In Washington tomorrow, the first hearing of the Financial Crisis Inquiry Commission, what hopefully turns out to be as revealing as the Pecora investigation into the crash of ’29 did in the thirties, will convene. In his column today in The New York Times, Andrew Ross Sorkin, whose book Too Big to Fail is an excellent account of the crisis of 2008, suggests some questions which ought to be put before the heads of the giant banks who will give testimony. Sorkin suggests a question for Lloyd Blankfein of Goldman Sachs. It’s not rude, but it sure does seem to pack a wallop: “Mr. Blankfein, your firm, and others, created and sold bundles of mortgages known as collateralized debt obligations that it simultaneously sold short, or bet against. These C.D.O.’s turned out to be bad investments for the people who bought them, but your short bets paid off for Goldman Sachs. In the process of selling them to institutional investors, however, your firm lobbied ratings agencies to assign them high ratings as solid bets — even as your firm planned on shorting them. Could you explain how Goldman bet against these C.D.O.’s while simultaneously trying to persuade ratings agencies and investors that they were good investments? Were they designed from the outset to be shorted by Goldman and possibly select clients? And were those clients involved in helping design these transactions? What explicit disclosures did you make to Standard & Poor’s and Moody’s about your plans to short these instruments? And should we continue to allow transactions in which you’re betting against what you’re also selling?”
And why, Sorkin might have added, isn’t shit like this illegal?!?!? I mean, we lock up people for multifarious methods of committing fraud, how come there’s no penalty for the guy who says “Buy this, it’s really good,” while simultaneously saying “Let me short this stuff, it’s going to crash and burn!”?
Here’s another question from Sorkin that he poses for any of the bankers: “All of your firms are involved in some form of proprietary trading, or using your own capital to make financial bets, not unlike hedge funds and other private investors. As the recent crisis has shown, these bets can go catastrophically wrong and endanger the global financial system. Given that the government sent a clear signal in the crisis that it would not let the biggest firms fail, why should taxpayers guarantee this sort of trading? Why should the government backstop what amounts to giant hedge funds inside the walls of your firms?”
This is especially pertinent, since what we’ve seen is that the bankers keep the profits, but the taxpayers get the losses. Capitalism for the profits, socialism for the losses.
I don’t know how the bankers will reply, but inevitably we’re going to get around to asking the question Paul Volcker and Elizabeth Warren and others have been presenting: why shouldn’t we reinstitute the Glass Steagel Act? That law put up a wall between a bank’s commercial activities, like lending for business development and home mortgages and so on, and investment activities. It’s true, this law prevented banks from becoming the high-flying money printers that they’ve been in recent years, but on the other hand, it did mean that we had 75 years of stability and prosperity. I, for one, have not enjoyed the Too Big to Fail experience, and I would hate to see the country go through it again.