There are times in Washington when genuine bipartisanship exists. It’s rare. The press does not cover it, and we rarely hear about it, but it exists. Such is the case regarding the U.S. Senate Permanent Subcommittee on Investigations, which is part of the Homeland Security and Governmental Affairs Committee. This committee is run by Democrat Sen. Carl Levin and Republican Sen. Tom Coburn. Two hearings were held this week on the financial crisis. The first was on Wall Street and the role of high-risk home loans. The second was on the regulators and what role they played in allowing this to happen.
One does not have to be a geek to be interested in these hearings. They have all the drama and suspense of any Broadway play. The CEO of Washington Mutual, better known as WaMu, a bank that was seized during the crises, defended himself. However, former co-workers outlined problems that would scare the skin off of a snake. It was quite a scene. Much blame was attributed to the overall financial state of the country, and former CEO Killinger owned very little blame. It had all of the courtroom drama of an “I didn’t do it” murder.
As the Permanent Subcommittee on Investigations looked into what occurred in the financial crisis, both the minority and majority staff worked together. The result was not the usual partisan name-calling, but a real blow-by-blow understanding of what took place in the home-mortgage market. Levin’s opening statements were a masterpiece, and anyone desiring understanding into what actually happened should go and read the testimony.
As Levin explained it, “To rebuild our defenses, it is critical to understand that the recent financial crisis was not a natural disaster. It was a man-made assault. People did it. Extreme greed was the driving force. And it will happen again unless we change the rules.”
As Levin pointed out, prior to the early 1970s when somebody wanted to purchase a home they would go to their local bank, provide information, have a reasonable down payment and get a 30-year fixed mortgage. The local bank would hold the mortgage for the life of the loan. This all changed because banks could sell their loans in bulk and make more money. Because of the incentive to sell loans and make more money, there was a system set up where people could qualify for larger loans and the bank could sell them at a profit. Levin and Coburn’s committee stressed that the system was designed to make money even if it meant increasing the amount of high-risk home loans. Those loans could generate higher fees and interest rates, and they could be sold quickly so the bank would not have to show risk. Everyone was in on this due to the fact that even the lowly loan officer was getting a commission and was able to turn around mortgages even if the documentation was shoddy.
The committee found huge fraud problems with prime loans and was even able to trace many of the problems to two loan officers who made hundreds of millions of dollars of loans. Much of the loan documentation was fraudulent. The problem had been identified as early as 2005, but not until two years later was anything done about it. The situation was only addressed after a mortgage-insurance company refused to ensure loans made by one of these officers.
Even scarier was the role of some other regulators. John Reich, who was the director of the Office of Thrift Supervision in Washington D.C., wrote a memo to his staff saying that the CEO of WaMu was going to be in town and wanted a lunch meeting. The memo referred to CEO Kerry Killinger as “my biggest constituent.”
History repeats itself. Levin pointed to the 1935 Senate committee investigation into the causes of the 1929 stock-market crash. Some of what they found could have been written about this financial crisis. They found “an utter disregard by officers and directors of … banks’ … basic obligations and standards arising out of the fiduciary relationship.” The committee in 1935 also found compensation arrangements that were an incentive to bank and securities officers to have the institutions engage in speculative transactions and float security issues that were hostile to the interests of these institutions and the investing public.
The Levin-Coburn committee pointed out that some of the same banks that had been investigated in 1934 were again participants in this crisis. If the September 2008 fall had been a Hollywood script written in 1970, no one would have believed it could happen. It did happen, and only tough regulation will prevent another cycle of greed and financial collapse. Hopefully Congress will take the work of the Levin-Coburn committee seriously. It is truly bipartisan and is doing the work that the citizens elected their senators to do.