D.C. Witness Protection Program

A financial inquiry hits the bankers, ignores the Fed and Fannie Mae.

Law enforcers normally use the witness protection program to shield people willing to provide testimony. So far, the Financial Crisis Inquiry Commission seems determined to protect a political class willing to do almost anything to avoid testifying.
That's the message of the commission's first week of hearings, which focused on repeating the Beltway's pet theory of what caused the credit mania and subsequent panic. To wit, the greedy bankers did it, abetted by Bush Administration deregulators and perhaps, a little, by the Clinton Treasury when it agreed to repeal the Glass-Steagall Act. If the commission is merely going to reinforce this laughably narrow and politicized view, this is going to be a waste of money and time.
Created by Congress and due to report by December 15, the commission is chaired by Phil Angelides, a former chairman of California's Democratic Party. His first group of witnesses on Wednesday were the CEOs of Bank of America, Goldman Sachs and JPMorgan Chase, plus the Chairman of Morgan Stanley.

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Associated Press

Phil Angelides

Mr. Angelides delivered what you would expect of a political hearing, accusing Goldman of "selling a used car with faulty brakes" when it sold mortgage-backed securities. He demanded that the executives accept blame for the crisis and then said he "was troubled by the inability to take responsibility." On day one, Mr. Angelides appeared to have reached his conclusion.

Yesterday, on day two, the commission loaded up on details about "current investigations into the financial crisis" by state, local and federal law enforcers. Attorney General Eric Holder was there, along with Lanny Breuer, head of the Criminal Division, and a lawyer for the Miami-Dade County police department. The theme seemed to be how many banker miscreants will end up in jail.

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Our point isn't that bankers didn't make stupendous blunders. It is that the roots of the mania and panic are so much larger than any single financial security, compensation practice or regulation. And those roots are found as much in Washington as on Wall Street.
Start with the Federal Reserve, which for years kept interest rates below the rate of inflation and thus created a global subsidy for credit. Bankers and investors had an incentive to sell and take on more debt. A Journal survey of economists this week found that a majority now think Fed policy was a major culprit. Providing a rare source of wisdom at yesterday's hearing was FDIC Chairman Sheila Bair, who explained how the Fed's monetary policy helped inflate the housing bubble.
If the commissioners are looking for historical guidance, they might consult the late Charles Kindleberger's classic, "Manias, Panics, and Crashes: A History of Financial Crises." On page 10 of the Fifth Edition paperback, the good professor declares that "The thesis of this book is that the cycle of manias and panics results from the pro-cyclical changes in the supply of credit." (Our emphasis.) An inquiry that ignores the sources of credit that fed the mania is like a history of the Civil War that ignores slavery.
Also missing this week was anyone from Fannie Mae and Freddie Mac, the mortgage giants that turbocharged the housing boom. With their implicit taxpayer backing, Fan and Fred held or guaranteed more subprime and Alt-A loans than anyone—much more than the combined holdings of the four bankers represented this week.
So long as Fan and Fred kept increasing mortgages to low-income borrowers, the dynamic duo's political protectors kept fighting off efforts to cap the size of Fan and Fred's mortgage portfolios. The pair would ultimately hold or guarantee mortgages amounting to more than $5 trillion. That sum is greater than the annual GDP of Japan, the world's third largest economy, and yes, a whole lot bigger than the balance sheet of Goldman Sachs. A serious inquiry will examine the business practices of Fan and Fred, the long battle to rein them in, and the Members of Congress who blocked reform.
We'll admit we don't have much hope for any inquiry led by Mr. Angelides, who is about as partisan a chairman as one can imagine. As California treasurer and board member at Calpers, the giant pension fund for state employees, Mr. Angelides led the movement to invest to advance political goals. He pushed Calpers to invest in "environmentally screened" funds and helped pressure companies like Safeway and countries like the Philippines to embrace union labor. While at Calpers, he was dogged by questions about investment funds managing Calpers cash whose executives coincidentally were backers of his political campaigns.
Also on the panel is Brooksley Born, who has already been widely portrayed in the media as the lonely regulator who blew the whistle on derivatives but was crushed by other Clinton-era officials. By all means, Ms. Born should be a witness and her story considered. But as heavily invested as she already is in a narrative that blames derivatives and lax regulation, she is another odd choice for a disinterested inquiry.

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The greatest oddity of the commission may be that its report is set to arrive after Congress and the Administration hope to pass the most far-reaching reform of financial laws since the 1930s. So prescription first, diagnosis later. Perhaps the commission will surprise us, but the evidence of the first week is that this exercise is less about getting to the truth than about reinforcing Democratic theories about whom to blame.