Crisis Culprits to Pay Back Cash?

On January 14, President Obama unveiled a plan for banks and brokers to pay fees to cover bailout loans that are not likely to be repaid by certain companies that were bailed out (although some banks have repaid their TARP loans). See Financial Crisis Responsibility Fee fact sheet.

The unofficial successor to the Pecora investigations of the 1929 Crash and Great Depression, the Financial Crisis Inquiry Commission (FCIC), began hearings into the current crisis.

In his testimony to the FCIC, Goldman Sachs Chairman and CEO Lloyd Blankfein endorsed the fiduciary standard for brokers who provide advice to retail investors. That was extraordinary. Will any of the three other CEOs who testified with Blankfein second that endorsement? JPMorgan Chase & Co. Chairman and CEO, Jamie Dimon, Morgan Stanley Chairman John Mack, Bank of America CEO and President Brian T. Moynihan all testified at the hearings, but none uttered the word "fiduciary" in their statements.

When I contacted Morgan Stanley about this issue, spokesman James Wiggins responded by email: "Morgan Stanley Smith Barney is working through our industry association, SIFMA, which has endorsed the idea of a uniform national fiduciary standard and is engaged with the policymakers in Washington to implement it in a way that preserves our ability to offer the full range of services that our clients want."

JPMorgan Chase and Bank of America/Merrill Lynch had not responded to requests for interviews or comment at press time.

The fiduciary issue for individual investors is one simple and critically important subset of the overarching and vastly important issues in play here. The issues are even more important because, rather than being part of a cyclical or even secular market correction, the causes of the current crisis are man made. We have been covering and writing about the crisis since mid-2007, before then-Treasury Secretary Henry Paulson and Fed Chief Bernanke, and many Wall Street CEOs, would even admit that there was a serious crisis at hand.

While many blame sub-prime borrowers for the crisis, lenders, packagers and the Wall Street brokers and banks that securitized mortgages and other loans had an even bigger hand, and axe to grind, feeding the securitization-profit beast. While there are many levels of blame to go around--rating agencies, lack of oversight by numerous regulators, and Congress, the boneheaded way banks were permitted to keep holdings off the books in SIVs, the ability of banks and brokers and insurers to in effect make highly levered bets on one another's demise through credit default swaps--all of this and more gets a share of blame for this crisis. Oh, by the way--whatever happened to the need to mark holdings to the market?

Laying part of the blame for the crisis on low interest rates--as Blankfein did in his remarks doesn't cut any ice either--simply having low rates doesn't take away the obligation of company executives to act in a prudent manner for their employees and shareholders--and, by the way, what about the greater good? Can't there be a healthy form of capitalism that does not destroy the world's economy? Because if not, then we are all going to be in trouble again, and perhaps sooner than later.

As Nobel Laureate Paul Krugman pointed out in his January 14 Op-Ed Column "Bankers Without a Clue," in The New York Times, the testimony was inadequate, for the most part: "the bankers' testimony showed a stunning failure, even now, to grasp the nature and extent of the current crisis."

Perhaps FCIC Chairman Phil Angelides said it best in his opening remarks, when he reminded us that, "Nearly 7 million Americans have lost their jobs since the economic downturn began. Nearly 25 million Americans-or over 16% of our workforce-are unemployed, underemployed because they can't find full time work, or have given up looking for work." Twenty-five million Americans. Out of work.

Angelides's conclusion echoes the sentiments of many Americans: "Let me conclude with this thought: There is much anger, and justifiably so, about what has transpired. The public's trust in our financial system has been badly shaken. Many Americans who abided by the rules now find themselves out of work, devastated by foreclosures, uncertain of their future prospects. There is a hunger to see those who profited from irresponsibility take responsibility, for wrongdoers to be held accountable. Yet the most important task in front of us is shed light, not heat. For us to take stock of what has happened and give a true accounting so the important work of restoring faith in our economic system can begin."

Don't even get me started on the bonuses.

Angelides's full statement as well as that of all of the others is available below at the FCIC Web site.

Comments? Please send them to Kate McBride is editor in chief of Wealth Manager and a member of The Committee for the Fiduciary Standard.

Read more Wealth Manager: Viewpoint blog posts:

Crisis Culprits to Pay Back Cash? January 15, 2010 It has been an extraordinary week, by any standard, if you were paying attention to what was happening in Washington regarding the financial crisis. ...
SEC Chair Repeats Strong Support for Fiduciary Duty January 15, 2010 "Broker-Dealers and Investment Advisers Should be Subject to the Same Fiduciary Standard of Conduct and Heightened Regulatory Regime When Providing the Same or Substantially Similar Services," she ...
Smart Money January 14, 2010 Goldman Sachs Chairman and CEO Lloyd C. Blankfein testified that at Goldman Sachs, "...we do support the extension of a fiduciary standard to broker/dealer registered representatives who provide advice to retail investors." ...
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