Here is the opening statement I gave at the first public meeting of the Financial Crisis Inquiry Commission, held this morning in a hearing room in the House Longworth Office Building.
Thank you Mr. Chairman. First I’d like to thank Senator McConnell for appointing me to this commission. I would also like to thank you and Vice Chairman Thomas for your work getting us started, and Mr. Greene for agreeing to contribute his expertise and experience. [Tom Greene is the commission's new Executive Director.]
I think and hope that I bring a somewhat unique perspective to our work. I looked at an old calendar, and one year and one day ago I hosted the Roosevelt Room briefing for President Bush at which Secretary Paulson and Chairman Bernanke presented their recommendation to intervene to prevent AIG from failing suddenly. 364 days ago I hosted the decisional meeting at which President Bush accepted the Paulson-Bernanke recommendation to propose the TARP, and the following night I ran the staff conference call until 1 AM where we drafted the famous three pages of legislative language for the TARP. I coordinated the policy process for President Bush that led to the loans go GM and Chrysler in late December of last year. Throughout 2008 and 2009, and for several years before that, I served on President Bush’s National Economic Council staff working on issues including financial regulatory and housing policy. I hope to share some of my insider’s view, and I hope to help the commission and the public understand how the options looked to policymakers who were dealing with the crisis in real time, operating with imperfect information and severe constraints. Our task is now one of hindsight, where we know what happened. It’s critical to remember that the past is known, but the future is uncertain.
I think what we’re doing here is very important. We also need to make sure it’s relevant. We have a reporting deadline of 15 months from now. If we wait that long to produce any usable information, then the work of this commission will be far less relevant to the policymaking process. The Administration and Congress say that want to move legislation this fall addressing certain causes of the financial crisis. I doubt they will succeed in doing so. At the same time, I think it’s essential that we contribute whatever useful information and analysis we can to those policymaking debates before they finish.
I surmise that most people in positions of power are not particularly excited that this commission exists. The Administration has already offered its policy proposals, and the President did not call for the creation of this commission. The Congressional committee chairs say they want to move legislation this Fall, and the regulatory agencies are beginning their bureaucratic jockeying for position. Many of the affected constituencies in the financial sector are thinking about how to play defense against the work that we do. Other than the Members of Congress who created this panel and a couple hundred million Americans who are justifiably furious with what happened last year in Washington and Wall Street, I’m not sure who wants us to succeed.
I believe the solution is for us to move quickly and aggressively, and I urge you and the chairman to develop a mechanism for the commission to produce useful information to the public and policymakers over the course of the next year and a quarter. If we hold all of our information until next December, our work will be irrelevant.
There is a temptation in this kind of process to look for villains, and indeed some have already been found and locked up. I expect we will uncover more. In Washington the easiest solution is to form an unruly political mob and march on Wall Street, and we have seen some of that behavior over the past year. I believe that part of our job is to help Washington policymakers also look in the mirror and realize that there are systemic pressures that created or exacerbated these problems, whether they are the iron triangles of particular financial interests working to weaken their oversight and regulation, or various subsectors using legislation as a competitive battleground, or the overwhelming bipartisan desire to do ever more to encourage homeownership, without regard for the adverse consequences of their actions. I strongly believe that politically popular laws enacted by Congress greatly contributed to the crisis, and I think it is essential we understand those causes.
Even having been on the inside throughout the crisis, I have a lot of unanswered questions. I have built a list of 20 questions that I think are important to answer, inspired by the list of topics directed by Congress. I won’t read all 20 questions here today, but I do want to highlight a few. I will provide my fellow commissioners with the full list of 20 questions, and will also post them this afternoon on my blog at KeithHennessey.com.
Here, then, are six of those twenty topics. If we as a commission could answer these questions, I think we could significantly advance the understanding of what happened, and help policymakers address the root causes.
- What were the relative contributions to a credit bubble in the U.S. of (a) changes in global savings; (b) changes in relative savings between the U.S. and other (especially developing) countries; and (c) low interest-rate policies of the Greenspan Fed?
- To what extent did well-intentioned policies designed to encourage the expansion of homeownership contribute to a relaxation of lending standards and people buying houses they could not and would never be able to afford?
- Did the capital purchase program of TARP work? Was it the right decision to use taxpayer funds to provide public capital to the largest financial institutions to prevent systemic failure? In retrospect, was the decision to use TARP resources for direct equity investment rather than to buy troubled assets a wise one? Was $700 B a reasonable number given the circumstances?
- Was there a legally and economically viable option available to save Lehman? If so, based on what we know now, should Lehman have been saved?
- I think that several heavily regulated large financial institutions failed both because they were highly leveraged and because they made bad bets. Did regulatory examiners miss both elements? If they didn’t miss them, why did regulators allow these institutions to place themselves and the financial system at so much risk?
- To what extent did three aspects of Fannie/Freddie: (a) their dominant position in mortgage securitization; (b) their large retained portfolios of mortgage-based assets and (c) their legal treatment as equivalent to US government debt; cause or contribute to three resultant failures: (i) the insolvency of Fannie and Freddie; (ii) the lowering of credit standards for mortgages; (iii) the failure or anticipated failure of other financial institutions?
If anyone in the public is interested in the other questions, you can find them later today on the web at KeithHennessey.com.
I want to hit three process points before concluding:
- I want to thank the Chairman and Vice Chairman for including whistleblower protections. I will work with Mr. Greene on the details to make sure we can get the information we need.
- I know there’s been some discussion about whether we should produce recommendations. I am in favor of doing so.
- I would like to offer a concrete suggestion: let’s build a timeline, what is sometimes called a “tick-tock.” I have a big picture timeline that we used in the Administration that I will contribute to get us started, and I know the NY Fed has built a couple of excellent timelines.
Thank you, Mr. Chairman. I look forward to working with you and the other members of the commission.
(photo credit: KeithBurtis)