Wall Street executives said Wednesday they underestimated the severity of the 2008 financial crisis and apologized for risky behavior and poor decisions. They also defended their bonus and compensation practices to a skeptical commission investigating what caused the collapse.
Americans are furious and "have a right to be" about the hefty bonuses banks paid out after getting billions of dollars in federal help, the commission's chairman told chief executives of four major banks, all survivors of the deepest and longest recession since the Depression.
As the hearings opened before the Financial Crisis Inquiry Commission, chairman Phil Angelides pledged "a full and fair inquiry into what brought our financial system to its knees."
The panel began its yearlong inquiry amid rising public fury over bailouts and bankers' pay.
"We understand the anger felt by many citizens," said Brian Moynihan, chief executive and president of Bank of America. "We are grateful for the taxpayer assistance we have received."
With Bank of America having repaid its bailout money, he said "the vast majority of our employees played no role in the economic crisis" and do not deserve to be penalized with lower compensation. Moynihan said compensation levels will be higher next year than they were in 2008 — but not at levels before the financial meltdown.
Jamie Dimon, chief executive of JPMorgan Chase & Co., said most of his employees took "significant cuts in compensation" in 2008. He said his company would continue to pay people in a "responsible and disciplined manner" to attract and retain top talent.
Still, Dimon said, "We did make mistakes and there were things we could have done better."
John Mack, chairman of Morgan Stanley, said the crisis was "a powerful wake-up call for this firm." He said he didn't take a bonus in 2009 and that his bank has overhauled its compensation practices to discourage "excessive risk-taking."
Angelides, a former Democratic treasurer of California, questioned Goldman Sachs' Lloyd Blankfein about packaging soured assets into bond-like securities and selling them to investors — even as Goldman Sachs was "shorting" the same securities, or making bets they would fail. These included risky mortgages that were extended to borrowers with poor credit records and helped cause the home-loan bust.
"It sounds like selling a car with faulty brakes and then buying an insurance policy on that car," Angelides said.
Responded Blankfein: "I do think the behavior is improper. We regret the consequence that people have lost money in it."
Like the other witnesses, Blankfein acknowledged lapses in judgment in some practices leading up to the crisis.
"Whatever we did, it didn't work out well," he said. "We were going to bed every night with more risk than any responsible manager would want to have."
The commission's vice chairman, former Rep. Bill Thomas, R-Calif., said the inquiry would try "to get to the bottom of what happened and explain it in a way that the American people can understand."
Thomas, a former chairman of the tax-writing House Ways and Means Committee, said one important question is, "If you knew then what you do now, what would you have done differently?"
Dimon said a crucial blunder was "how we just missed that housing prices don't go up forever." Added Mack: "We did eat our cooking and we choked on it."
Commissioner Heather Murren, a retired Merrill Lynch director, raised questions about banks that insisted on being paid in full by failed insurer American International Group Inc. on financial contracts that went bad.
She asked Blankfein why Goldman Sachs didn't offer to take less than 100 percent in payments from AIG, given the severity of the financial crisis and knowledge of the taxpayers' stake. "It didn't come up in any conversation that I can recall," Blankfein said.
The bipartisan, 10-member commission was handed the job of writing the official narrative of what went wrong before the financial system nearly collapsed in the fall of 2008.
The commission is modeled on the panel that examined the causes of the attacks of Sept. 11, 2001. But the prototype could be the Pecora Commission, the Senate committee that investigated Wall Street abuses in 1933-34. It was named after Ferdinand Pecora, the committee's chief lawyer.
Congress has instructed the current commission to explore 22 issues, from the effect of monetary policy on terms of credit to bank compensation structures.
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Financial Crisis Inquiry Commission: http://www.fcic.gov
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