Wall Street clashed with Washington on Wednesday over the causes of the biggest financial crisis since the Great Depression, with political leaders and financial chieftains trying to cast the blame on each other.
The highly anticipated drama played out on the first day of hearings by the Financial Crisis Inquiry Commission, a bipartisan panel appointed by Congress charged with finding the roots of the crisis. But panel Chairman Phil Angelides, a Democrat and former California state treasurer, made it clear that he already concluded that Wall Street — investment giant Goldman Sachs, in particular — were the primary culprits.
In a series of sharp exchanges with Goldman Chief Executive Officer Lloyd C. Blankfein, Mr. Angelides accused the storied Wall Street firm of selling defective mortgage products to unsuspecting investors, and then secretly making profitable bets in the derivatives markets that those products would fail.
"Sounds a little bit to me like selling a used car with faulty brakes, and then buying an insurance policy" on the driver, Mr. Angelides said.
He pledged to conduct a yearlong inquiry into the crisis.
Mr. Blankfein denied that the firm deceived and undercut its clients, which were mostly sophisticated pension funds and other large investors. He said Goldman merely practiced prudent hedging strategies that helped the firm weather the crisis and stay profitable.
Mr. Blankfein said Congress shared much of the blame because federal laws and policies helped create the conditions that led to the monumental housing and credit bubbles.
"Without trying to shed one bit of our industry's accountability, we would also further our collective interests by recognizing other contributing causes to the severity of the crisis," he said.
"The official policy of promoting, supporting and subsidizing homeownership in the United States" was a major contributor, the Goldman Sachs chief argued, noting the extensive subsidies from mortgage and real estate tax deductions to mortgage insurance aid provided by Congress.
He also blamed low interest rates fostered by the Federal Reserve and lopsided trade deficits that had to be financed with enormous flows of capital from China and other countries that ended up in the housing market.
"This flood of foreign capital" directly financed the expansion of Fannie Mae and Freddie Mac mortgage lending and drove interest rates even lower, he said. That, in turn, spawned a search for higher-yielding assets by investors and their Wall Street brokers, which led to the creation of the risky mortgage-backed securities that spawned the crisis, he said.
The session signaled the opening of what is expected to be a sharp debate over who was at fault in the global financial meltdown.
While the Obama administration and some legislators also have examined how overconsumption fostered by U.S. tax and spending policies helped cause the huge trade deficits, most legislators — including the bipartisan panel — continue to target Wall Street, whose primary role was to funnel the funds gushing in from abroad into mortgage and housing investments.
Mr. Angelides demanded that each of four Wall Street CEOs, lined up at the witness table, explain the mistakes their firms made and the changes they have made to correct those mistakes.
Jamie Dimon, chief executive of JPMorgan Chase & Co., acknowledged that his bank's mortgage lending policies became too lenient, although it avoided the riskiest loan products. He said the bank now provides loans only to consumers who have the traditional 20 percent down payment on their homes.
Mr. Dimon suggested that Congress had made many "regulatory lapses and mistakes." He said the Fed and other regulators did not have the authority they needed to close "too big to fail" institutions and curb abuses in the mortgage market.
In particular, he said, independent mortgage brokers — who originated most of the subprime and abusive loans — were not regulated at the federal level and state regulators were either unaware of the abuses or unable to stop them. Mr. Dimon said JPMorgan has stopped originating mortgages through brokers because of the high rates of defaults.
Congress, Mr. Dimon said, turned a blind eye to the extraordinary growth and leverage of Fannie Mae and Freddie Mac, growth based on an implicit federal guarantee of their debt that Washington steadfastly denied even existed throughout the bubble era. That implicit guarantee became explicit in September 2008 when the Treasury took control of the firms and started pumping $100 billion into them.
Morgan Stanley CEO John J. Mack was the most contrite of the executives. He acknowledged that extraordinary leverage ratios and other risky activities drove the investment bank to the edge of collapse in September 2008, from which it needed a taxpayer-financed federal rescue. Bank of America CEO Brian Moynihan also testified.
Like Goldman and JPMorgan, Morgan Stanley has repaid the bailout funding it received from the Treasury in October 2008, and has provided the government with double-digit returns on the money.
"There's no denying that every firm in the industry — and the broader financial markets as a whole — benefited from this support," Mr. Mack said.
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