17 September 2009 
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)
I like your list of questions. Mostly.
1. 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?
This is an interesting question and I think one that is not much discussed elsewhere. But I think it's going to be tough to answer – more of a question for academia than for your commission, perhaps.
2. 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?
This is a question that only a right-winger would be asking. Well, at least if the policies you're talking about are the ones about minorities, equal housing, first-time homebuyers, and things like that. I think it's pretty clear that the issue on this front was the diffusion of responsibility. There's a great This American Life story about it — at least I think that's where I heard it — where they did a great job of making the case that the local bank could loosen standards because they could package the loans and pass them on (so they weren't on the hook if someone defaulted). And so on up the line, with each party thinking the default risk could be handed off to the next step (securitization, credit default swaps, and all that). So then the profit motive with little or no apparent risk is what led to the loosening of lending standards. There are plenty of stories from the inside about the pressures on loan officers to ignore the lack of income of their clients.
3. 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?
I would add to this whether the "blank check" approach of TARP was a good idea in the first place, versus a more targeted or regulated approach. Or at least something with more accountability to Congress. But this question is the most important one about the response to the crisis.
4. 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?
A secondary but still important question.
5. 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?
I think this is the most important kind of question to be asking in terms of the causes of the crisis and how to prevent it from happening again. What do we need to do in the regulatory environment?
6. 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?
Again I think this is a question much more likely to be emphasized by a right-winger. They were a small potatoes compared with all the other things going on here, in terms of contributing to the cause and to the consequences.
Again I think this is a question much more likely to be emphasized by a right-winger.
It's a valid question no matter WHO asks it. Waving the "right-winger" flag simply indicates a desire to prevent any response to the question. So what's being hidden or shielded by this tactic?
' There's a great This American Life story about it — at least I think that's where I heard it — where they did a great job of making the case that the local bank could loosen standards because they could package the loans and pass them on (so they weren't on the hook if someone defaulted)….So then the profit motive with little or no apparent risk is what led to the loosening of lending standards. There are plenty of stories from the inside about the pressures on loan officers to ignore the lack of income of their clients. '
I suspect that Keith knows the Stan Liebowitz paper, Anatomy of a Train Wreck
http://www.independent.org/pdf/policy_reports/200…
that blows up that all too convenient story, Joshua, but clearly, you don't know it.
"or the overwhelming bipartisan desire to do ever more to encourage homeownership,"
There is a clear confusion between ownership and speculation. You own the equity. No money down, no equity — no ownership.
The mortgage interest deduction encourages speculation — it should be replaced by a pure 30% tax credit for the whole house payment (interest AND principal), up to some life-time maximum (maybe 10*prior year's mean taxpayer's taxable income?).
To call Fannie /Freddie support of risky behavior with a gov't guarantee "small potatoes" is the kind of thing a knee-jerk true-believer in Big Gov't would say.
Thanks for your comments. No personal attacks, please.
I would like to send a formal letter to the Commission. What address should I use?