My Two Questions for Banking CEOs

Blogging The FCIC

I’m going to be blogging the Financial Crisis Inquiry Commission over at New Deal 2.0 for the next two days. My first post, A User’s Guide, is already online. I’ll actually be doing this from Washington DC where I’ll be watching the hearings live. I’ll probably do a post for each of the five panels, panels which I’ve outlined in that User’s Guide, so check it out.

There are many lists of questions being gathered for the FCIC to ask the first panel, the banking CEO panel. Simon Johnson, Andrew Ross Sorkin, Keith Kennessey, and Daniel Indiviglio have all compiled lists of questions. Over at New Deal 2.0 there are the Top Ten Questions for the FCIC from Eliot Spitzer, William Black, and Frank Partnoy, people experienced with examining and investigating white-collar financial fraud.

I have two simple questions, the first important and targeted, the second more general, that are closer to the ground and reflect interests specific to this blog. Both are after the events of 2008, but both are incredibly important for the history and our policy response.

Question One

To Lloyd Blankfein, CEO of Goldman Sachs, [as well as other Banking CEOs]:

Has any representative or lobbyists of Goldman Sachs [or your firm] provided members or staffers of the House Financial Services Committee language or changes to be placed in HR 4173, the Financial Reform Bill? If so, what did that language do?

There is language that has been showing up in the financial reform bill, sophisticated little pieces, designed to kill efficient reform. I blogged about language related to derivatives exchanges, that showed up at the last minute. Also as Newsweek reported, whole pages of law are being inserted into the bill: “The staffer, who would speak only on condition of anonymity, passed on to NEWSWEEK nine pages of proposed changes in the legislation intended to protect trading from open scrutiny—all of it on paper without a letterhead—that she says came from Goldman Sachs.” Other people I’ve discussed this with find this completely credible. I can understand why a staffer would fear retribution for going public; but having the truth come out is what these kinds of commissions are for.

It’s perfectly reasonable to consult with industry leaders when crafting policy – they often know the best. So let’s get Blankfein under oath, explaining exactly how he is trying to change the language of financial reform behind the scenes. God’s work and all that, maybe we’ll all thank him afterwards for the changes if they benefit the public and the stability of the financial sector.

Question Two

During 2009, Treasury and the Federal Reserve announced several plans designed to get financial markets going again. Were you and/or other TARP recipients informed of these plans in advance of both the public and the general market? How much of a role, if any, did you play in designing these plans? And did you take any actions, particularly investment decisions, in advance of these market announcements?

Fall 2008 was a terrible time for our financial markets. There were bad calls and there were terrible calls. The AIG bailout was a disaster. I think TARP was a necessary evil. etc. But looking at that time period one must at least keep in mind, to use the economist Austan Goolsbee’s phrasing: “Look, we enter the government essentially in a hotel that is on fire. We’re throwing people from the windows into the pool to save their lives and this is the evaluation of the Olympic diving committee: Well, the splash was too big.”

The question of what to do with the banks in 2009 was a completely different matter, and any shenanigans that involve distorting markets to try and inflate the asset side of the bank’s books while quietly shifting the liability side to taxpayers is a gross injustice that needs to be investigated. It is well known that the banks were lobbying hard for favorable subsidies through public policy, particularly those surrounding so-called ‘legacy assets’ (the Public-Private Investment Program – PPIP – being the most notable). I think a very unexplored avenue of inquiry would be if they actually were involved with Treasury crafting (or dictating) policy, and adjusting their exposures with information from the government and Federal Reserve in advance of the general market having this knowledge. Did this happen? To what extent did it happen? Let’s get some people under oath; we spend a lot of time focusing on 2008, when there may have been just as many bad calls through the first year of the Obama adminstration.