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Shadow-Boxing With the CEOs: Day One at the Financial Crisis Inquiry Hearings

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The heads of Goldman Sachs, JP Morgan Chase, Morgan Stanley, and Bank of America came to testify and said... just about nothing.

Yes, they made mistakes. But gee, they had learned a great deal and they certainly didn't cause the crash. They promised they are managing risk better, even though they claimed always to have done so. Also, they insist they are not too big too fail and they are reforming compensation so we shouldn't worry about their sky-high compensation packages.

After these predictable pronouncements, Phil Angelides -- the former Democratic California State Treasurer and Chairman of the Financial Crisis Inquiry Commission (FCIC) -- came out swinging at Lloyd Blankfein, CEO of Goldman Sachs. But he ended up shadow-boxing.

Angelides threw his best punches at Goldman Sachs concerning reports that it provided toxic assets to customers while it was betting against them. "It sounds to me a little bit like selling a car with faulty brakes and then buying an insurance policy on the buyer of those cars," said Angelides.

Blankfein easily parried the punches by explaining that that's what market makers are supposed to do. He then diverted the conversation into technical language that few of the public can understand. Meanwhile, the big questions weren't asked.

Angelides almost cornered Blankfein with the question of whether or not Goldman Sachs would have gone under had it not been bailed out by the taxpayer. Blankfein again successfully parried the punches by saying, No one knows. We were doing the best they could, and better than everyone else.

Angelides' best punch came when he listed a slew of government programs that supported Goldman Sachs: TARP, the AIG pass through of taxpayer money, no-interest loans from the Fed, guarantees from the FDIC and more.

Blankfein bobbed and weaved. But Angelides missed the chance to nail him. It was the perfect time to bring up the fact that AIG gave Goldman Sachs our money to cover its bets at 100 cents on the dollar.

This is key to the allegations that Geithner pressured AIG to give Goldman Sachs $12.9 billion dollars to settle bets whose market value was about $2 billion. This was clearly a gift of taxpayer money that has directly fattened the bottom line of Goldman Sachs and their bonus pool. (See GeithnerGate)

Heather Murren, a former Merrill Lynch analyst chosen by the Democrats for the Commission, pushed Blankfein at bit more: "Did anyone ask you to take anything less than 100 cents on the dollar?"

Blankfein said other staff had that discussion but it never really came up to him. Unfortunately, she backed off and didn't follow up with the obvious question: "Shouldn't you have taken much less -- yes or no -- since you admitted already that you didn't really need taxpayer support?"

The answer might have had severe consequences for Geithner and for Goldman Sachs' outrageous bonus pool. Clearly, Geithner helped Goldman Sachs walk off with taxpayer money that it didn't need then and certainly doesn't need now. Tough public questioning might help provide Obama the basis for taxing it back.

Overall, the Commission let the big boys off the hook. Here are the kind of questions they failed to ask and if they don't ask them soon, the American people will tune out.

1. Now that you've paid back TARP, how much government support are you getting currently from various government programs? This would punch through the PR spin that says the big banks have paid back the government. The reality is that these highly profitable institutions are still taking advantage of an array of government financial programs that are padding their bottom lines and bonus pools.

2. Given all the mergers that have taken place during the crisis, is your institution, right now, too big to fail? If so, shouldn't we break you up? The committee should be setting up the basis for the break up of these giant companies. Keith Hennessey, a Republican, started to get there. The other commissioners should help him follow-up.

3. How do you justify having your employees earn 10 to 100 times the compensation earned by the leading neurosurgeons? The Commission needs to point out that the pay scale is wildly excessive in the financial markets and that it represents a distortion of our entire system. The free market alone cannot correct it. There is no economic justification for it.

4. Are your banks paying for lobbyists that are working against efforts to create a Financial Consumer Protection Agency? This is the perfect time to get these bankers to explain how they are lobbying against the public's interest.

5. Given all the support you have received (and are still receiving), and given all the damage your industry has done to the economy and to the lives of millions of Americans, why shouldn't the government place a windfall profits tax on your near record profits and bonuses? This might pressure the Obama administration to get back some of our money.

Dynamite from one Expert Witness:
In its second panel, the Financial Crisis Inquiry Commission heard from Kyle Bass, of Hayman Financial Advisors, who read a statement that had some juice to it. I don't know this guy, but it's pretty clear no PR flack scripted him.

He took direct aim at the fiction that top traders at troubled institutions like AIG must receive top compensation or we will lose the vital "talent" needed to unwind their complicated bets. Those traders at AIG placed more than $450 billion in bets on toxic securities. The traders, of course, made these bets because of the enormous fees and bonuses they received.

But why should we continue to pay these traders, given their disastrous track records and the fact that the taxpayer is bailing out AIG to the tune of more than $150 billion? Unfortunately, the Obama administration is going along with the myth that these traders need to receive large compensation packages because if they leave AIG, it will hurt the taxpayers' investment.

But Bass demolished that argument by saying flat out that he knew of hundreds of unemployed derivative brokers who would gladly to do the job for $100,000 a year instead of for millions. The trading emperors have no clothes.

Too bad the commissioners didn't bring up that argument to the CEOs before them in the AM session. The commission should hire Bass for its staff.

It's only Day One of the hearings, but they let the big fish get away. Let's hope they find other witnesses to help capture the public's attention.

(I'll be live blogging the hearings at Campaign for America's Future)

Les Leopold is the author of The Looting of America: How Wall Street's Game of Fantasy Finance destroyed our Jobs, Pensions and Prosperity, and What We Can Do About It Chelsea Green Publishing, June 2009.