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Friday, January 15, 2010

Krugman: Bankers Without a Clue

by Calculated Risk on 1/15/2010 12:02:00 AM

Krugman: Bankers Without a Clue

... the bankers’ testimony showed a stunning failure, even now, to grasp the nature and extent of the current crisis. And that’s important: It tells us that as Congress and the administration try to reform the financial system, they should ignore advice coming from the supposed wise men of Wall Street, who have no wisdom to offer.
There is much more in the piece, but that is the crux. The bankers are apparently clueless, or if they have any inkling about what happened, they will not say it. The first morning of hearings were a waste of time.

The question now is will the Financial Crisis Inquiry Commission be a waste?

I'll try to help ... first, start from the bottom, not the top. Don't interview any more bankers or heads of regulatory agencies, at least not yet.

1) Regulators: My first suggestion is that the Commission start interviewing - in private - the field examiners at the Fed, FDIC, OCC and OTS. There is no need to publicly embarrass any examiner. The various Inspector General reports on bank failures would provide a starting point (see Eric Dash's article in the NY Times: Post-Mortems Reveal Obvious Risk at Banks).

Ask the examiners what they saw and when - according to the Inspector General's reports, the field examiners were warning about lending problems in 2002 and 2003.

Follow the trail. Did this information generate warnings inside the organizations? If so, why wasn't action taken? Was the action blocked by political appointees?

And more background:
  • From Binyamin Appelbaum and David Cho at the WaPo: Fed's approach to regulation left banks exposed to crisis

  • And from last year, here is a great article by Binyamin Appelbaum and Ellen Nakashima on the OTS, in the WaPo: Banking Regulator Played Advocate Over Enforcer

  • And from Zach Carter at the Nation about John Dugan at the OCC: A Master of Disaster

    2) Understand the originate to distribute model. Understand the entire process from the perspective of each participant from independent mortgage broker to Wall Street firms to investors, and the role of credit agencies, automated underwriting, and other "improvements" in the process.

    Put points 1 & 2 together. That is a start.