Angelides: Jury still out on Wall Street

As a sluggish economy bumps along, quarter after quarter, month after month, with unemployment unacceptably high and consumer confidence depressingly low, the human instinct for survival demands a focus on the here and now.

Why are things still so uncertain? When will jobs become more plentiful? And, most critically, how will next month’s bills get paid?

As each month of the crawl out of the Great Recession continues, its origin becomes less relevant to the day-to-day concerns of a public now more anxious about the future than angry about the past.

“That is,” says Phil Angelides, chairman of a national commission investigating the origins of the financial meltdown that triggered it all, “just the way that people on Wall Street would like it to be.”

He’s hoping that the commission’s final report, to be broadly released to the public in December in the same manner as the 2004 report from the 9/11 Commission, will refocus some attention on the origins of the crisis and the urgency of preventing a similar catastrophe in the future.

“This is fundamental,” Angelides told me last week. “The world’s strongest financial system was brought to its knees.”

The bipartisan panel held its first hearing in January. Over the ensuing months, Angelides and his colleagues have grilled titans and fallen titans of Wall Street and the regulators who watched the meltdown unfold.

Angelides, a former California state treasurer and one-time real-estate developer, was not unsophisticated in the ways of finance. Still, he has been dumbfounded by the things he has learned.

“I feel like I walked into my local community bank and opened a door I wasn’t supposed to open,” he said. “And when I opened it, I saw a casino floor as big as New York, New York.”

He’s learned that some of the nation’s largest “shadow banks” — those outside the reach of bank regulators — were leveraged at ratios as high as 39-1. “It’s as if someone with $50,000 in assets took out a $2 million mortgage that could be called in overnight.”

He’s learned about financial instruments called collateralized debt obligations, in which slices of BBB-rated mortgages from mortgage-backed securities were packaged into separate instruments in which the majority were reclassified as AAA. “It’s like the old alchemy story of turning lead into gold.”

He’s learned about synthetic securities backed by nothing other than bets on how actual collateralized debt obligations would perform. In 2008, Angelides notes, 86 percent of the trades at Goldman Sachs were synthetics.

And he’s learned that the Federal Reserve Board, the one entity that could have done anything to impose sanity, watched as the risks grew higher and higher.

The commission has also held regional hearings, such as the one planned this week in Sacramento, to learn the full consequences of the calamity. Two figures that stand out for Angelides from a hearing in Las Vegas: 70 percent of homeowners are underwater on their mortgages, and that their collective mortgage debt is 120 percent of the value of the citywide housing stock.

“‘Financial crisis’ is not a past-tense term — for Wall Street, maybe, but for the rest of the country the financial crisis is still with us.”

Angelides hopes that the final report will give policymakers and the public cause to insist that financial reforms passed by Congress are effectively implemented.

“Normally, the way we learn things is from the consequences of our mistakes. But Wall Street has felt almost no consequence,” he said. “As of today, very little has changed. The jury is still out on whether we will have real financial reform.”

While it may seem backward that the report will come out after Congress passed its Wall Street Reform and Consumer Protection Act, Angelides said it is not unlike the situation in which Congress created the Department of Homeland Security before the 9/11 Commission released its findings.

In this case, he said, the critical decisions remain, as regulators conduct the 220 separate rule-making processes needed to implement the new law — and will be doing so under the intense political pressure that 3,000 Wall Street lobbyists can exert.

“In many respects,” he said, “the fight is just starting now.”

Just as with the 9/11 report, this report will be written in a narrative style with the hope of stimulating broad readership. It will be released in bookstores and made available online in enhanced e-editions for Kindles and iPads that provide links to actual documents and video of testimony.

Angelides has high expectations.

“We will produce a report that for today and for history will explain what went wrong.”

— Timm Herdt is chief of The Star state bureau. His political blog “95 percent accurate*” is at http://www.TimmHerdt.com.