Just Imagine Blankfein Questioning Barney Frank - Mercedes-Benz Forum

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Just Imagine Blankfein Questioning Barney Frank

Just Imagine Blankfein Questioning Barney Frank: by Caroline Baum -Bloomberg News
2009-02-12 05:01:00.16 GMT

Commentary by Caroline Baum
Feb. 12 (Bloomberg) -- The chief executive officers of Wall
Street’s too-big-to-fail banks traipsed up to Capitol Hill
yesterday to submit to questioning from Barney Frank and the
House Financial Services Committee he heads.
It was the latest installment in a series of show trials
featuring the likes of Major League baseball, the Detroit auto
industry, Big Oil and Bad Tobacco.
Not that Congress is outside its jurisdiction in inquiring
after the taxpayer money it has doled out. (If only lawmakers
were as vigilant about the rest of their spending.) When our
elected representatives are out for blood, a legitimate form of
inquiry quickly degenerates into finger-pointing and grand-
standing for the folks back home.
Yesterday’s hearing was relatively tame, as far as lynchings
go. The eight Wall Street CEOs, including Citigroup Inc.’s Vikrim
Pandit, JPMorgan Chase & Co.’s Jamie Dimon, and Bank of America
Corp.’s Ken Lewis were questioned about their lending, or lack of
it, since they received an injection of government capital under
the Troubled Asset Relief Program. They were scolded for spending
the money unwisely. They were asked about salary, bonuses and
“planes and perks” (a show of hands, please).
The bankers were appropriately contrite in admitting
mistakes and sincere in their commitment to make amends. Pandit
volunteered to take a salary of $1 and no bonus until Citigroup
is profitable again.
The execs had to dance around some of the questions, such as
one on raising credit-card rates, with prosecutor Maxine Waters,
Democrat of California, cutting off the witness before he could
explain how banks make a profit.

Reversal of Fortune

Just imagine if the tables were reversed. Frank and Waters
are seated at the witness table instead of perched on the hearing
room dais. The questioning would go something like this:
Chairman Frank, on July 14, 2008, you made the following
pronouncements about Fannie Mae and Freddie Mac, the two huge
government-sponsored enterprises that are the key players in
mortgage finance:
“Fannie and Freddie are fundamentally sound.”
“They are not in danger of going under.”
“Looking at the financials, they’re solid.”
You followed that analysis with a forecast. Referring to
legislation before your committee to allow the Treasury to lend
to and buy unlimited shares in the GSEs, you said: “We’re doing
three separate things that make it much less likely -- very, very
unlikely -- that we’ll have this kind of a housing crisis six
months or a year from now.”
Less than two months later, Fannie and Freddie were wards of
the state.
Just answer the questions, Mr. Chairman.

GSE Enabler

As the ranking member of the House Financial Services
Committee -- before you became chairman in 2007 -- you
consistently opposed stricter regulation of Fannie Mae and
Freddie Mac. I would just note that you received $42,350 from
Fannie’s and Freddie’s political action committees and employees
from 1989 to 2008.
In 2004, you received a report from the GSE regulator showing
that Fannie and Freddie had manipulated their earnings, enriching
their senior executives in the process. Yet you and your fellow
committee members, primarily Democrats, looked the other way.
Even worse, you shot the messenger, Armando Falcon, director
of the Office of Federal Housing Enterprise Oversight, who found
accounting irregularities at both companies.

‘Innovation’ Lending

This is what you said to Falcon at a committee hearing:
“I don’t see anything in your report that raises safeness
and soundness problems.”
Your distinguished colleague, Maxine Waters, was right there
to back you up.
“We do not have a crisis at Freddie Mac, and particularly
at Fannie Mae, under the outstanding leadership of Franklin
Raines,” she said.
She went on.
“What we need to do today is to focus on the regulator, and
this must be done in a manner so as not to impede their
affordable housing mission.” That mission, as you noted, has
seen “innovation flourish from desk-top underwriting to 100
percent loans.”
We all know how that worked out. Fannie had to restate
earnings back to 2001, erasing $6.3 billion in previously
reported profits.

Doing Penance

Former CEO Franklin Raines kept the lion’s share of the $91
million bounty he received for his six years of service at the
company. (Raines had to cough up $24.7 million last year to
settle a claim that he inflated earnings.)
Questioned by former congressman Chris Shays, Republican of
Connecticut, about Fannie’s teensy 3 percent capital cushion,
Raines said of the multi- and single-family loans the company
holds: “These assets are so riskless that capital for holding
them should be under 2 percent.”
Finally, Mr. Chairman, you used your influence as chairman
of the House Financial Services Committee to secure $12 million
for a troubled home-state bank under the TARP program. Treasury
had stipulated that the banks be healthy.
It’s disingenuous to be critical of legislation you passed
and a program you implemented when you’re the one bending the
Mr. Chairman, we thank you for your candor in appearing
before us today.

(Caroline Baum, author of “Just What I Said,” is a
Bloomberg News columnist. The opinions expressed are her own.)

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