WASHINGTON-A federally impaneled committee began a year-long investigation last week into the causes of the banking crisis with two-days of hearings that included representatives of the four big banking companies, JP Morgan Chase, Bank of America, Morgan Stanley and Goldman Sachs and representatives from the FDIC, SEC, U.S. Department of Justice and a variety of Wall Street and mortgage industry experts.
The committee, officially known as the Financial Crisis Inquiry Commission, discussed the effects of the implosion of the huge secondary market for mortgages and its causes on financial institutions and consumers. Among the issues discussed were whether Goldman and other market players packaged troubled subprime mortgages into collateralized debt obligations, and sold them to customers, then bet short on them as they failed. Such instruments, known as CDOs, are among the failed investments on the books of WesCorp FCU, one of two corporate credit unions giants taken over by NCUA last year.
Absent was any presence or mention of credit unions and the estimated $10 billion of losses that are projected for the corporate credit union system and its effect on the nation's 7,800 credit unions. The possibility that Wall Street firms may have profited from their own customers was front and center last week amid allegations that some firms may have been selling their customers securities they knew to be bad investments.
Another major issue discussed last week was the growing leverage of the large Wall Street banks that have been the focus of the reform efforts on Capitol Hill that have drawn in small community banks and credit unions. Several experts testified they watched as Wall Street banks that held traditional leverage of less than 10-to-one, increased that leverage and the accompanying risk to as much as 30-to-one, and in some cases 90-to-one in recent years.
The Commission is modeled after the so-called Pecora Commission that studied the causes of the banking crisis following the 1929 stock market crash that resulted in Depression-era banking reforms and legislation that included the Glass-Steagle Act that separated commercial banking from investment banking.
The latest commission is chaired by Phil Angelides, the former state treasurer in California and co-chaired by former Rep. Bill Thomas of California, who credit union observers will remember as chairman of the congressional tax-writing ways and means committee during 2005.
