When Fannie Mae hired former U.S. Senator Warren Rudman in 2004 to investigate how its accounting practices had gone awry, his law firm’s final report took 17 months to complete and cost the company more than $60 million.
Compare that with the enormous task before the Financial Crisis Inquiry Commission, the 10-member investigative panel formed last year by Congress and headed by former California Treasurer Phil Angelides. The deadline for its final report is Dec. 15, less than 11 months away, and its budget is $8 million. Yet it’s supposed to be covering far more ground, and it’s still just getting started.
In addition to investigating the causes of Fannie Mae’s 2008 meltdown, the panel is charged with examining the failures or near-deaths of at least 10 other major financial institutions, including Lehman Brothers Holdings Inc., American International Group Inc. and Citigroup Inc. Those autopsies aren’t even the commission’s primary mission, though.
That would be to examine the many causes of the financial crisis at large. The statute that created the commission says its report specifically must tackle the role of regulators, monetary policy, accounting practices, tax policy, fraud, capital requirements, credit raters, executive pay, derivatives and short selling -- plus a dozen other required areas of study.
So what are the odds the commission can conduct all these investigations by mid-December and do a thorough job? About zero, which clearly was Congress’s intent all along.
Time and Money
Maybe the public will get lucky, and the commission will happen upon some revealing morsels of culpability here or there. But it isn’t possible for this group to do everything it has been directed to do in such a short time with so little money.
The crisis commission tried to put on a show anyway last week when it called top government regulators and Wall Street chief executive officers to testify, including Lloyd Blankfein of Goldman Sachs Group Inc. and Jamie Dimon of JPMorgan Chase & Co. Having refrained from exercising their subpoena power so far, though, the commission’s members lacked ammunition to ask probing questions and lobbed softballs to the witnesses.
No new facts of any significance emerged from the two days of testimony. That shouldn’t have been surprising, because the commission hadn’t done any investigative work to speak of before the hearings. It was still assembling its staff last month and didn’t even get its Web site up and running until a week ago.
For a panel modeled partly on the Pecora Commission of the 1930s, it’s a disappointing start. There’s a bit of history here that bears mentioning, however. That series of hearings started off as a snoozer, too.
It remained so for almost a year until January 1933, when the Senate Committee on Banking and Currency hired Ferdinand Pecora, a former assistant district attorney from New York, to guide its investigations into Wall Street corruption and fraud.
After three duds, the Sicilian-born Pecora became the fourth chief counsel to oversee the committee’s work, the scope of which was expanded twice through Senate resolutions after he was hired. The scandals he unearthed captivated the nation and spurred the creation of the Securities and Exchange Commission and the passage of the Glass-Steagall Act, which separated commercial and investment banking until its repeal in 1999.
Pecora wasn’t operating under arbitrary deadlines. The Senate had directed the committee “to make a thorough and complete investigation” and “to report to the Senate as soon as practicable the results of such investigation,” which it did in June 1934 after more than two years of public hearings. Pecora took over much of the questioning of witnesses himself, as well as the issuing of subpoenas.
At last week’s hearings, by comparison, Angelides and his fellow commissioners asked all the questions, and their greenness showed. This is a job for experienced prosecutors, not blue-ribbon political appointees.
For instance, there was this question by Angelides to Blankfein: “Can you tell me very specifically what are the two most significant instances of negligent, improper and bad behavior in which your firm engaged and for which you would apologize?” Blankfein’s response, which I’ll paraphrase loosely here: Yeah right, Phil.
To have a chance at a credible effort here, Congress at a minimum needs to amend the legislation that created the commission so it doesn’t have a fixed deadline to release its final report. By statute, the commission will be terminated 60 days after the report is due.
If its investigators get a hot lead in late November, they shouldn’t have to blow it off to meet a publication deadline. And if the commission ever issues subpoenas, the recipients shouldn’t be able to drag them out past the commission’s expiration date simply by refusing to comply and taking the matter to court. Angelides also needs to turn over the conduct of the hearings to a veteran trial attorney who knows how to build cases and cross-examine witnesses properly. A decent budget would help, too.
Otherwise, the way it is set up now, this commission might as well be telling the whole country that the fix is in. The bankers and their guard dogs in government must be pleased.
(Jonathan Weil is a Bloomberg News columnist. The opinions expressed are his own.)
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