive action is at the start of his tenure. Nor did they anticipate that the public was not as dumb and inattentive as they assumed, and has taken notice of how the Administration has hitched its wagon to that of the plutocrats.

Now some readers might argue that, gee, things look better than the did in March, surely this Team Obama program was not such a bad idea. Well, actually, it was and is. The record of serious financial crises shows that regulatory forbearance (which is letting banks soldier on with the hope they will earn their way out of their messes over time) is more costly than forcing them to recognize losses and recapitlize them. Not only are the ultimate bailout costs higher with the “let ‘em off easy” approach, but economic recovery is weaker too.

Team Obama is now having the contradictions in its stance exposed. If the banks were really healthier due to their own efforts, the salvos against them would be unwarranted. Here they had gone over the brink, pulled themselves up by their bootstraps. All these complaints about their earnings and bonuses are mere class jealousy. But no one save the banksters themselves believe that tripe. The banks got massive subsidies during and after the crisis; they continue now with the Fed’s super low rates and continued intervention in the mortgage markets (theoretically ending in March, but most informed observers expect the central bank to blink).

But Team Obama does not want to play up the extent to which the industry has benefitted from public munificence; that only stokes the deserved and correct public anger, which includes the Administration for cutting such a crappy deal with the industry. So it has the PR conundrum of having it be beneficial for political reasons for them to beat up on the financiers, but now being so deeply aligned with them as to make that impossible, save perhaps on a few narrow issues that it hopes will have sufficient peasant-appeasement value. Any full-bore attack would represent an embarrassing change from the Administration’s past fawning posture, and would also require the sacrifice of a senior head or two, presumably starting with Timothy Geithner, to look credible. But Obama seems constitutionally incapable of firing anyone, no matter how much it would serve him to do so.

The sketchy announcement du jour, that Obama will announce a $120 billion TARP fee this week (hhm, conveniently timed to distract attention from the start of the hearings into the crisis and Wall Street bonus announcements) illustrates the bizarre position the Administration is in. Alert readers may recall that Obama was touting the performance of the TARP at his Lehman anniversary speech in September. It repeated that palaver in December.

Read the rest of the post.

We will be on the lookout for the best analyses of and commentaries on the testimony in today’s hearings. If you find something particularly cogent, let us know.