FINANCIAL CRISIS INQUIRY COMMISSION UPDATES:
The Financial Crisis Inquiry Commission held its first hearing in Washington today; with another session scheduled for tomorrow. Today's witnesses included Goldman Sachs CEO; Lloyd Blankfein; Bank Of America CEO Brian Moynihan; Morgan Stanley Chairman John Mack; and JPMorgan Chase CEO Jamie Dimon.:
If there was any doubt that Wall Street thinks the government will step in to save "too big to fail" firms, Goldman Sachs CEO Lloyd Blankfein dispelled it on Wednesday morning.
In response to a question about whether the federal government would prevent one of his three counterparts at today's hearing -- Bank of America, JPMorgan Chase and Morgan Stanley -- from failing, Blankfein essentially said that the government would in fact step in.
"I think tomorrow in the context of this environment, at some level the government would intervene." "Because of the fragility of the system," Blankfein said, the government would be forced to step in.
In other words, 'too big to fail' is real. And Wall Street knows it.
Blankfein qualified his answer by stating that perhaps the government wouldn't have stepped in a year and a half ago, nor would they perhaps step in a year from now.
UPDATE, 1:30 P.M.:
After a short break, the commission opened its afternoon session by speaking with financial industry analysts and experts, including Kyle Bass, the managing director of Hayman Advisors. In his prepared testimony, Bass tore into the amount of leverage in the financial system before -- and after -- the financial crisis. Here's Bass:
"Depository institutions like Citibank were able to parlay their deposits into large levered bets in the derivatives marketplace. In fact, at fiscal year‐end 2007, Citigroup was 68.4X levered to its tangible common equity, including off‐balance sheet exposures."Bass was particularly harsh on the mortgage giants Fannie Mae and Freddie Mac, which, the Treasury Department announced last month, would have blank check support from the U.S. government:
These organizations have been some of the single largest political contributors in the world over the past decade with $200 million being given to 354 lawmakers in the last 10 years or so. Yes, the United States needs low cost mortgages, but why should organizations created by Congress have to lobby Congress? Fannie and Freddie used the most leverage of any institution that issued mortgages or held mortgage backed bonds. At one point in 2007, Fannie was over 95X levered to its statutory minimum capital with just 18 basis points set aside for losses. That's right, 18 one hundredths of one percent set aside for potential losses. They must not be able to put humpty dumpty back together again. If they are to exist going forward, Fannie and Freddie should be 100% government‐owned, and the government should simply issue mortgages to the population of the United States directly since this is essentially what is already happening today, with the added burden of supporting a privately‐funded, and arguably insolvent, capital structure.Read Bass's full testimony here.