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

Angelides Should Call Those Who Warned the Bank CEOs Early

No one knew about how bad this credit crisis would be. So why hold Wall Street CEOs responsible? Why hold Fed chairman Ben Bernanke or then-New York Fed president Tim Geithner responsible for failing to foresee the ramifications until it was too late? The financial system just tilts towards disaster every one in a while. It's the price of free market prosperity. Don't blame us. The Obama administration seems to accept this view, especially given how little they are willing to shake up the Wall Street community. No one really knows what was going on.
As the Congressionally-appointed Angelides Commission at last holds its first hearings this week to determine the cause of the crisis, this myth should be among the first to go. In fact, many did know! And the recent literature about the crisis, penned by former bankers, traders, academics, and some darned good journalists, has opened the public's eyes to some of the facts. The Angelides Commission is first calling CMOs like Lloyd Blankfein of Goldman Sachs, Jamie Dimon of JP Morgan Chase, and John Mack of Morgan Stanley to testify. They will glide through unharmed.
Who we really want to hear from are lower level executives who understood the market, warned about them, and told their bosses (who often ignored them). For example, Jeffrey McDonald, a former bond trader at Lehman Brothers, writes in his book, A Colossal Failure of Common Sense, how Mike Gelband, the new head of global fixed income at Lehman, warned the firm as early as June 2005 that the mortgage backed investments they were making by the billions of dollars were highly dangerous. Eventually, according to McDonald, he told not only his boss, Dick Fuld, but also the Bush Treasury Secretary, Henry Paulson, about his fears.
Charles Gasparino, a dogged former Wall Street Journal reporter now with CNBC, reports that Lawrence Lindsey -- the outspoken former Bush chief economist, and later a highly paid consultant to Lehman -- warned the firm to cut its exposure to sub-prime bonds in June 2006. Fuld did not listen.
Gasparino reports that there were high-level doubters at Salomon who could not get through to top management about the risks being taken. Jamie Dimon -- the one prominent CEO who cut risk during the storm, and who merged his Bank One into JP Morgan Chase -- ironically learned of the dangers of mortgage backed securities, reports Gasparino (the tip comes from an analyst at Bear Stearns), while Bear was aggressively buying up more mortgage-backed securities. Hedge fund managers at Bear Stearns were warning that all could collapse in early 2007, according to e-mails. Bear Stearns sold out for almost nothing to Dimon at JP Morgan Chase.
Stan O'Neal, the man who buried Merrill Lynch, isolated himself from many in his firm who had serious doubts about the mortgage backed markets he was aggressively pursing in 2007. He was forced about, but took home a pay package that year of about $200 million. Merrill sold out at distress prices to Bank of America the next September. made . markets he .
Some academic papers were written by late 2006 that showed how vulnerable the new Wall Street collateralized debt obligations were to rising levels of mortgage defaults. Joseph R. Mason, a professor, and Josh Rosner, an investment specialist, wrote a key analysis, which they presented in early 2007 at the Hudson Institute. They found that defaults that were already occurring in 2006 would soon hurt the value of the CDOs on the books. Most ominous, they discovered that federal regulators were not entitled to look at the composition of the CDOs. No regulator seemed to know.
And there were doubters as well at the private credit ratings agencies, like Standard & Poor's. How could you rate a package of mortgage securities without analyzing the underlying loans, some asked their bosses. No one looked at the file of borrowers in these enormous pools of 10,000 mortgages. They largely depended on the veracity of the mortgage brokers. Keep quiet and do the job, the doubters were told.
Ben Bernanke, who sits atop the smartest bunch of economic analysts in America at the Federal Reserve in Washington, did not know as late as May 2007 that defaults in subprime mortgages could devastate the assets and trade by commercial and investment banks. When so many others did, and even published the information, why didn't he? And of course where was the New York Fed branch under Geithner?
Angelides and his colleagues have to call the CEOs to testify first, I suppose. But they should really be called last. The commission must talk to the traders and analysts themselves to find out who knew what and when. They must get the e-mails if they can't get the testimony--by subpoena if necessary. It's at these managerial levels where the truth lies. Then they should call the CEOs and the regulators. Only then will they prepared to get the full truth out of them.