Wednesday, January 13, 2010

Coming on TV: Congressional probe into financial crisis

Business Times - 14 Jan 2010

Coming on TV: Congressional probe into financial crisis


IT is a production that will not cost as much as the American science-fiction epic film Avatar. And it is probably not going to attract as large a television audience as the reality shows American Idol and The Biggest Loser.

But the televised hearings of the Congressional Financial Crisis Inquiry Commission (FCIC), which holds its first public hearings on Capitol Hill today, could prove to be one of the most dramatic spectacles of the season, offering some of Washington's leading investigators an opportunity to confront Wall Street's top financial executives, and examine the root causes of the 2008 financial crisis.

The year-long investigation by the FCIC, a bi-partisan 10-member panel established by Congress and which was allocated US$8 million for its work, has been compared to the work done by the 9/11 Commission which Congress formed in order to examine the events that had led to the worst terrorist attack in American history.

The FCIC is supposed to conclude its work on Dec 15, and like the 9/11 Commission, it is expected to publish the conclusions of its investigation in the form of a book or several case studies that will attempt to explain to readers what really happened, who was responsible for it, and what can be done to prevent another devastating financial meltdown.

Some have been referring to the FCIC as '9/15 Commission', after the day in which legendary investment firm Lehman Brothers collapsed, setting the stage for the most devastating economic recession in US history since the Great Depression of the 1930s.

Indeed, in addition to 9/11, another historical analogy that is being brought up as the FCIC panel opens hearings that feature a selection of America's top bank executives - Lloyd Blankfein of Goldman Sachs, Jamie Dimon of JPMorgan Chase, John Mack of Morgan Stanley and Brian Moynihan of Bank of America - is the Senate committee that investigated the causes for the Wall Street Crash of 1929.

The chief counsel to that committee, which opened its hearings in 1932, was lawyer and judge Ferdinand Pecora whose thorough and dramatic investigation, which was broadcast on radio at that time, led to indictment of several bankers and government officials and helped create the momentum for major reform of the financial industry of that era.

The person who is expected to play the role of Mr Pecora in the current hearings is the chairman of the FCIC, Phil Angelides, who is a former California state treasurer. Mr Angelides told reporters that in addition to a series of televised public hearings that he is planning to hold, the panel will also conduct hundreds of interviews and request or subpoena information from companies and government agencies.

Mr Angelides, who is a Democrat and who has been critical of Wall Street in the past, described the bonuses financial firms are planning to hand out this year as 'unjustifiably wrong'. The expectation among lawmakers and journalists in Washington is that the hearings are going to ignite a lot of fireworks that could end up destroying the reputations, if not the careers, of a few financial executives and perhaps even government officials.

Much public and media attention is expected to focus on the testimonies of figures such as Federal Reserve chairman Ben Bernanke, former Treasury secretary Henry Paulson, and his successor, former New York Fed chief Tim Geithner, as well as former heads of AIG and Citigroup, including Robert Rubin.

Republican congressman Darrell Issa of California has already demanded an investigation of the close relationship between New York Fed, including its chairman Mr Geithner, and executives at AIG.

While the FCIC will conclude its work after this year's midterm election in November, the White House and Democratic lawmakers insist that they plan to get Congress approve a major bill to overhaul the regulation over the financial industry before the election.

And they hope that the hearings could help shape the final draft of the legislation.

Ironically, among some of the reforms that Mr Pecora's investigation in the 1930s helped produce was the Glass-Steagall Act that included a provision that prohibited a bank holding company from owning other financial companies.

It is now clear that the repeal of that provision in 1999 enabled commercial lenders such as Citigroup to underwrite and trade instruments such as mortgage-backed securities and collateralised debt obligations and establish so-called structured investment vehicles. And that led directly to 9/15 and the financial crisis. It remains to be seen if Congress will move to resurrect the Glass-Steagall Act.

The drama is about to begin.

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