Yesterday, the Financial Crisis Inquiry Commission (FCIC) held its first public hearing to discuss the causes of the financial markets crisis. Testifying before the Commission were:

Panel 1: Financial Institution Representatives

  • Lloyd C. Blankfein, Chairman of the Board and Chief Executive Office, Goldman Sachs Group, Inc.
  • James Dimon, Chairman of the Board and Chief Executive Officer, JPMorgan Chase & Company
  • John J. Mack, Chairman of the Board, Morgan Stanley
  • Brian T. Moynihan, Chief Executive Officer and President, Bank of America Corporation

Panel 2: Financial Market Participants

  • Michael Mayo, Managing Director and Financial Services Analyst, Calyon Securities (USA) Inc.
  • J. Kyle Bass, Managing Partner, Hayman Advisors, L.P.
  • Peter J. Solomon, Founder and Chairman, Peter J. Solomon Company

Panel 3: Financial Crisis Impacts on the Economy

  • Mark Zandi, Chief Economist and Co-founder, Moody's
  • Kenneth T. Rosen, Chair, Fisher Center for Real Estate and Urban Economics, University of California, Berkeley
  • Julia Gordon, Senior Policy Counsel, Center for Responsible Lending
  • C.R. "Rusty" Cloutier, President and Chief Executive Officer, MidSouth Bank, N.A.; Past Chairman, Independent Community Bankers Association  

The majority of the questions for the first panel were directed toward Mr. Blankfein, who, together with the other CEOs, responded to questions regarding business practices, risk management policies and compensation structure and bonus awards. Blankfein said that believed that some Goldman’s pre-2008 practices may have been improper in retrospect, and that Goldman got “caught up in and participated and therefore contributed to elements of froth in the market,” but maintained that Goldman’s practices seemed appropriate at the time. Mr. Mack echoed Mr. Blankfein’s remarks, noting that “We did eat our own cooking — and we choked on it.”

Mr. Blankfein asserted that the crisis was not caused by the financial industry alone, and that the underlying factors contributing to the crisis were (i) the enormous growth of foreign capital and emerging markets, (ii) nearly ten years of low long-term interest rates, and (iii) government policies promoting and subsidizing homeownership. He also stated that the industry has learned important lessons over the past two years, and that these lessons should be reflected in any regulatory proposals being considered. Blankfein suggested that new regulation should require:

  1. Risk and control functions to be completely independent from business units;
  2. Consistent valuation standards across risky assets;
  3. Ongoing stress tests, the results of which are made public;
  4. A strong but flexible resolution authority to oversee and liquidate failing firms if necessary; and
  5. Enhanced capital requirements.

On the second panel, Mr. Mayo stated that he does not feel that banks have made enough changes in light of their responsibility for the financial markets crisis. He pointed out that, although many policy makers currently believe that a healthy Wall Street is necessary for the economy to work, the economy worked well before the development of complicated financial products.

The third panel strongly emphasized the difference between the large banks represented in the first panel and community banks, and asked that policymakers keep community banks in mind when creating new regulations for the financial services industry. Mr. Cloutier, representing the Independent Community Bankers of America, stated that small community banks did not create the financial markets crisis. According to Cloutier, community banks utilized responsible lending practices, operating under “the quaint but effective practice of only lending money to people who can pay it back.”

The FCIC’s hearing continues today.