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Friday, September 25, 2009


Facts and the Financial Crisis

The Financial Crisis Inquiry Commission, created by Congress to examine the causes of the crisis, held its first public meeting last week. In his opening remarks, the chairman, Phil Angelides, a former California state treasurer, likened the group’s potential impact to that of the Pecora hearings in the 1930s, which examined the stock market crash of 1929 and led to transformational changes in banking, investing and financial regulation.

And yet, last week’s meeting was oddly inauspicious, feeding doubts about the commission’s ability to realize that potential.

For starters, the meeting was a long time coming, and thin on substance. It has been four months since Congress passed a law authorizing the commission and two months since lawmakers selected its 10 commissioners — six chosen by the Democratic leadership and four by the Republican leadership.

Just days before the meeting, Mr. Angelides announced the hiring of the commission’s executive director, Thomas Greene, a chief assistant attorney general in California. Mr. Greene has performed ably in various cases, including those involving antitrust issues against Microsoft and civil prosecutions of Enron. But he will need to hire tough Wall Street experts to assist him. He may also find himself hobbled by restraints on his subpoena power, because the commission rules, written by Congress, require that Democrats and Republicans on the commission agree before subpoenas can be issued.

The meeting itself was mainly prepared statements from commission members, describing the group’s mission and expressing their commitment to a full investigation. In their more enlightening moments, some of the commissioners previewed specific concerns to pursue — like the role in the crisis of derivatives, of Fannie Mae and other too-big-to-fail institutions, and of the Federal Reserve and other regulators.

But the real work — gathering documents and taking testimony from financial executives and government officials — will not start before November. Public hearings are not expected until December. A final report is due to Congress on Dec. 15, 2010.

Is that slow start an early sign of drift? Does it reflect the apparent ambivalence of lawmakers to rein in the banks?

To dispel such questions, the commission will have to start now to mount a rigorous inquiry that explains both the underlying and immediate causes of the crisis. Stretching back decades, which beliefs and policies — especially deregulatory efforts — allowed for the tremendous growth of finance as a share of the economy, and for the increasing reliance on debt as the engine of economic growth?

Providing historical context will be easy compared with investigating more recent events, because near-term events involve people still in power. In the run-up to the crisis, what did regulators, particularly the Federal Reserve, know and do in response to unconstrained lending? What were their thoughts about the way banks and investors worldwide increasingly disregarded risk?

Publicly, they did not act to curb the excesses. But internally, was there contrary analysis or dissent? Were there chances to take another course that we may learn from now in hindsight?

Answers to these questions are in files that are not public and in the heads of the people in positions of responsibility at the time. The commission must be aggressive in its pursuit of documents and unflinching in taking testimony at even the highest levels of government and business.

The commission must also trace the facts and circumstances that connect the implosions of Bear Stearns, Fannie Mae, Lehman Brothers and the American International Group. What were the terms of the derivatives contracts between A.I.G. and its counterparties, like Goldman Sachs, which received $12.9 billion via the A.I.G. bailout? What was revealed in the meetings that resulted in the A.I.G. bailout and in the subsequent $700 billion taxpayer-provided lifeline for financial firms? Why was Citigroup, a failing institution last year, treated more favorably than A.I.G.? And to what extent have the survivors of the crash, like Goldman and JPMorgan Chase, benefited from cheap financing, loan guarantees and other government interventions?

In the months since the inquiry commission was created last May, other significant efforts have been undertaken to get to the bottom of the financial crisis.

Judge Jed Rakoff of the United States District Court in New York has demanded that Bank of America and the Securities and Exchange Commission be more forthcoming about the identities of bank officials who may have withheld from shareholders important information relating to BofA’s purchase of Merrill Lynch at the height of the financial crisis.

Bloomberg News has filed a Freedom of Information suit to learn the identities of banks that took emergency funding from the Fed, the amounts and the collateral they offered. The judge in that case has told the Fed to release the names; the Fed has until the end of September to appeal the decision. The Fed should not appeal. The truth will come out, and in the end, the nation will be better for it.

The commission can take its cue from those efforts. Probing questions, asked in order to advance the public interest and with a goal of ever greater transparency, are what Americans have a right to expect — and what the commission, if it so chooses, can deliver.





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