Resisting Corporate Corruption, 3rd Edition

Essay 6Wall Street and the Crisis – Causes, Contributions and Problems to Fix

In 2009, Congress Convened the Financial Crisis Inquiry Commission to investigate the causes of the crisis and recommend remedies. Around mid-year, the CEOs of major banks gave testimony on these topics. The comments of Goldman’s Lloyd Blankfein, J.P. Morgan’s Jamie Dimon, Morgan Stanley’s John Mack and Bank of America’s Brian Moynihan shed some light on the causes of the crisis. They also shed “inadvertent” light on Wall Street’s role in creating the debacle.

The word inadvertent is used because of the topics which the bank CEOs tiptoed around or avoided altogether. These evasions constitute important clues regarding the banks’ critical failures. The CEOs clearly felt exposed, legally and politically, and could not risk a candid discussion. For us their evasions are like bread crumbs, marking a path toward the deeper causes of the crisis. This path will also help inform us whether remedies such as Dodd-Frank have adequately fixed the problems.

Broadly speaking, the CEOs painted the following picture of the financial crisis. There was a housing “bubble.” This bubble came about because of public policy favoring expanded home ownership, historically low interest rates, and deteriorating mortgage underwriting standards. The banks made errors in risk management. There was also excessive use of leverage and over-reliance on short-term funding. When housing prices fell in 2007, mortgage securities dropped ...