What question should I ask four bank CEOs?

What question should I ask four bank CEOs?

The Financial Crisis Inquiry Commission has its first substantive hearing next week. The hearing will begin Wednesday morning (details to follow when they’re public). The commission staff has told the press we will have a panel of four financial CEOs/Chairs:

  • Lloyd Blankfein of Goldman Sachs;
  • Jamie Dimon of JPMorgan Chase;
  • John Mack of Morgan Stanley; and
  • Brian Moynihan of Bank of America.

I expect each will provide a written statement and some oral testimony. Commissioners will then ask questions. There will be other panels as well, which I will discuss after the Commission staff makes the details of them public.

I am one of 10 commissioners, and there are four people on this panel, and several panels, so I anticipate I will get to ask at most three or four questions, and more likely one or two. I assume I can submit written questions as well.

I am posting to ask for suggestions: what do you recommend I ask these men about the causes of the financial crisis?

I am serious about this request. I was a policy staffer for 14 years and have written hundreds (thousands?) of hearing questions and answers for my former bosses, so I have a few good questions in mind. At the same time, I long ago learned the value of getting input from a wide range of sources, so here’s your chance.

In return, I ask that you take this seriously. Here is how you can best help me.

Please post your question in the comments or email it to me: kbh <dot> fcic <at> gmail <dot> com. Warning: I will impose a stricter comments policy on this post, and I intend to delete comments which stray from the parameters described below.Please take your rants elsewhere, and post or send me only serious questions that meet these criteria.

Please do:

  • Suggest questions that are appropriate to ask a firm CEO or Chairman. These are general managers who think about their firm as a whole. Questions should be about the forest or at least big trees, not about leaves and twigs.
  • Suggest questions that can elicit information that is not otherwise available but should be.
  • Suggest hard questions.

Please don’t:

  • Suggest questions designed only to attack or embarrass the witnesses. I won’t ask them. My goal is to elicit information and analysis and, if possible, to encourage debate and discussion of what happened and why. I have no problem asking questions that embarrass witnesses or that they want to avoid, but only if it’s the most effective path to serious policy debate. I will leave the demagoguery to others.
  • Send me speeches. I am interested in asking questions that solicit useful answers, not in hearing myself talk. If your question begins Don’t you think … then you’re on the wrong track.

The Commission’s mission is to “submit on December 15, 2010 to the President and to the Congress a report containing the findings and conclusions of the Commission on the causes of the current financial and economic crisis in the United States.”

To repeat: We’re supposed to understand and explain the causes of the current financial and economic crisis. That should guide your questions.

While I will consider questions on any topic related to our mission, when thinking about large financial institutions, I am most interested in questions surrounding the too big to fail concept. I am also quite comfortable asking prospective questions about how well-prepared we are to prevent the next crisis, whatever that may be.

If all goes smoothly, within the next day or so I will post again with similar requests for other panels and witnesses. My goal would be to post again before next Wednesday with the best questions I have received.

To help get your thinking started, here is the key text from the invitation letter sent to the CEOs by Commission Chairman Phil Angelides and Co-Chairman Bill Thomas. This is already circulating widely among DC insiders and lobbyists, but the public doesn’t have access to it. That’s unfair. Having it will also help explain the written and oral testimony you see from the CEOs next week, since you will know the questions to which they are responding.

These are good questions, but they do not necessarily reflect my thinking, so please do not feel you need to limit the questions you suggest to the scope described below.

The FCIC is interested in learning what caused financial problems experienced by your company, including losses incurred, and what changes have been implemented as a result. Therefore, your testimony should address the following topics:

  • What were the primary errors and business practices that caused the financial problems at your company and what actions have been taken to address them;
  • What were your company’s business models and major sources of income (or loss), what changes have been made, what were the reasons for the changes, and what are your company’s current business models and sources of profit;
  • What types of lending activities did your company pursue that caused the financial problems, including the amount, Iypes and terms of loans being made, what changes have been made, what were the reasons for the changes, and what are your company’s current lending practices;
  • What were the risk management policies and practices at your company, including the types of investments being made, underwriting and approval of investments including reliance on third parties for due diligence, monitoring of investments by management, the board of directors, committees of the board of directors, and any other persons or entities, and the accounting and public reporting of the company’s investments. What changes have been made to your company’s risk management policies and practices, what were the reasons for the changes, and what are your company’s current risk management policies and practices. In addition, what were your company’s risk exposure, what changes have been made to your company’s risk exposure, what were the reasons for the changes and what are your company’s current risk exposure;
  • What were the executive compensation plans and practices at your company and how did they contribute to the problems. What changes have been made to your company’s executive compensation plans and practices, what are the current executive compensation plans and practices, and what were the reasons for the changes.

I look forward to your suggestions, and want to thank everyone who has emailed me input for my work on the commission. Please keep it coming, using the same email address provided above. I am sorry I can’t respond to everyone who is sending me stuff … the volume is just too great.

(photo credit: Empty hearing room by talkradionews)

131 responses

  1. This may be too broad but I'd like to see some discussion about striking the proper balance between free markets and all their attendant benefits, while not allowing companies to grow so large that they take the whole financial system with them on the way down.

    The libertarian in me says let 'em grow as big as they want and suffer when they fail but back here in the real world, allowing the economic system to collapse is a rather steep price to pay for such purity.

    Where do we draw the line? Or even, what factors should we consider in trying to draw that line?

  2. These firms ran into trouble not only because of their investments, but also because of the way they financed them. A 5% decline in asset values may be survivable if you are levered 8-to-1; heck, you might even squeak by at 15-to-1 if your debts don't come due for many years and you have some earning power. If you are levered 25-to-1, however, and much of the debt is very, very short-term, you can blow up quickly.

    In short, the FCIC should have included a liability version of its third question, something like:

    "What types of borrowing activities did your company pursue that caused the financial problems, including the amount, Iypes and terms of loans being taken, what changes have been made, what were the reasons for the changes, and what are your company’s current borrowing practices."

  3. Too big to fail is the root of it all. But Qs on that will often generate self-serving answers. They will have reasons they need to be so big regardless of whether they are really true. I'd like to ask the CEOs of small to medium sized financial corps what regs would facilitate no firm accounting for more than 1% of US banking. How do we prevent companies from becoming too big?

  4. My question:
    If we believe in free markets, where prices are set by the interplay of supply and demand, then why is it that interest rates are constantly being manipulated by a quasi-government agency, and isn't it possible that this manipulation of interest rates leads to severe imbalances between savings and investment flows?

  5. Pingback: Tweets that mention What question should I ask four bank CEO’s? | KeithHennessey.com -- Topsy.com

  6. In your opinion, what role did leverage play in the financial crisis? Would limiting leverage have reduced the severity and duration of the financial crisis? And if it would, is there a feasible way to do that?

  7. I would ask what, if any, regulations that weren't in place in 2005 might have prevented or mitigated the financial crisis? In the same vein, what existing financial regulations are now obsolete and overly burdensome?

    Why shouldn't the CEO's "too big to fail" firms be broken up based on their negative social externalities?

  8. Paul Volcker says the commercial banks should stick to commercial lending. They should not be in hedge funds, equity funds, commodities trading, trading in derivatives.

    How can we separate commercial banking from those other functions.?

    Paul Volcker also says the bonus' given are out of touch with reality.

    Do financial institutions need regulations on calculating bonus'?

    Lastly, Paul Volcker says: You have to have a much stronger supervisory and regulatory apparatus to have any chance of keeping up with that.

    So, what supervisory and regulatory apparatus would they recommend to prevent a future melt down?

    • And Warren Buffett says that we need more stick and less carrot for most financial institutions as far as pay and bonuses.

      Why should anyone get a bonus for shutting down our economy instead of increasing shareholder value?

  9. This may be too broad but I'd like to see some discussion about striking the proper balance between free markets and all their attendant benefits, while not allowing companies to grow so large that they take the whole financial system with them on the way down.

    The libertarian in me says let 'em grow as big as they want and suffer when they fail but back here in the real world, allowing the economic system to collapse is a rather steep price to pay for such purity.

    Where do we draw the line? Or even, what factors should we consider in trying to draw that line?

  10. The mortgage brokers and institutions closest and most knowledgeable to the mortgagees earned lucrative fees placing mortgages, which were then aggregated, securitized and sold to other financial institutions, often ultimately ending up with a GSE like Fannie Mae or Freddie Mac.

    That meant that the mortgage brokers faced a situation where they could earn high fees but had no downside risk, since the mortgages were to be packaged and sold to someone else. As a result, it appears that the system was tilted in favor of ever increasingly risky and larger mortgages, since risky mortgages were the easiest to sell and the higher loaned amounts led to larger fees.

    What systematic changes would you suggest to give incentives to those brokers and institutions closest to the mortgage holders to ensure that loans are only given to qualified mortgagees?

  11. Perhaps too short to use but I'd ask a simple dual question: In a capitalist system, are financial insitutions supposed to act differently than other corporations in seeking profits? More specifically, is it appropriate for financial institutions to maximize profits even if it creates risk to the broader economy?

  12. A) What were the key causes of the financial crisis? How much of the blame can be placed on your institutions'/banking sectors activities (securitization etc..) &how much on government policy namely propping up housing markets via Freddie Mac &Fannie Mae, as well as the FED's loose monetary policy and the consequent asset bubbles?

    B) As CEOs/Chairmen of leading financial institutions do you prefer the complete separation of commercial banking from investment banking activities or increased regulation and oversight of financial institutions as a means of avoiding future crises like the current crisis? Please state why, and if you have an alternative solution/recommendation for policy action what would those be?

  13. Since it's rational to assume that none of you planned to put your respective institutions and the financial system in peril, how did you miss the evidence that your business practices, lending and investment strategies were running dangerously out of control. Was it a failure of internal systems to alert you, a failure of communications within the organization or some other factor that let the industry be taken by complete surprise? Would more open communication among industry participants and the regulators provided a better understanding of the risks that were being assumed? If, indeed there was a problem with information feeding up to the top does this indicate that the system you are trying to manage is too complex to function without excessive delegation of authority to distant management levels?

    Sorry to make it a multi-question submission but hopefully you get the drift.

  14. I'd hope you ask the quick question: "When do you figure you could look at the market and say its been "normalized", so you can report the value of your assets accordingly? We've all been dying to know your financial situation since 157(a)!"

  15. I'd love to hear Lloyd Blankfein answer the following question:

    "How do you find your new job in theology?"

    But I would like to ask them what, at each of their institutions, signaled the beginning of the financial crisis. Were they caught completely by surprise? Or did the data warn them? If so, did, they convey this information to their customers/investors? How?

  16. Mr. Hennessey,

    I would like to ask a question that deals with the same issues but from a slightly different perspective. As someone that believes that the crisis was caused by a combination of risky financial practices, improper incentive structures, and government influence, I would like to ask the following question to the bank CEOs:

    As a CEO of the largest banks in the U.S., can you please explain the relationship your bank has held with the following federal government institutions – federal reserve, Fannie Mae, and Freddie Mac – with a particular focus on how your bank responded to their policy and financial request?

    I ask this question because without understanding the bank-federal government interaction, we will not be able to understand a) why banks dedicated so much of their capital to low-income mortgage holders, b) why the banks tried to pass on the loans as collateralized derivatives, and c) why the banks did not follow typical credit score, collateral, and income requirements for loans.

    Thank you Mr. Hennessey.

    Good luck unraveling what actually happened in the financial industry.

  17. Two unrelated questions:

    1-Should the U.S. reimpose the restrictions on bank holding companies owning other financial institutions? If not, why not? And if yes, what changes would you make to the original Glass-Steagall formulation?

    2-In general, are bank executives worth the amount that they are paid?

  18. QUESTION: Virtually everyone agrees that small business growth is the key to economic recovery, with small business in mind, are bank ing regulations and regulators enforcement actions hampering your ability to lend to small business?

  19. Don Marron and Joseph probe the same area, but I believe it's the key to this crisis, some from the past, and important for the future. How much maximum leverage is appropriate for a financial institution? Of course, there is no exact answer, with variable factors such as maturity, asset values, etc. That said, there surely must be candidate formulae for such, and a maximum limit that everyone would consider ridiculous under normal ranges of inflation, GDP growth, etc. The answers would then provide the basis for new regulation on maximum allowable leverage (after taking off 20%, figuring the panel is overly optimistic).

Follow

Get every new post delivered to your Inbox.

Join 6,386 other followers