03/18/2010 05:12 am ET | Updated May 25, 2011

FCIC: First Panel Report

You'll be happy to note that all four bank CEOs understand that Too Big To Fail shouldn't exist, and that they've spent a lot of time re-examining their compensation packages. We know this because all four bank CEOs took the upmost pain to describe both these things during the opening panel of the Financial Crisis Inquiry Commission this morning in Longworth House Office Building in Washington D.C. Wednesday morning.

The first panel, consisting of Lloyd Blankfein, CEO of Goldman Sachs, James Dimon, CEO of JPMorgan Chase, John Mack, Chairman of Morgan Stanley, and Brian Moynihan, CEO of Bank of America, started with 10 minute statements from each of the executives before questions. And each of them, in addition to giving a similar high-level story of the crisis that blamed excessive liquidity, easy credit, and high-leverage, mentioned that Too Big To Fail wasn't an option. And with the public suffering from 10% unemployment while Wall Street is ready to enjoy the huge bonuses that have come in part from taxpayer recapitalization, all of them took a minute to discuss changes to their compensation. Moynihan reminded the commission that most of his employees weren't involved with the risky part that collapsed, trying to lay the groundwork for a large bonus season. Blankfein mentioned that Goldman's new compensation structure was also designed to reduce risk.

This did not get them many brownie points from the Commission. Chairman Angelides started the questioning by tearing into Blankfein, questioning him about whether or not Goldman was involved in fraud in the market, and the practice of shorting mortgage-backed securities that they were selling to other investors. In a powerful moment, Blankfein said that "these are professional investors" who were buying the products Goldman was shorting on the side, where Angelides responded "these are the pensions of police officers", pointing out the human costs of these situations that Goldman was able to profit from.

The questioning continued with Vice Chairman Bill Thomas requesting that the record stay open and stating that he wished to submit questions collected by the New York Times to be answered by the CEO's. He then encouraged people to email him ( with additional questions, and said that he hoped as many of them as possible can be answered.

The Commission continued to pile into the Goldman Sachs CEO. Former analyst Heather Murren asked if anyone had contacted Blankfein about whether or not the firm should take a haircut and receive less than 100% of the CDS value that AIG had with them -- money that came straight from the taxpayer. Blankfein, starting to lose his cool, surprised audiences when he said that nobody had ever asked him. Could there be additional fallout from AIG information people don't know yet?

After additional questioning, James Dimon, CEO of JP Morgan -- which is supposed to have one of the best risk management houses on Wall Street -- admitted that their risk management never thought that housing prices couldn't go down. To be specific, he said their 'stress tests', features that form the backbone of part of the Frank Bill (in the living will part of Too Big To Fail), were never run with scenarios where housing prices went down during the housing bubble.

And these are the smartest guys!

Byron Georgiou asked if, since clawbacks are mentioned all the time, any employee has actually had their bonus taken through a clawback for being irresponsible. The CEOs will get that to him in writing later -- they couldn't think of any at the time.

'A Matter of Responsibility'

The question of what responsibility the CEOs have towards the clients they work for lead the second half of questioning. Bill Thomas questioned wether all the complexity that the largest firms provide is really just a form a tax. They make a document 100 pages long instead of 1 page long because it costs more to do the 100 pages, even if there is no benefit to their client. The CEOs dodged this question, though Thomas was smart and brought it into a question about whether or not many of these exotic derivatives should be made simpler and easier to manage through standardization. Again the CEOs dodged, but only after admitting that they are able to charge more for this complexity.

Keith Hennessey pointed out that having Too Big To Fail firms distort the market, since investors are more willing to invest in firms that have an implicit government guarantee. The CEOs pointed out that their spreads have increased post-crisis, defanging the line of inquiry. However, Hennessey asked Blankfein if one of the other three firms present failed tomorrow, whether or not the government would bail them out. Blankfein admitted yes, the government probably would. You could feel the collective sigh of the packed room.

Peter Wallison asked tough questions about the relationship between AIG and Goldman Sachs. He asked whether or not coming under the regulatory umbrella of the SEC caused these banks to leverage up and take huge bets; he was promised information later. He also pushed on proprietary trading within these hybrid commercial/investment banks. Should firms that have access to the Federal Reserve window, designed to protect regular people, be using that to gamble like a hedge fund? Again, they said they would get back to him on this matter.

Finally Brooksley Born asked questions focusing on her speciality: the unregulated OTC derivatives market. Born was pushed out of her job in the late 1990s for saying that the OTC derivatives market, which includes the credit default swaps that blew up AIG, should be regulated, an opinion all the CEOs shared today. Born asked if having clearinghouses during the 00s would have prevented AIG, which Blankfein denies. Born then pushes for exchange-based derivatives legislation , something reformers have been fighting tooth and nail for over the past year but which has constantly been watered down. Born asks what amount of derivatives are 'bespoke', and thus couldn't be standardized; for the last time in the first panel, the CEOs mentioned they'd get back to the commission.

Chairman Angelides ended with a few concluding questions based around an idea: What is the responsibility of a bank like Goldman? Is it proper underwriting, which means making products that have quality to them, or is it simply market making, giving people whatever they want, even if they know it is garbage? Angelides asked point blank if Goldman's due diligence was enough for the investors it was underwriting for, and Blankfein said that it was. Goldman and the rest of the banks came down on the second side of this question, and this is one of the essential knots that reform will have to untangle: what do we expect of our banks? Quality service, or efficient money-making and giant bonuses?

This post originally appeared on New Deal 2.0