Panel Rips Wall Street Titans

By JOHN D. MCKINNON And MICHAEL R. CRITTENDEN

ABACAUSA.COM

John Mack of Morgan Stanley: 'We as an industry made mistakes.'

WASHINGTON—Comparing Wall Street titans to shady car salesmen, a committee investigating the financial crisis grilled the nation's top bankers Wednesday in the latest example of Washington's smoldering anger at an industry many there feel hasn't atoned for its role in the slump.

"It sounds to me a little bit like selling a car with faulty brakes, and then buying an insurance policy on the buyer of those cars," said former California state Treasurer Phil Angelides, chairman of the Financial Crisis Inquiry Commission, while questioning the chief executive of Goldman Sachs Group Inc.

Bank CEOs did acknowledge their role in the crisis. "It has been clear how poor business judgments we have made have affected Main Street," said Brian Moynihan, Bank of America Corp.'s CEO. But the executives as a group also hedged that position considerably by spreading the blame to policy makers and the economy as a whole.

WSJ's Jerry Seib gives an update on today's Financial Crisis Inquiry Committee hearing on Capitol Hill in which he says the heads of J.P. Morgan, Goldman Sachs, Morgan Stanley and Bank of America opened with the right mix of humility and gratitude, but remained defensive on bonuses.

Beyond the theatrics—reminiscent of the Pecora hearings that investigated the 1929 crash that led to the Great Depression—the hearings could bolster legislation being considered by Congress to rewrite financial regulations. The House already has passed its version establishing stronger consumer protections, and Senate leaders hope to take up their bill soon.

Efforts to put new taxes on financial institutions and to curb compensation also could get a boost. President Barack Obama is expected Thursday to propose a new tax on banks to compensate the U.S. for its bailout-related losses. The tax is expected to be based on the banks' exposure to risk.

Banks and their allies worry the hearings could produce evidence exposing them to securities litigation. On Wednesday, commissioners asked probing questions about the banks' possible acts of negligence, their duties to customers and other issues that could crop up in such cases.

At Wednesday's dramatic first hearing of the commission, which was created last year with little fanfare, the confrontation between Wall Street and Washington quickly turned personal.

Mr. Angelides, in making his used-car comment, noted Goldman's practice of selling mortgage securities to investors, then betting that those securities would drop in value. "It doesn't seem to me that that's a practice that inspires confidence," he said.

Goldman CEO Lloyd Blankfein appeared caught off guard, interrupting Mr. Angelides to clarify Goldman's duties and responsibilities. "These are the professional investors who want this exposure," he said.

Noting that "people are angry" over Wall Street's bailout-boosted profits, Mr. Angelides vowed that the commission would become "a proxy for the American people–their eyes, their ears, and possibly also their voice….If we ignore history, we're doomed to bail it out again."

Goldman declined to comment on the exchange.

Mr. Angelides also warned CEOs the commission could refer evidence of criminal wrongdoing to law enforcement.

The hearings, which are expected to last the remainder of the year, could raise the profile of its members, in particular Mr. Angelides, a veteran of California's rough-and-tumble politics, who emerged as the toughest questioner. Mr. Angelides served as a trustee of California state pension funds at a time when the funds became national leaders in pursuing securities lawsuits against companies suspected of fraud.

In a brief interview later, Mr. Angelides said he was "troubled by the inability [of the bankers] to take responsibility because I think it's fundamental."

On Thursday the commission will hear about officials' efforts to investigate and prosecute financial wrongdoing in the crisis. Attorney General Eric Holder is expected to testify that the Justice Department is "using every tool at our disposal—including new resources, advanced technologies and communications capabilities, and the very best talent we have—to prevent, prosecute, and punish these crimes." He also will note that the Federal Bureau of Investigation is investigating more than 2,800 mortgage-fraud cases, up almost 400% from five years ago. 

Republicans on the bipartisan panel expressed more sympathy for banking-industry leaders. Panel member Keith Hennessey, a former economic adviser to President George W. Bush, said it might be "more interesting" to talk to executives of the firms that didn't survive. He also suggested the government played a role by letting the largest banks take on too much risk.

Among banks, the stakes could be highest for Goldman Sachs and Mr. Blankfein. His bank has been under intense public fire for its decision to pay out billions of dollars in bonuses to its employees just a year after the firm, as well as others, accepted government money to bolster their balance sheets.

In an effort to diffuse the anger, Mr. Blankfein gave a number of interviews and speeches in 2008, although the charm offensive backfired on occasion. In November he told a British-based reporter he is just a banker doing "God's work," a remark that reverberated around the world.

Top Goldman advisers spent hours prepping Mr. Blankfein this week.

Top Wall Street executives started Wednesday's testimony on a conciliatory note, saying their institutions made mistakes that helped lead to the 2008 financial crisis. But they warned in testimony that policy makers shouldn't limit the size of financial entities.

J.P. Morgan Chase & Co.'s CEO, James Dimon, said Wall Street and policy makers need to be "brutally honest" about the causes of the financial crisis, and said the country cannot repeat the events of late 2008.

Mr. Dimon said "the solution is not to cap the size of financial firms." Instead, he said, "we need a regulatory system that provides for even the biggest banks to be allowed to fail, but in a way that does not put taxpayers or the broader economy at risk."

Morgan Stanley Chairman John Mack struck a conciliatory tone. "There is no doubt that we as an industry made mistakes," he said. "The financial crisis also made clear that regulators simply didn't have the visibility, tools, or authority to protect stability of the financial system as a whole."

Initially, the panel invited Kenneth Lewis, Bank of America's former CEO, to appear before it. There was a brief discussion among the bank's executives about whether Mr. Lewis would go before the commission, since he was at the bank for much of the crisis, but executives decided that Mr. Moynihan would do it. Given Mr. Moynihan's recent appointment—he became CEO only in recent weeks—he wasn't on the hot seat Wednesday.

"It gave him the opportunity to reiterate some forward-looking themes," said Bank of America spokesman James Mahoney.

After the hearing, Mr. Blankfein left the room, while Mr. Dimon of J.P. Morgan Chase stayed to answer a few questions. "I felt they were looking for answers," and not seeking to embarrass the CEOs, Mr. Dimon said.

Write to John D. McKinnon at john.mckinnon@wsj.com