Some of the country's top financial scholars met over the weekend with the panel charged with investigating the causes of the financial crisis. What followed was the kind of open, honest debate that is so rare in Washington.
The event was a forum organized by the bipartisan presidentially-chartered Financial Crisis Inquiry Commission. The academics gathered Friday and Saturday presented their thoughts on topics ranging from Too Big to Fail to subprime mortgages, and then engaged in a running debate among themselves and the commissioners.
But rather than the kind of staid or theatrical hearing often seen in Congress, in which talking points are repeated and participants talk past each other, the academics and the commissioners engaged each other in a running debate in which theories about the origin of the financial crisis were questioned and defended.
The academics pointedly confronted one another, scoffing openly at various points. The commissioners, who include among their ranks powerful former House and Senate committee chairmen, were politely corrected on some points, and not-so-politely interrupted on others.
"I hope they do more of these," said one panelist, John D. Geanakoplos, an economist at Yale University. Bill Thomas, the commission's vice chairman and former chairman of the House Ways and Means Committee, said the panel had been holding such events in private, so it figured it would hold one in public, too.
Held at American University's Washington College of Law, the forum was captured on video, broadcast live and archived on the Internet. Some of the highlights:
- Geanakoplos, whose presentation was on risk taking and leverage, told the panel that the Federal Reserve is not keeping track of leverage -- a scary realization given that excessive leverage was one of the key causes of the financial collapse, he argued.
- Christopher Mayer, a real estate expert at Columbia University, said poor mortgage underwriting practices were one of the causes of the financial crisis. The originate-to-distribute model, in which lenders give mortgages to borrowers with the intent of passing the mortgage on to investors, rather than keeping it for themselves, allowed a lot of bad mortgages to be written because lenders weren't taking on the risk.
- But Dwight Jaffee, a University of California, Berkeley, banking and real estate professor, said just the opposite -- there wasn't enough securitization, he argued. If banks and lenders had been able to securitize more of their loans, rather than keeping them on their books, the risks and losses would have been spread, rather than concentrated at a few institutions. Had that happened, he said, the nation's biggest banks wouldn't have suffered as much as they did.
- Some of the academics, like Mayer, pointed to the failures of the credit rating agencies as one of the drivers behind the crisis. Others, like Yale's Gary Gorton, completely disagreed.
- In questioning specific practices, commission Chairman Phil Angelides brought up the fact that Wall Street firms underwrote mortgages, securitized them, and then sold them to investors -- all the while betting against those securities with their own money. Angelides brought this up a few times, in fact, which may not bode well for the firms that engaged in this behavior, most notably Goldman Sachs. During the commission's last public hearing, in January, Angelides challenged Goldman Sachs chief executive Lloyd Blankfein on this point.
- Anil Kashyap, a professor at the University of Chicago, noted that the financial crisis was largely a failure of risk management. Combing through internal records at the nation's biggest financial firms would shed light on what happened, and why - and Congress doesn't have the resources or appetite for it, he said. Speaking to the commission, Kashyap said: "You're our only hope for getting to the bottom of this."
- On that point, Randall Kroszner, a professor at Chicago and a former Governor of the Federal Reserve System, said that one of the things that concerned the Fed during his tenure was that firms' financial innovation was done to stay one step ahead even of the firms' own internal risk management models.
- Douglas Holtz-Eakin, a commissioner and former director of the Congressional Budget Office, revealed that the FCIC has pending requests of several of the biggest financial firms in the country for internal reports on the firms' risk management practices, particularly on what changes have taken place since the crisis.
- All the academics noted that federal financial regulators don't collect enough of the right kinds of data from the institutions and financial system they're supposed to be overseeing. The coverage gap lends itself to poor supervision and regulation, they noted.
But unfortunately, less than 2,000 people tuned in online to watch the hearings, according to spokesmen for the FCIC and the law school.