Financial Crisis Inquiry Commission

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See also bailout and financial crisis.



Source:A Panel Is Named to Examine Causes of the Economic Crisis New York Times, July 15, 2009

"...They also said they hoped the Angelides commission would play a role similar to the one played by the Pecora commission in the 1930s. The work of that commission, named for Ferdinand Pecora, the investigative counsel for a Senate committee during the Great Depression, contributed to the creation of the Securities and Exchange Commission, the Federal Deposit Insurance Corporation and provisions in the Glass-Steagall Act, which separated investment and commercial banks.

The commission’s deliberations over the coming months could influence efforts by lawmakers to overhaul the financial regulatory system. Senior White House officials and some lawmakers have said they hoped legislation would be completed by the end of this year, although many lawmakers expect it is likely to slide into 2010, particularly because many of the same senators working on the regulatory measures are also heavily involved in trying to create health care legislation.

The commission is supposed to issue a final report at the end of next year...."

First Commission hearing - Jan. 13, 2009

The Financial Crisis Inquiry Commission, a 10-member panel formed by the U.S. Congress to examine the causes of the financial meltdown, will hold its first public hearings on Wednesday and Thursday this week. Here is a list of the witnesses scheduled to appear.

Wednesday, Jan 13:

Panel one, financial institution representatives:

  • Lloyd Blankfein, chief executive of Goldman Sachs Group Inc. Testimony
  • Jamie Dimon, chief executive of JPMorgan Chase & Co. Testimony
  • John Mack, chairman of Morgan Stanley Testimony
  • Brian Moynihan, chief executive of Bank of America Corp. Testimony

Panel two, financial market participants:

  • Michael Mayo, managing director and financial services analyst at Calyon Securities (USA) Inc Testimony
  • Kyle Bass, managing partner at Hayman Advisors Testimony
  • Peter Solomon, chairman of Peter J. Solomon Co Testimony

The heads of Wall Street’s largest banks faced skeptical questions on Wednesday about executive pay and the failures of regulation from the bipartisan commission established to examine the causes of the biggest downturn since the Depression.

Tensions flared as commission members retraced the events leading to the near-collapse of the financial system in 2008 and pressed bankers on whether they or their employees had acted unethically.

Phil Angelides, a Democrat and a former California treasurer who is chairman of the commission, focused on Lloyd C. Blankfein, chief executive of Goldman Sachs. At one point, after Mr. Blankfein likened aspects of the financial crisis to an “hurricane” and similar “acts of God,” Mr. Angelides cut in to say, “These were acts of men and women.”

Critics have accused Goldman Sachs and other Wall Street firms of deliberately packaging troubled mortgages and passing the bonds off as sound investments, a point on which Mr. Angelides pressed Mr. Blankfein.

“I’m just going to be blunt with you,” Mr. Angelides said. “It sounds to me like selling a car with faulty brakes, and then buying an insurance policy on the buyer of those cars.”

When Mr. Blankfein suggested that some complex investment products had been intended primarily for professional investors, Mr. Angelides interjected that the group included “pension funds representing the life savings of police officers.”

Mr. Blankfein said in his prepared testimony that he was not “trying to shed one bit of our industry’s accountability” and that “there is enough blame to go around.” But he also defended Goldman’s risk management and compensation practices, and urged Congress not to go too far in cracking down on trading of exotic instruments like derivatives.

“After the shocks of recent months and the associated economic pain, there is a natural and appropriate desire for wholesale reform,” he said. “We should resist a response, however, that is solely designed around protecting us from the 100-year storm.”

Mr. Blankfein was joined at the hearing by three other Wall Street financiers: Jamie Dimon of JPMorgan Chase, John J. Mack of Morgan Stanley and Brian T. Moynihan of Bank of America.

Mr. Dimon emphasized the fundamental uncertainty in the financial markets.

“You don’t know exactly what’s going to go bad, or exactly what direction it’s going to come from,” Mr. Dimon said, adding, “We didn’t see home prices going down 40 percent.”

At another point, Mr. Dimon told commission member John W. Thompson, a former chief of the Symantec Corporation: “It’s not a mystery. It’s not a surprise. We know we have crises every 5 or 10 years. My daughter called from school and said, ’Dad, what’s a financial crisis?’ ” Mr. Dimon said he told her that it was an event that occurs every few years.

Of the four executives, Mr. Mack in some ways seemed the most supportive of expanded federal regulation. He called for scaling back of proprietary trading, the establishment of a systemic risk regulator and the creation of a federally regulated clearinghouse of derivatives.

“Regulators simply didn’t have the visibility, tools or authority to protect the stability of the financial system as a whole,” Mr. Mack said, adding “we did not do everything right.”

Heather Murren, a former managing director at Merrill Lynch and one of six Democratic appointments to the commission, pressed Mr. Blankfein on whether he supported greater regulation. After Mr. Blankfein went on for a bit, she cut in and asked, “Is there a yes in there?”

That prompted Mr. Blankfein — whose bank used to be regulated by the Securities and Exchange Commission but is now primarily overseen by the Federal Reserve — to respond: “I can’t assert that it’s not enough. It feels like a lot of regulation — and appropriately a lot.”

In their remarks, the bank executives tried to walk a fine line between accepting responsibility and pushing back against regulatory reforms they consider too drastic.

Mr. Dimon urged lawmakers to re-examine the role of regulators in the system, though he noted “the responsibility for a company’s actions rests with the company’s management.”

“No institution including our own should be too big to fail,” Mr. Dimon said in his opening remarks.

Commission members repeatedly brought up the consequences of the downturn for the American people. Nearly seven million Americans have lost their jobs in the downturn, and 17.3 percent remain unemployed or underemployed. More than two million families have lost homes to foreclosure in the last three years and households have seen $13 trillion in wealth evaporate.

Mr. Angelides, who unsuccessfully challenged Gov. Arnold Schwarzenegger of California in 2006, was the most insistent and critical questioner. He asked whether the “perfect storm” cited by so many in the financial sector was in fact “a man-made perfect storm.”

Mr. Angelides at one point told Mr. Blankfein, “I’m troubled by your inability to accept the probability or certainty that your firm would not have made it through the storm without vast federal assistance.”

He added: “Maybe this is like the murder on the Orient Express: everyone did it.”

The 10-member commission, with a budget of just $8 million, is charged with delivering a comprehensive report to President Obama on 22 factors associated with the crisis, from mortgage fraud to regulatory failings. The vice chairman of the panel is Bill Thomas, a Republican and a past chairman of the House Ways and Means Committee.

Second hearing witness list - Jan. 14, 2009

Panel three, financial crisis impacts on the economy:

  • Mark Zandi, chief economist at Moody’s Testimony
  • Kenneth Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at the University of California,Berkeley Testimony
  • Julia Gordon, senior policy counsel at the Center for Responsible Lending Testimony
  • Rusty Cloutier, chief executive of MidSouth Bancorp Inc. Testimony

Thursday, Jan 14:

Panel one, current investigations into the financial crisis – federal officials:

  • Eric Holder, U.S. attorney general Testimony
  • Lanny Breuer, assistant attorney general in the criminal division of the Justice Department [ Testimony]
  • Sheila Bair, chairman of the Federal Deposit Insurance Corp [ Testimony]
  • Mary Schapiro, chairman of the Securities and Exchange Commission Testimony

Panel two, current investigations into the financial crisis – state and local officials:

  • Lisa Madigan, Illinois attorney general [ Testimony]
  • John Suthers, Colorado attorney general [ Testimony]
  • Denise Voigt Crawford, commissioner of the Texas, Securities Board and president of the North American Securities Administrators Association [ Testimony]
  • Glenn Theobald, chief counsel of the Miami-Dade County Police Department [ Testimony]

Greenspan testifies to Crisis Inquiry Commission

UPDATE: 5:30 PM Greenspan: Lehman Brothers Would Have Needed An Additional $68 Billion To Survive - Shahien Nasiripour

Lehman Brothers would have needed an additional $68 billion in capital to survive the financial crisis that forced it into bankruptcy, according to Wednesday testimony given by former Federal Reserve Chairman Alan Greenspan and a Huffington Post review of the firm's regulatory filings.

"I believe that during the past 18 months, there were very few instances of serial default and contagion that could have not been contained by adequate risk-based capital and liquidity. I presume, for example, that with 15% tangible equity capital, neither Bear Stearns nor Lehman Brothers would have been in trouble," Greenspan told the Financial Crisis Inquiry Commission, the panel created by Congress to investigate the roots of the financial crisis.

Tangible equity capital refers to total stockholders' equity, as Lehman Brothers defined it in its second quarter 2008 filing with the Securities and Exchange Commission. As of the end of May 2008, Lehman had about $26.3 billion of this kind of equity.

But the 15-percent figure Greenspan refers to takes the equity number and divides it by total assets. At that time, Lehman had $639.4 billion in assets, for a quarter-end figure of 4.1 percent tangible equity capital.

To meet that 15-percent figure that Greenspan outlined, Lehman would have needed $95.9 billion, or just short of an additional $70 billion.

Put another way, Lehman Brothers would have needed more than two-and-a-half times as much equity capital than it had at the time of the crisis.

Lehman declared bankruptcy in September 2008.

Greenspan offered a reason why firms wouldn't want to squirrel away so much capital.

"Increased capital, I might add parenthetically, would also likely result in smaller executive compensation packages, since more capital would have to be retained in undistributed earnings."

In other words, smaller bonuses.

CORRECTION: Rolfe Winkler at Reuters points out that tangible common equity is defined as total shareholder equity minus preferred stock, goodwill and other intangibles. Also, it's compared against tangible assets, which is total assets minus goodwill and other intangibles. Tangible common equity is the "last, best buffer to absorb losses since it is totally captive capital," emails Winkler, a former analyst at a hedge fund and a chartered financial analyst.

Based on Winkler's definition, HuffPost's calculation was off by a small amount.

Lehman Brothers had about $27.2 billion in tangible equity, not $26.3 billion. Also, Lehman had $635.3 billion in tangible assets, not $639.4 billion. Based off these updated numbers, Lehman would have needed $68 billion to meet Greenspan's proposed requirement, not $70 billion as HuffPost reported yesterday...

Read the rest of the coverage here.

Rubin and Prince testify on Citi's collapse

Charles Prince and Robert Rubin, who led Citigroup (C.N) in the run-up to the 2008 banking crisis, voiced regrets on Thursday, but accepted no responsibility for the mega-bank's massive losses.

The two came under heavy fire in a congressional panel hearing for being blind to Citi taking on huge financial risks under their watch, leading ultimately to the bank's near collapse, prevented only by a $45-billion taxpayer bailout.

His hands visibly shaking as he answered questions, Rubin, formerly U.S. Treasury secretary during the Clinton administration, told panel members that he was not a key decision-maker at Citi during the worst of its troubles.

Former CEO Prince came to the defense of Rubin, saying that as an advisor he was not responsible for Citi's losses. Prince offered up multiple apologies for his own ignorance.

"I can only say that I am deeply sorry that our management -- starting with me -- was not more prescient and that we did not foresee what lay before us," Prince said.

Some members of the Financial Crisis Inquiry Commission -- charged by Congress with explaining the origins of the worst U.S. financial crisis since the Great Depression -- did not buy the two executives' half-hearted mea culpas.

"You either were pulling the levers or asleep at the switch," commission Chairman Phil Angelides said to Rubin.

Citi has been in the crosshairs of the commission for two days now in public hearings occurring just before Congress resumes debate on a raft of financial reform proposals, and as the White House ramps up its push for a regulatory overhaul.

Eight former and current Citi executives have testified. All have basically said that no one, including them, could have foreseen the problems that nearly destroyed the bank.


Vice Chairman Bill Thomas pushed the Citi executives for some explanation of how they personally square the bank's financial calamities with their own lavish compensation packages, saying, "Behavior has to have consequences."

Prince left the bank in 2007 with almost $40 million in bonuses, shares and options. Citigroup paid Rubin more than $120 million for his work at the bank over several years.

Bad bets on repackaged debt securities, consumer loans and other assets forced Citi to take three separate government rescue packages totaling $45 billion, more than any other major bank. When the dust settled, taxpayers held about a third of Citigroup's common stock and $27 billion of its debt.

"The overriding lesson of the financial crisis was that the financial system is subject to more severe downside risk than almost anyone had foreseen," Rubin said. "It is imperative that private institutions and the government act on that lesson."

Rubin tried to clear his name on an old score from the late 1990s, defending his opposition to bringing over-the-counter derivatives under stricter regulatory control.

Back then, Rubin joined with former Federal Reserve Chairman Alan Greenspan in resisting attempts by former Commodity Futures Trading Commission chair Brooksley Born to bring transparency to the unpoliced OTC derivatives market.

On Thursday, Rubin told the commission -- which includes Born -- he was never against more regulation, he simply feared the CFTC's approach would bring dangerous legal uncertainty.

"Financial reform is imperative and should include ... derivatives regulation," said Rubin, a former Citi executive committee chairman and a former Goldman Sachs executive..."

Cassano, Goldman’s Cohn to testify at FICC swaps hearing

Joseph Cassano, who led the American International Group Inc. unit that brought the insurer to the brink of collapse with bad bets on subprime mortgages, will appear before the Financial Crisis Inquiry Commission next week to give his first testimony since leaving the company.

Cassano, 55, had shied away from public statements as U.S. and U.K. regulators investigated his role in the money-losing trades, which he said in December 2007 would be profitable. Cassano left New York-based AIG in 2008, and probes by the Justice Department and U.K. regulators were dropped last month.

“It’s not going to be a pleasant thing,” Ernest Patrikis, a former AIG general counsel, said in an interview. “He owes an awful lot to the people of AIG who were harmed financially,” said Patrikis, now a partner at White & Case LLC.

The panel, led by former California Treasurer Phil Angelides, is reviewing the role of derivatives in the credit crunch. AIG was forced into a U.S. bailout in September 2008 after it was unable to meet collateral calls from Wall Street firms including Goldman Sachs Group Inc. on credit-default swaps. The rescue, which swelled to $182.3 billion, ensured payment of $12.9 billion by AIG to Goldman Sachs on contracts including the swaps.

Goldman Sachs President Gary Cohn and Chief Financial Officer David Viniar will also appear, as will ex-AIG Chief Executive Officer Martin Sullivan, according to a statement today on the FCIC’s website. The hearing will be held June 30 and July 1 in Washington.

Angelides announced on June 7 that the FCIC had subpoenaed New York-based Goldman Sachs, claiming the company tried to hinder a probe by overwhelming the panel with documents and resisting attempts to interview managers including CEO Lloyd Blankfein.

Commission examines "shadow banking system"

Today, the Financial Crisis Inquiry Commission (FCIC) held the first of a three-day hearing entitled “The Shadow Banking System”. Testifying before the FCIC were the following witnesses:

Session 1: Investment Banks and the Shadow Banking System

  • Paul Friedman, former Senior Managing Director, Bear Stearns
  • Samuel Molinaro, Jr., former Chief Financial Officer and Chief Operating Officer, Bear Stearns
  • Warren Spector, former President and Co-Chief Operating Officer, Bear Stearns

Session 2: Investment Banks and the Shadow Banking System

  • James E. Cayne, former Chairman and Chief Executive Officer, Bear Stearns
  • Alan D. Schwartz, former Chief Executive Officer, Bear Stearns

Session 3: Regulation of Investment Banks

  • Charles Christopher Cox, former Chairman, U.S. Securities and Exchange Commission (SEC)
  • William H. Donaldson, former Chairman, SEC
  • H. David Kotz, Inspector General, SEC
  • Erik R. Sirri, former Director, Division of Trading & Markets, SEC

FCIC Chairman Phil Angelides opened the hearing, explaining the FCIC’s interest in studying the nature and scope of the “shadow banking system,” which he defined to include those largely unregulated institutions conducting bank-like activities outside the commercial system, such as investment banks and hedge funds. Mr. Angelides emphasized the extent to which investment banks affect the entire economic system, collectively financing trillions of dollars of economic activity through the sale and management of securitized products, structured products, commercial paper, asset-backed commercial paper, repurchase agreements and derivatives.

Next week, the Financial Crisis Inquiry Commission will hold a two-day hearing in Washington. This time the topic is the emergence of the so-called shadow banking system.

Leading witnesses will include Christopher Cox and William Donaldson, former chairmen of the Securities and Exchange Commission; Tim Geithner, Treasury secretary and former president of the New York Federal Reserve; former Treasury Secretary Henry Paulson; and top officials of financial firms such as Bear Stearns Cos., PIMCO, GE Capital and State Street.

The shadow-banking system refers to the rapid growth in recent years of non-bank financing mechanisms such as commercial paper markets, structured investment vehicles, specialized debt instruments, and the investment banks themselves. In total, these alternative financing vehicles came to rival the traditional banking sector in size by 2007.

But much of this system operated outside the purview of federal banking regulators. When some of the highly-leveraged players in this system got in trouble – notably investment banks such as Bear Stearns – the result was a series of catastrophic runs on those institutions. Some got bailed out or bought out; others went away.

Donaldson and Cox are likely to be stars of next week’s proceedings; they oversaw the SEC at a time when it was relaxing capital standards for some of the biggest players in the shadow-banking system. Bear Strearns had a debt ratio of about 33-to-1 prior to its implosion, investigators found.

The GSE's, Congress and securitization

The panel created by Congress to investigate the roots of the financial crisis grilled former top officials at Fannie Mae on Friday over the tens of millions of dollars they received in compensation and their extensive (and successful) lobbying of Congress.

The firm, along with its corporate cousin, Freddie Mac, were taken over by the federal government in September 2008 after officials determined that the companies did not have enough cash to cover their liabilities and climbing losses.

FCIC Vice Chair Bill Thomas zeroed in on Fannie's lobbying: "Were you ever present at a meting in which there was a discussion about how a particular member of Congress might be approached in attempting to advance the quote-unquote business model of Fannie Mae?"

Robert Levin, former executive vice president and chief business officer at the mortgage behemoth, dodged the question for a few minutes.

He was finally forced to answer the question, which Thomas and FCIC Chair Phil Angelides pressured him to answer with a yes or no response.

"C'mon, yes or no?" Thomas finally snapped.

"Yes," Levin responded.

Fannie had branched out in previous years to buying and insuring billions in riskier types of home mortgages, partly due to political pressure, and partly due to top officials wanting to boost revenue, which led to higher bonuses.

After the housing market collapsed in 2008 and private sources of financing for home mortgages dried up, the federal government, through Fannie, Freddie, and the Federal Housing Administration, stepped in to prop it up. Uncle Sam now enables about nine in 10 new home mortgages.

U.S. taxpayers stand behind trillions of dollars in home mortgages, and will likely lose hundreds of billions. The Obama administration promised to deliver a plan this year on how it will reform the mortgage giants; it punted that decision to next year, after this November's Congressional elections.

While experts and commentators debate the size of the role Fannie and Freddie played in causing the crisis, there's no doubt it was sizable.

The Financial Crisis Inquiry Commission spent Friday speaking with former top officials at Fannie, and their federal overseers.

"Forum to Explore the Causes of the Financial Crisis"

After hearing public testimony from leaders of both private and public sector entities in January, the Financial Crisis Inquiry Commission (FCIC) is bringing together experts who have researched the financial crisis for a forum in Washington, DC on February 26-27, 2010 at American University Washington College of Law.

The economists will present working papers to the Commissioners on the key issues and events leading up to the crisis and its underlying causes. The presentations will be followed by discussion with the Commissioners.

The forum is a part of the Commission's ongoing efforts to hear from academic experts and economists on issues related to the crisis. The Commission has already met with, among others, Martin Baily, Simon Johnson, David Moss, Carmen M. Reinhart, Kenneth T. Rosen, Hal S. Scott, Joseph E. Stiglitz, John B. Taylor, Mark Zandi and Luigi Zingales.

Commission to begin hearings

Yesterday the Financial Crisis Inquiry Commission (FCIC or the Commission), the bipartisan 10- member panel established by Congress to examine the causes of the financial crisis and the events surrounding the September 2008 financial market meltdown, announced the dates for its first public hearing, to take place at 9:00 a.m. on Wednesday, January 13 and Thursday, January 14, 2010 in Room 1100 of the Longworth House Office Building, in Washington, D.C. The subject of the hearing will be the "Causes and Current State of the Financial Crisis."

Jamie Dimon (CEO and Chairman, JPMorgan Chase & Co.), Lloyd Blankfein (CEO and Chairman, Goldman Sachs Group Inc.), and John Mack (CEO and Chairman, Morgan Stanley) are among those scheduled to testify. Brian Moynihan, recently named President and CEO of Bank of America Corp., has been invited and is expected to appear as well.

Earlier this fall, FCIC Chairman Phil Angelides indicated that future witnesses would likely include former U.S. Treasury Secretary Henry Paulson, as well as current and former executives from Fannie Mae, Freddie Mac, Lehman Brothers, Bear Stearns, Merrill Lynch, and AIG.

The January hearings are just the first in what is expected to be an extended series of public hearings in 2010, a period in which the Senate will be debating its version of financial market oversight and regulatory reforms. On December 11, the House of Representatives passed H.R. 4173, The Wall Street Reform and Consumer Protection Act of 2009, which would establish, among other things, clearinghouses for certain types of derivatives, shareholder voting rights on executive compensation packages, and a Consumer Financial Protection Agency.

The Commission has thus far operated below the radar. It has held private meetings, reviewed readily available documents, but has not made many public pronouncements. It has not yet established a website, nor released its official rules of procedure.

However, in late November, the Commission added the following appointments to its senior staff:

  • Christopher P. Seefer (Securities Class Action Partner at Coughlin Stoia Geller Rudman & Robbins LLP – San Francisco) as assistant director and deputy general counsel
  • Gary J. Cohen (Senior Corporate and Finance Partner at Sidley Austin, LLP – Los Angeles) as special business counsel
  • Thomas Borgers (Association of Certified Fraud Examiners – New York) as senior investigator1

The Commission also named Mina Simhai (Associate, Hogan & Hartson LLP – Washington, D.C.) as investigative counsel, and Carl McCarden (Investment Banking Associate, Credit Suisse – San Francisco) as a financial investigator. With the Commission staff more firmly in place and the first substantive hearing now officially on the docket, the Commission's examination of key documents and witnesses can be expected to begin in earnest. Morgan Lewis is well poised to assist your firm to deal with each facet of this investigation as it progresses


1. Further information regarding the Commission's initial senior staff appointments, and other FCIC-related information,can be found on our website at: ( .

"The chief executive officers of JPMorgan Chase & Co., Goldman Sachs Group Inc., and Morgan Stanley will headline the inaugural hearing of a congressional panel investigating Wall Street’s financial crisis.

JPMorgan’s Jamie Dimon, Goldman’s Lloyd Blankfein, and Morgan Stanley’s John Mack will testify next month in Washington, Financial Crisis Inquiry Commission Chairman Phil Angelides said in a telephone interview yesterday. Bank of America Corp.’s incoming CEO, Brian Moynihan, has been invited and is expected to appear as well, Angelides said.

“There’s no question that these institutions were at the center of this storm, not to make any prejudgments about their role in it,” Angelides said. He called the witnesses “key leaders who have been involved in the financial crisis.”

The hearing on Jan. 13 and 14 will kick off the public work of the crisis commission, which was appointed by Congress in July. Privately, the 10-member panel has been meeting with administration officials including Treasury Secretary Timothy Geithner and Securities and Exchange Commission Chairwoman Mary Schapiro.

Publicly, it has taken criticism over the pace of its work. The group’s Web site remains under development and the commission only recently hired an investigative staff. It is required to file its final report by next December.

Fraud Enforcement and Recovery Act of 2009

Fraud Enforcement and Recovery Act of 2009 Authorizing legislation link S.386 ( link)

SEC. 5. FINANCIAL CRISIS INQUIRY COMMISSION. (a) Establishment Of Commission.—There is established in the legislative branch the Financial Crisis Inquiry Commission (in this section referred to as the “Commission”) to examine the causes, domestic and global, of the current financial and economic crisis in the United States.

(b) Composition Of The Commission.—

(1) MEMBERS.—The Commission shall be composed of 10 members, of whom—

(A) 3 members shall be appointed by the majority leader of the Senate, in consultation with relevant Committees;

(B) 3 members shall be appointed by the Speaker of the House of Representatives, in consultation with relevant Committees;

(C) 2 members shall be appointed by the minority leader of the Senate, in consultation with relevant Committees; and

(D) 2 members shall be appointed by the minority leader of the House of Representatives, in consultation with relevant Committees.


(A) IN GENERAL.—It is the sense of the Congress that individuals appointed to the Commission should be prominent United States citizens with national recognition and significant depth of experience in such fields as banking, regulation of markets, taxation, finance, economics, consumer protection, and housing.

(B) LIMITATION.—No person who is a member of Congress or an officer or employee of the Federal Government or any State or local government may serve as a member of the Commission.


(A) IN GENERAL.—Subject to the requirements of subparagraph (B), the Chairperson of the Commission shall be selected jointly by the Majority Leader of the Senate and the Speaker of the House of Representatives, and the Vice Chairperson shall be selected jointly by the Minority Leader of the Senate and the Minority Leader of the House of Representatives.

(B) POLITICAL PARTY AFFILIATION.—The Chairperson and Vice Chairperson of the Commission may not be from the same political party.

Commission issues first subpoena to Moody's

Angered by what it viewed as foot dragging, a special panel charged with getting to the bottom of the nation's financial crisis issued a subpoena Wednesday to compel Moody's Corp. to provide information.

It was the first such subpoena issued by the Financial Crisis Inquiry Commission, and comes days before Moody's chief Ray McDaniel is scheduled to appear Friday before the Senate Permanent Subcommittee on Investigations.

In a statement, commission Chairman Phil Angelides and Vice Chairman Bill Thomas accused Moody's of "failing to comply with a request for documents in a timely manner."

Late Wednesday, Angelides held a teleconference with journalists and said his panel had sent a request to Moody's on March 10 for e-mail records and documents and didn't receive any until after the announcement of the subpoena.

Noting that to date, the commission has received more than 2 million pages of documents from others, the chairman, a former California state treasurer, accused Moody's of stalling.

"What we cannot allow to happen is that we let people run out the clock here, we can't let that happen," said Angelides, referring to his mandate to issue a detailed report to Congress in December.

Commission members

Source: Ex-California Treasurer Angelides to Lead Economic Crisis Probe July 15 (Bloomberg)

"Former California Treasurer Philip Angelides will lead a panel charged by Congress with investigating causes of the financial crisis following public anger at the $700 billion taxpayer rescue of Wall Street banks.

House Speaker Nancy Pelosi and Senate Democratic Leader Harry Reid today announced the appointment of Angelides, 56, who lost to Arnold Schwarzenegger in California’s 2006 election for governor. House and Senate Republicans named former U.S. Representative Bill Thomas as the panel’s vice chairman.

“The commission will conduct a thorough, systemic and non- partisan examination of the failures in both government and financial markets,” Pelosi, a California Democrat, said in a statement. “The American people deserve nothing less than a full explanation of why so many people lost their homes, their life’s savings and their hard-earned pensions.”

The panel, with six members appointed by Democrats and four by Republicans, has subpoena power and may identify firms and individuals judged responsible for contributing to the deepest recession since the Great Depression. Congress modeled the commission on a panel headed in the 1930s by Senate staffer Ferdinand Pecora that led to the creation of regulators and laws that policed financial firms for seven decades.

Democratic leaders also appointed Brooksley Born, former chairman of the Commodity Futures Trading Commission; former U.S. Senator Bob Graham of Florida; John Thompson, chairman of Cupertino, California-based Symantec Corp.; Heather Murren, a retired managing director at Merrill Lynch & Co.; and Byron Georgiou, a Las Vegas lawyer and member of the advisory board of Harvard Law School’s corporate governance program.

In addition to Thomas, a California lawmaker for 28 years until 2007, House Republican Leader John Boehner of Ohio and Senate Republican Leader Mitch McConnell of Kentucky named Douglas Holtz-Eakin, former director of the Congressional Budget Office; Peter Wallison, a former Treasury Department general counsel; and Keith Hennessey, former director of the National Economic Council."

Conflicted interests for panel members and staff alleged

A congressional commission examining the causes of the financial crisis is drawing fire even before its first public hearing gets under way Wednesday, with business interests complaining that some panel members' ties to a major plaintiffs law firm could aid litigants seeking to sue financial firms.

The panel, the Financial Crisis Inquiry Commission, was created by Congress last year and also includes several members with ties to the banking industry. It will begin taking sworn testimony Wednesday from the chief executives of several big Wall Street banks, including Goldman Sachs Group Inc. and J. P. Morgan Chase & Co.

The panel also will hear from federal, state and local officials about their current efforts to uncover wrongdoing.

The San Diego-based law firm with ties to the commission, Coughlin Stoia Geller Rudman & Robbins, has filed dozens of lawsuits against major banks since 2007, according to federal court records. A longtime lawyer with the firm, Byron Georgiou, sits on the 10-member commission. A senior commission staffer, Christopher Seefer, is on leave from his position as a partner with the law firm.

The commission chairman, former California Treasurer Phil Angelides, was a trustee of state pension funds that periodically used Coughlin Stoia's predecessor firms in securities litigation against the likes of former telecommunications giant WorldCom, which collapsed in a massive accounting fraud that resulted in a 25-year prison term for its CEO. Mr. Angelides received about $250,000 in contributions from lawyers with the firm during his 2006 campaign for governor.

"Appointing plaintiffs' class-action trial lawyers to the financial-crisis commission, and to its staff...raises a very real concern as to whether they will use the important work of the commission ultimately to feather their own nests," said Lisa A. Rickard, president of the U.S. Chamber Institute for Legal Reform, an offshoot of the Chamber of Commerce that seeks to ease the burden of civil litigation for businesses.

In a written statement, Mr. Angelides rejected any suggestion he would be influenced by the interests of trial attorneys. "My fellow commissioners and I have one job to do -- to conduct a full and fair inquiry on behalf of the American people into the causes of the financial meltdown. Over the course of my career, I have received support from tens of thousands of individuals and worked with people from all walks of life."

In an interview, Mr. Georgiou emphasized that he doesn't have any financial interest in Coughlin Stoia cases against companies that the commission might look into, and would "certainly" recuse himself if he did. He is of counsel to the firm, and doesn't have an equity interest in it.

Coughlin Stoia was formed when the high-profile securities-litigation firm Milberg Weiss Bershad Hynes & Lerach split in 2004.

Dan Newman, a spokesman for Coughlin Stoia, said critics of the firm's ties to the commission were seeking "to prevent the public from learning the truth about the root causes of the financial meltdown."

A panel spokesman said commissioners have agreed to file financial-disclosure statements, which they aren't required to do. He added that the commission staff is bound by confidentiality agreements that prohibit the use of nonpublic information outside the panel's purview. Staffers also agree not to use their positions to further their own private interests or those of others, according to a copy of the document.

The commission has been ordered to write a final report. It hasn't been determined how much of the information the panel gathers will be made public. Some banking representatives worry that much of it will be. That could save time and expense for plaintiff lawyers who sometimes have to litigate for years to get discovery in securities cases.

The commission letter inviting the chief exectuvies to testify at Wednesday's hearing, for example, asks for a number of admissions that could be useful in a lawsuit. It tells the CEOs to address "what were the primary errors and business practices that caused the financial problems at your company and what actions have been taken to address them."

Some panel members and staffers have close ties to businesses. Vice chairman Bill Thomas, a former Republican congressman, is a government-relations adviser with a law firm that has banking clients. Peter Wallison is a fellow at the conservative American Enterprise Institute and a critic of many financial-regulation proposals. The commission employs a number of lawyers who previously worked for law firms that typically defend corporations, including banks.

Paul Light, a professor of public service at New York University, said the ties to the plaintiff's firm could hurt the commission. "Yes, the banks are in the spotlight, but the commission must maintain its distance from the perception that this is all a 'gotcha' exercise," he said.

IMF Chief Economist on the cause of the crisis

Source: The Crisis: Basic Mechanisms, and Appropriate Policies, Olivier Blanchard Speech at the Munich Center for Economic Studies, November, 2008


" How could such a relatively limited and localized event (the subprime loan crisis in the United States) have effects of such magnitude on the world economy?

To answer this question, I shall proceed in four steps.

First, by identifying the essential initial conditions which have shaped the crisis. I see them as fourfold: the underestimation of risk contained in newly issued assets; the opacity of the derived securities on the balance sheets of financial institutions; the connectedness between financial institutions, both within and across countries; and, finally, the high leverage of the financial system as a whole.

Second, by identifying the two amplification mechanisms behind the crisis, once the trigger had been pulled and some of the assets appeared bad or doubtful. I see two related, but distinct, mechanisms: first, the sale of assets to satisfy liquidity runs by investors; and, second, the sale of assets to reestablish capital ratios. Together with the initial conditions, these mechanisms can lead, and indeed have led, to very large effects of a small trigger on world economic activity.

Third, by showing how the amplification mechanisms have played out in real time, moving from subprime to other assets, from institution to institution, and from the United States, first to Europe, and then to emerging countries.

Fourth, by turning to policies. It is too late to change the initial conditions for this crisis... So, current policies should be aimed at limiting the two amplification mechanisms at work at this juncture. Future regulation and policies should also aim however at avoiding a repeat of some of those initial conditions. In short, we need to both fight current fires and reduce the risk of fires in the future."

Too big to fail, not too big for jail

"U.S. Attorney General Eric Holder appeared before the Financial Crisis Inquiry Commission today. He cited his strong statutory authority to go after the firms that had a role in the worst economic disaster since the Great Depression. His team was tackling securities fraud, accounting fraud, financial discrimination and fraud related to the stimulus bill. It was an impressive list, but what was not impressive was the first case he touted – Bernie Madoff.

You remember Bernie. His kids turned him in. It appears that the FBI considers this the high-water mark of criminal detective work.

The FBI is to be applauded for finally nabbing Mr. Madoff for his 1920s-style ponzi scheme (named for Charles Ponzi a celebrity investor, who managed to build a house of cards off of international postal coupons). But can we talk about the modern era and what one professor of criminal law has characterized as "the greatest elite white-collar crime wave in the history of the world"?

While the FBI reports that it is working on some 5,000 investigations including 2,800 mortgage fraud investigations, Bill Black, who played a key role in the crack-down on S&L officials and the unraveling of the Keating Five scandal 20 years ago, thinks only two numbers matter: "Zero indictments and zero convictions of senior insiders at specialty lending companies."

Commission member Douglas Holtz-Eakin put his finger on another problem with these impressive sounding numbers. "While mortgage fraud was important, it is the magnitude of the financial crisis that is central," he said. Mortgage brokers did not have the capacity to collapse the global economy. It took major banks and securities firms with the ability to package and peddle toxic assets around the globe to do that. But in the year and a half since the Wall Street titans blew a hole in the economy and forced the government to pony up some $14 trillion in rescue funds, not one employee of a major Wall Street firm is behind bars. Not even AIG executive Joseph Cassano, who was labeled the "Man Who Crashed the World" by Vanity Fair.

Compare this to what happened after the S&L crisis 20 years ago, which cost taxpayers approximately $350 billion in today's dollars. According to Department of Justice statistics, no less than 1,852 S&L officials were prosecuted and 1,072 were jailed. 500 were top officers.

What is going on here? Don't we believe in holding people accountable any more?

Black says: "The huge difference between the S&L crisis and now is that back then, regulators were pushing for criminal convictions. They were providing enormous resources to DOJ and the FBI, and they were demanding that they take action. That is what produced the successful convictions along with some very good FBI agents and prosecutors."

This is clearly not happening today. No congressional committee has had a hearing on the slow progress of prosecutions. No members of Congress, certainly not those in the committees of jurisdiction who receive the vast majority of their campaign contributions from the financial sector, are subpoenaing JP Morgan Chase, Goldman Sachs, Bank of America, Lehman Brothers, Bear Sterns or any other financial institution that pushed toxic mortgage-related securities.

That is why an independent Financial Crisis Inquiry Commission is so critical. The commission's message to Holder should be that the big banks may be too big to fail, but they are not too big for jail. The commission should turn up the heat on Holder and the lackluster SEC in an effort to get to the bottom of what the big firms knew and when they knew it, and they should put a spotlight on Ohio Representative Marcy Kaptur's bill to muscle up these efforts with 1,000 new FBI agents.

This exercise in accountability is critical, because, as later witnesses made clear, new waves of criminal financial fraud are already upon us."

New York Times urges specifics on the Commission

Source: The Financial Truth Commission New York Times editorial, July 28, 2009

"Congress has pledged to reform the banking system, but too often over the past year lawmakers have chosen instead to shield the financial industry, a big campaign contributor, from accountability.

So the public has every right to ask whether the newly formed Financial Crisis Inquiry Commission — created by Congress to investigate the meltdown — can be counted on to put the public interest ahead of political loyalties, professional ties and ideological biases. The men and women on the panel are accomplished in their fields — business, law, economics and academia — and many have past government experience. They have been chosen to perform a service that is crucial to restoring trust in the markets and in the government; their findings will also inform regulatory reform efforts.

The 10 members — six chosen by the Democratic leadership, four by the Republican leadership — also have long partisan histories and at least one has strong ties to the financial industry.

The Democratic chairman, Phil Angelides, a former California state treasurer, has given, together with his wife, nearly $327,000 to Democratic candidates over the past two decades, according to the Center for Responsive Politics. The vice chairman, former Representative Bill Thomas, a Republican, received $1.6 million in campaign contributions from financial, insurance and real estate interests during his nearly two decades on Capitol Hill. He is now an adviser to a law firm that represents banking and financial-services clients.

All of this suggests that the commission’s efforts bear close monitoring. Here are some early indicators to watch to see whether they are rising to the occasion.

CHOOSING A LEAD INVESTIGATOR It is imperative that Mr. Angelides and Mr. Thomas agree on a strong investigator — with a proven record of exposing deceptive or fraudulent activities — to serve as the commission’s director. The director must also be given the resources to assemble a strong team of experts and have the commission’s full support to press the investigation.

The law allows the commission to issue subpoenas if the chairman and vice chairman agree or if a majority of the panel agrees, as long as the majority includes at least one Republican. If subpoenas are inhibited by partisan votes, the commission will be hamstrung.

STANDING UP TO THE BANKS The law requires the commission to investigate each failure of a major financial institution during the crisis, such as Lehman Brothers, and each major failure that was averted by assistance from the Treasury. Some banks may try to argue that although they received assistance, they were never in danger of failure, and thus are off limits to commission investigators. But all of the major banks are implicated in the crisis, and none should be outside the commission’s purview.

STANDING UP TO THE GOVERNMENT The law requires government agencies and departments to furnish information to the commission upon request. Even though much of what the panel will investigate happened under President Bush, the executive branch tends to guard its secrets. President Obama has already reserved the right to assert executive privilege. The commission must be willing, if necessary, to fight for access to documents.

The commission is expected to hold its first meeting around Labor Day. As its work unfolds, there will be more benchmarks of success, or lack thereof. For now, it is important that it gets started with the right staff and a commitment to use its powers to the fullest

Risk and regulation timeline


  • May: Over objections of other financial regulators, Born issues "concept release," questioning whether unregulated derivatives contracts should get government oversight like exchange-traded futures contracts do.


  • November: Congress passes law to dismantle Depression-era Glass-Steagall law, which had separated commercial and investment banking. The law does not give the Securities and Exchange Commission authority to regulate investment bank holding companies, which were trading heavily in unregulated derivatives contracts.
  • November: A President's Working Group report on derivatives recommended no CFTC regulation, saying that it "would otherwise perpetuate legal uncertainty or impose unnecessary regulatory burdens and constraints upon the development of these markets in the United States."
  • June: Born leaves the CFTC, with no change in the regulation of derivatives.


  • December: Commodity Futures Modernization Act passes. Championed by Sen. Phil Gramm (R-Tex.), the law bars the Securities and Exchange Commission, as well as the Commodity Futures Trading Commission, from issuing new regulations on unregulated derivatives.


  • April: The Securities and Exchange Commission creates a voluntary program of oversight for investment bank holding companies. It gives the SEC its first comprehensive look at the large trading positions the firms had in unregulated derivatives and mortgage-related securities.


  • September: The Federal Reserve Bank of New York holds discussions with derivatives dealers on creating a voluntary clearinghouse for unregulated derivatives trades.


  • September: Insurance giant AIG is seized by the federal government after it's forced to scramble for cash to use as collateral for $440 billion in credit default swaps it sold.
  • September: Lehman Brothers files for bankruptcy protection after other financial firms demand cash to protect their positions.
  • March: Bear Stearns is rescued by J.P. Morgan Chase and a $29 billion federal government loan after other financial firms question its stability and demand cash to protect their positions with the firm.

Inquiry into financial products and services in Australia

On 25 February 2009 the Parliamentary Joint Committee on Corporations and Financial Services resolved to inquire into and report by 23 November 2009 on the issues associated with recent financial product and services provider collapses, such as Storm Financial, Opes Prime and other similar collapses, with particular reference to:

  1. the role of financial advisers;
  2. the general regulatory environment for these products and services;
  3. the role played by commission arrangements relating to product sales and advice, including the potential for conflicts of interest, the need for appropriate disclosure, and remuneration models for financial advisers;
  4. the role played by marketing and advertising campaigns;
  5. the adequacy of licensing arrangements for those who sold the products and services;
  6. the appropriateness of information and advice provided to consumers considering investing in those products and services, and how the interests of consumers can best be served;
  7. consumer education and understanding of these financial products and services;
  8. the adequacy of professional indemnity insurance arrangements for those who sold the products and services, and the impact on consumers; and
  9. the need for any legislative or regulatory change.

On 16 March 2009 the Senate agreed that the following additional matter be referred to the Parliamentary Joint Committee on Corporations and Financial Services as part of that committee's inquiry into financial products and services in Australia, adopted by the committee on 25 February 2009 for inquiry and report by 23 November 2009:

The committee will investigate the involvement of the banking and finance industry in providing finance for investors in and through Storm Financial, Opes Prime and other similar businesses, and the practices of banks and other financial institutions in relation to margin lending associated with those businesses.

In conducting its inquiry, the Committee made a decision to focus specifically on nonsuperannuation products and services.

House Oversight hearing October 23, 2008

Hearing of the House Oversight and Government Reform Committee on the the Role of Federal Regulators in the Financial Crisis October 23, 2008

The hearing examined the roles and responsibilities of federal regulators in the current financial crisis.

A preliminary hearing transcript is available.

Chairman Waxman's opening statement.

The following witnesses testified:

  • Alan Greenspan, former Chairman, Federal Reserve Testimony
  • John Snow, former Secretary of the Treasury Testimony
  • Christopher Cox, Chairman, Securities and Exchange Commission ++Testimony


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