Just starting now, JEC hearing: Too Big to Fail or Too Big to Save? Examining the Systemic Threats of Large Financial Institutions (live webcast at the link)

Witnesses:

• Joseph Stiglitz, Nobel Prize recipient, 2001; University Professor, Columbia University; former chairman, Council of Economic Advisers
• Simon Johnson, Ronald A. Kurtz Professor of Entrepreneurship, MIT’s Sloan School of Management; Senior Fellow, Peterson Institute; former Economic Counselor, International Monetary Fund. cofounder of blog The Baseline Scenario
• Thomas M. Hoenig, President, Federal Reserve Bank of Kansas City

UPDATED with audio archive:

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(note: The Congressmembers’ voices are louder than the witnesses)

From Stiglitz’s prepared statement (pdf):

A good financial system manages risk and allocates capital, with the intent of increasing the overall efficiency of the economy; it does this with low transaction costs. However, we have a financial system which created risk and misallocated capital, with high transaction costs. While capital was being misallocated to homes beyond people’s ability to pay and in places where homes were not needed, too little capital was being deployed to new start-ups, to create and expand small and medium size enterprises, which are the bases of a dynamic economy.

A small part of our financial system, the venture capital firms, is responsible for a large part of our economy’s economic growth. While our big banks have not been at the center of this dynamic growth, they have been at the center of this tempest; they have created risk to our country, without any offsetting rewards—though to be sure those in the industry have been rewarded well.

Other parts of our financial system have done a good job—community banks, credit unions and local banks—in supplying consumers, small and medium sized enterprises with the finance they need.

But we should also be aware of the inadequacies of our financial system—beyond the failures in risk management and capital allocation that led to this crisis. Our financial system discovered that there was money at the bottom of the pyramid and made a concerted effort to make sure that they money did not remain there. They engaged in predatory lending; it is ironic that they were hoisted by their own petard in the sub-prime mortgages.

…we need to admit that those that predicted dire consequences to come from the repeal of the Glass-Steagall Act were correct. They warned about conflicts of interest, the increase in concentration of the banking system, with increasing risks of too-big-to-fail institutions—and increasing systemic risk as a result. They warned about the consequences of transferring the investment banking culture to the commercial banks, who are entrusted with the management of the payment system and ordinary individuals’ savings—insured by the government. The critics suggested that the benefits from economies of scope and scale were exaggerated, and, if present at all, these were almost surely outweighed by the costs. As painful as it may be, we need to revisit these questions. Depression-era regulations may not be appropriate for the twenty-first century, but what was needed was not stripping away regulations but adapting the regulatory system to the new realities, e.g. the enhanced risk posed by derivatives and securitization.

The process of breaking them up may be slow; there may be political resistance—even if the shareholders have not done well, their officers have, and their political contributions have not gone unnoticed.

In environmental economics there is the basic principle of the polluter pays. Those who pollute must pay the cost of clean-up. It is a matter of efficiency and equity. The too- big-to-fail institutions have contributed to the pollution of the global economy with toxic mortgages; they should now pay for the cost of clean-up.

We should recognize that, in a sense, the too-big-to fail institutions have succeeded in managing their risk well—but not in the way advertised. A relatively small investment in campaign contributions (the combined campaign contributions of U.S. financial, insurance, and real-estate firms has been estimated at around $5 billion over the past decade) has succeeded in transferring losses to the public, estimated well in excess of a trillion dollars.

Yes, apparently the too-big-to fail institutions have succeeded in managing their risk — by transferring it, with the help of both the Bush and Obama administrations, onto the rest of us.

(thanks to cbl2 who first alerted me of this hearing)

x-posted at oxdown.

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Today was the day I finally lost it. After hundreds of hours spent on Congressional committee hearings (listening to audio streams or reading transcripts), after over 40 oxdown hearing diaries since September and more than 100 hearing postings before that (starting when scarecrow asked me to include hearing info in the thread of his Monday morning posts at firedoglake), today’s House Financial Services Committee hearing with Geithner, Bernanke and Dudley was just too much.

I’m sick of watching hearings organized into 5 min question periods designed for sound bites and YouTube clips. I’m sick of watching ignorant Congress Members who can’t be bothered to stay for the whole hearing ask questions which if we’re lucky were written by a competent aide (which means the Congress Member doesn’t know enough to ask effective follow up) or if we’re not lucky are faux outrage grandstanding for a YouTube clip. I’m sick of watching witnesses permitted as Geithner, Bernanke and Dudley were today to distract, delay and in the end obscure when we are in such need of transparency and accountability.

Enough already.

Message to Congress: We’re in an economic crisis. A crisis that began a year and a half ago and that you have yet to show any interest in understanding let alone taking effective action to address. That has got to change. Right now. No more business as usual. It’s time to put aside your egos and your plans for re-election because it’s way past time for you to focus on what needs to be done for the millions of people who depend on you.

I know I’m not alone in being frustrated because rarely have I had to listen to a hearing alone (and for that I am profoundly grateful). So I’m going appeal to all my dear fellow hearing watchers: What do you think needs to be done? What should we be demanding from the committees?

Yesterday I called both the House Financial Services and the Senate Banking, Housing, and Urban Affairs Committees and was told that there are no rules or other impediments for having committee counsel (or other committee staff) do the questioning during hearings. That’s something I think we need - knowledgeable, experienced lawyers questioning the witnesses. And they should have a support staff that includes the best investigators that can be found. When I mentioned this to William Black during his visit here yesterday he replied, as he had to several other questions, that what we need is our own Pecora investigation (something that John Anderson also recently suggested). From Wikipedia:

Following the Wall Street Crash, the U.S. economy had gone into a depression, and a large number of banks failed. The Pecora Commission initiated major reform of the American financial system. As Chief Counsel, Ferdinand Pecora personally examined many high-profile witnesses that included some of the nation’s most influential bankers and stockbrokers. As the Commission’s first witness, Richard Whitney, president of the New York Stock Exchange, declared that "The Exchange’s refusal to pay heed to popular demand for reform was simply a manifestation of courage to do those things which are right, regardless of how unpopular they may be for the time being." Other important members of the Wall Street financial community to give testimony before the Commission included investment bankers Otto H. Kahn, Charles E. Mitchell, Thomas W. Lamont, and Albert H. Wiggin, plus celebrated commodity market speculators such as Arthur W. Cutten. Given wide media coverage, the testimony of the powerful banker J.P. Morgan, Jr. caused a public outcry after he admitted under examination that he and many of his partners had not paid any income taxes in 1931 and 1932.

As reiterated by SEC Chairman Arthur Levitt during his 1995 testimony before the United States House of Representatives, the Pecora Commission uncovered a wide range of abusive practices on the part of banks and bank affiliates. These included a variety of conflicts of interest such as the underwriting of unsound securities in order to pay off bad bank loans as well as "pool operations" to support the price of bank stocks. The hearings galvanized broad public support for new securities laws. As a result of the Pecora Commission’s findings, the United States Congress passed the Securities Act of 1933 and the Securities Exchange Act of 1934, instituting disclosure laws for corporations seeking public financing, and in 1935 formed the SEC as a means to enforce the new Acts.

In 1939 Ferdinand Pecora published his memoirs that recounted details of the investigations. Titled "Wall Street Under Oath", Pecora wrote: "Bitterly hostile was Wall Street to the enactment of the regulatory legislation." As to disclosure rules, he stated that "Had there been full disclosure of what was being done in furtherance of these schemes, they could not long have survived the fierce light of publicity and criticism. Legal chicanery and pitch darkness were the banker’s stoutest allies."

Of course, the key to this kind of real investigation is who would lead it. William Black told us "Jack Blum and Saul Wisenberg (Dem., Rep) as counsel. Hire Dick Newsom and Chris Seefer as your key investigators".

Sounds good to me.

I’m considering calling up every single member of the House Financial Services Committee and the Senate Banking Committee tomorrow and demanding that they take the necessary steps to begin our own Pecora-type investigation: the Blum-Wisenberg investigation. In the mean time they could immediately make the hearings more effective by 1) staying for the entire hearing - they might learn something, 2) giving their time for questioning the witnesses to the most appropriate committee staff person and 3) dispensing with the 5 min rule.

What do you think?

note: originally posted at oxdown, see link for discussion