William Blake’s The Marriage of Heaven and Hell came to mind, late Wednesday night as I waded through “Wall Street and the Financial Crisis: Anatomy of a Financial Collapse.” That is, the freshly-released bipartisan report from the Senate’s Permanent Subcommitee on Investigations. The Levin-Coburn Report, named for Subcommittee Chairman, Carl Levin (D-MI) and Ranking Minority Member, Tom Coburn (R-OK) came to the reasonable conclusion that:
“[T]he  crisis was not a natural disaster, but the result of high risk, complex financial products; undisclosed conflicts of interest; and the failure of regulators, the credit rating agencies, and the market itself to rein in the excesses of Wall Street.”
This is not a remarkable finding, even endorsed by both political parties. Some controversy has emerged, however, from comments made by Senator Levin when the report was released. Levin said that referrals to the Justice Department and Securities and Exchange Commission would be made. In particular, the Senator reportedly suggested that Goldman Sachs CEO, Lloyd Blankfein, who testified before the subcommittee last April, should be criminally investigated by federal prosecutors for perjury. However, according to the Financial Times, Coburn is not happy and “The two men must now hammer out whether, in fact, those referrals are made.”
But, why Blake? Here’s the connection. I have already reviewed an array of books, studies, reports, articles, editorials, charts, conference papers, films, blog posts, testimony, draft bills, final legislation, legal memoranda, notices for proposed rulemakings, comment letters and final implementing rules addressing this topic. Additionally, I am working on my own book concerning the legal and regulatory causes and responses to the Financial Crisis. So, before facing another 639 pages, (including more than – gasp – 2,800 footnotes), I paused for a moment to ask myself — haven’t I read enough? In response, perhaps as a sort of pep talk, I remembered Blake’s:
“You never know what is enough unless you know what is more than enough.”
Okay, then. Even if to some, another Financial Crisis report resembles a bland bowl of gruel, like Dickens’s young Oliver Twist, I say, “Please sir, I want some more.”
Fortunately, the Levin-Coburn Report is a bit tastier than that. It serves up four case histories of the blameworthy including: (1) high-risk mortgage lenders (Washington Mutual), (2) failed regulators (the Office of Thrift Supervision), (3) credit rating inflators (Moody’s and S&P), and (4) abusive investment banks (Goldman Sachs and Deutsche Bank.) The Report devotes more than 200 pages to Goldman alone, with a dozen alleged conflicts of interest on pages 602-603. Reflecting this emphasis, perhaps, a good portion of the early news coverage focuses on this bank.
Also, for those who followed the Subcommittee hearings in April 2010, including a from-breakfast-till-after-dinner grilling of the Taibbi-branded “vampire squid” investment bankers, the heavy Goldman flavor should be no surprise. That hearing (which can be watched here), began with a team of Goldman traders, including the “Fabulous Fab” Tourre and ended with Blankfein. Memorable moments included Senator Levin quoting Goldman employee emails that had described various structured securities as “shitty” and “crap pools.” At the time, it made me wonder whether those who sell investments called “crap pools” might want to reconsider referring to their business practices as “God’s work.”
Other highlights of that hearing included comments by CFO, David Viniar, now notably excerpted in the Academy Award-Winning documentary film, The Inside Job. When asked by Senator Levin how he felt about employees sending emails to each other calling an investment a “shitty deal,” Viniar responded, “I think that’s very unfortunate to have on email.” After additional questions, Viniar replied that he also thought it was “a very unfortunate thing for anyone to have said in any form” and finally that selling such a product was “unfortunate as well.”
The emphasis at the hearing and in the Levin-Coburn Report were conflicts of interest. Correspondingly, the Levin-Coburn Report highlights various purported conflicts at Goldman. One example was the Hudson 1 transaction. For this synthetic CDO, Goldman wore many hats, “including selecting assets and serving as the underwriter, initial purchaser of the CDO securities, collateral put provider, senior swap counterparty, and credit protection buyer.” Goldman represented that its interests were aligned with investors, pointing to the $6 million equity investment it made in Hudson. However, what Goldman allegedly did not reveal was that it also maintained a proprietary $2 billion short position. In addition, Goldman may have implied that Hudson assets (the credit default swaps) had come from outside sources when they were all produced and priced at Goldman. Ultimately, the Report states the firm collected $1.7 billion in gross revenues from the transaction and recorded a $1.35 billion profit. In contrast, the 25 Hudson investors lost all their money, as the Report notes “Today, Hudson securities are worthless.” Indeed, just three months after issuing the Hudson securities, a Goldman trader wrote that an investor’s “likelihood of getting principal back is almost zero.”
In addition, the Levin-Coburn report provides 19 recommendations for reform, summarized on pages 12 – 14. These recommendations are largely directed at federal regulators, suggesting essentially that they act to make lending less risky, regulators more bold, credit ratings reflect reality and investment banks less abusive. None of these recommendations appear to require new legislation. Instead, the Report would have the regulators use either long-existing or newly-granted authority under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”).
Back to Blake. “You never know what is enough unless you know what is more than enough.” What would “more than enough” of the Financial Crisis coverage look like?
Well, we have not had “more than enough” accountability. Comparatively, after the Savings and Loan Crisis of late 1980s, more than 1,000 bank officials were prosecuted and around 800 went to jail. So far, as Gretchen Morgenson and Louise Story reported in yesterday’s New York Times, “no high-profile participants in the disaster have been prosecuted.” Alas, some of the easy targets for criminal cases have been customers, as Joe Nocera revealed earlier this month in his column, “In Prison for Taking a Liar Loan.”
We have not had “more than enough” safeguards restored to prevent a future catastrophe. Indeed, even the embarrassingly lax culture of the OTS, seemingly abolished by Dodd-Frank, as discussed on page 241, may live on inside the Office of the Comptroller of the Currency (“OCC”). Thus, it is particularly helpful that the Report reminds us of the OTS track record, “a proximate cause of the financial crisis.” For example, OTS identified over 500 serious deficiencies at Washington Mutual over a five year period from 2004 to 2008. However, the regulator did not lower the bank’s safety and soundness rating and it did not begin enforcement until 2008 when the $300 billion bank was on the brink of collapse. Eventually, the secondary regulator, the FDIC, through its Chairman Sheila Bair, stood up to Wamu by simply contacting the bank to alert them of a likely safety and soundness downgrade. When she did so, John Reich, the OTS director shot off an email to a colleague, complaining, “I cannot believe the continuing audacity of this woman.”
Certainly, we have not had “more than enough” audacious regulators like Bair. Along these lines, we are still waiting hopefully for the appointment of Elizabeth Warren to head the Consumer Financial Protection Bureau, as discussed here. We have not had “more than enough” redress for those fraudulently induced to enter into risky and expensive mortgages. There has not been “more than enough” ability for homeowners who are underwater on their mortgages to shrink their loan principal balances, while this mode of deleveraging when asset values decline is commonplace for other assets in bankruptcy proceedings. We have not had “more than enough” debunking myths about the Financial Crisis, as described in part 1 here and part 2 here.
Returning to Blake. There is a second reason that he came to mind in relation to the work of the Levin Subcommittee. That would be the title. The Marriage of Heaven and Hell. Marriage. The subcommittee launched its first of four hearings on April 13, 2010, one year ago to the day the Levin-Coburn Report was released. An anniversary gift. How thoughtful. Paper is the traditional first anniversary gift. It’s okay that the Levin-Coburn Report is digitized. So, what should we hope for next year? Well, a traditional second wedding anniversary gift is cotton. Here’s a hint. For next year’s gift to the American people, I’m thinking some nice one piece cotton jumpsuits in orange. Or maybe a poly/cotton blend, I’m not choosy. But, make sure they have white collars.