Financial Crisis Panel Hears From Top Bankers

Wall Street's top bankers a told panel investigating the causes of the financial crisis that they had done a poor job of assessing risk in the years leading up to the meltdown. At least one banker invoked the "perfect storm" metaphor, only to have the commission chairman shoot back that the storm looked man-made.

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Even as the economy shows signs of recovery, the country's leading banks remain a target of anger. Several of the nation's top bankers were called to Capitol Hill yesterday. They faced questions from the Financial Crisis Inquiry Commission, which is looking into causes of the economic meltdown. NPR's John Ydstie has our report.

JOHN YDSTIE: Phil Angelides, chairman of the commission, opened the hearing with the top executives of four of the nation's biggest banks sitting before him at the witness table.

Mr. PHIL ANGELIDES (Chairman, Financial Crisis Inquiry Commission): People are angry. They have a right to be. The fact is that Wall Street is enjoying record profits and bonuses in the wake of receiving trillions of dollars in government assistance, while so many families are struggling to stay afloat.

YDSTIE: Angelides said the commission, which Congress has charged with documenting the causes of the financial crisis, will follow the facts where they lead, and if necessary, refer wrongdoing to the proper authorities.

The bankers representing Goldman Sachs, J.P. Morgan Chase, Morgan Stanley and Bank of America didn't apologize directly for the role their institutions might have played in the financial debacle. But they all said mistakes were made, including Goldman's Lloyd Blankfein, who said in the midst of the bubble, banks ignored the escalating risks.

Mr. LLOYD BLANKFEIN (CEO, Goldman Sachs): We all rationalize, gosh, the world is getting wealthier, technology has done things. Things are more efficient. These businesses are going to do well. And I think we talked ourselves into a place of complacency, which, of course, after these events, will not happen again in my lifetime, as far as I'm concerned.

YDSTIE: The bankers said they're now dedicating more staff and resources to understanding and controlling risk. Chairman Angelides suggested to John Mack, head of Morgan Stanley, that the problem might be that risk managers aren't paid enough to attract the most talented people.

Mr. ANGELIDES: What's the pay structure and amounts for risk managers versus traders?

Mr. JOHN MACK (Chief executive officer, Morgan Stanley): Well, I would say that we've been very clear, especially in '08 when we changed our head risk manager, who many years ago was a trader, that he can make the same kind of money that our best trader can make. That's the change.

Mr. ANGELIDES: Or - all right. All right. Thank you very much.

YDSTIE: But Angelides suggested the banks' problems went beyond ignoring risk. He chided Blankfein for Goldman's sale of mortgage-backed securities to investors, while at the same time the bank was making bets against the same securities.

Mr. ANGELIDES: I'm just going to be blunt with you. 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. It just - it doesn't seem to me that that's a practice that inspires confidence.

YDSTIE: Blankfein argued Goldman was only selling to very sophisticated investors who understood the risks they were taking.

The commission also heard from a second panel of Wall Street experts, who suggested regulators ignored warning signs, as well as the banks. Kyle Bass of Hayman Financial Advisors said he took concerns about mortgage-backed securities to the Federal Reserve. He told them his analysis showed the banks that owned them would be in trouble, even if home prices fell only a little.

Mr. KYLE BASS (Hayman Financial Advisors): Their answer was home prices always track income growth and jobs growth. And they showed me income growth on one chart and jobs growth on another and said we don't see what you're talking about, because incomes are still growing and jobs are still growing. And I said, well, you obviously don't realize where the dog and where the tail is.

YDSTIE: Ultimately, home prices fell sharply, financial chaos ensued and jobs and incomes declined. The commission hears from regulators today.

John Ydstie, NPR News, Washington.

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