Appearing before the Financial Crisis Inquiry Commission are Lloyd Blankfein,… (Jay Mallin / Bloomberg )
Reporting from Washington — They admitted making mistakes and they regretted the economic devastation their decisions wrought, but the heads of four major financial firms wouldn't take direct blame for the massive meltdown in some tough questioning today by a government panel investigating the causes of the financial crisis.
"We did eat our own cooking, and we choked on it," John Mack, chairman of Morgan Stanley, said about the large bets his industry made on the continued rise in housing prices.
The high-profile appearance Wednesday of Mack and other Wall Street titans at the first public hearing of the Financial Crisis Inquiry Commission came as President Obama prepared to announce Thursday a new levy on banks to help recoup expected losses from the $700-billion bailout fund.
The White House move to assess what it is calling the "financial crisis responsibility fee" reflects the public anger aboutthe return of big profits and large bonuses to the financial industry while average Americans continue to struggle.
That outrage also has prompted Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, to schedule hearings this month on excessive executive compensation and on possibly increasing taxes on large bonuses.
"The question of compensation for people in the financial industry is a legitimate cause of concern in the country as a whole, and we are going to address it," Frank told reporters Wednesday.
"There may be, in some of these financial institutions, people capable of playing Major League Baseball. I'm not aware of any," he said. "But absent that, I don't know where they would go to get comparable forms of compensation."
The Wall Street executives largely defended their compensation practices and deflected suggestions they triggered the crisis. They described themselves as among the many players, from major financial firms to average consumers, who took on too much risk during the boom of the last decade, believing the good times would not end.
"Somehow we just missed that home prices don't go up forever," Jamie Dimon, chief executive of JPMorgan Chase & Co., told the panel in admitting his company never tested its exposure to a 40% drop in home prices even though it tested almost every other market scenario.
Goldman Sachs Group Inc. Chief Executive Lloyd Blankfein and Brian Moynihan, the new chief executive of Bank of America Corp., were the other initial witnesses as the congressionally appointed commission began the public portion of its yearlong investigation.
"We're after the truth, the hard facts," Phil Angelides, the commission's chairman, said in kicking off the first two days of hearings. "People are angry. . . . They have a right to be. If we ignore history, we're doomed to bail it out again."
Angelides, a former California state treasurer and 2006 Democratic nominee for governor, swore in the four executives and told them the commission would use its subpoena power when necessary -- unneeded Wednesday because the witnesses testified voluntarily -- and refer any wrongdoing it uncovers to the authorities.
The questioning was contentious at times, and Angelides was the most aggressive of the 10 panel members. He wondered whether the crisis was "purely a perfect storm" or "a man-made perfect storm in which the clouds were seeded."
The answers, which the commission must provide to Congress by Dec. 15, will be difficult to determine, Peter J. Solomon, a New York investment banker, told the panel in a second session later in the day.
"There's no silver bullet here," he said of the cause of the crisis. "If you listed all the villains in this tale, you wouldn't get to the plot."
Angelides focused his questioning on Blankfein, whose firm has been criticized for selling securities containing subprime mortgages and then shorting those same investments to hedge the firm's risk.
Blankfein said the practice was "improper" and that "we regret the consequence that people may have lost money." But he also defended the actions, saying they were what "market maker" firms such as Goldman do in creating a mechanism to trade shares and in minimizing the risks.
"I'm just going to be blunt with you," Angelides responded. "It sounds to me a little bit like selling a car with faulty brakes and then buying an insurance policy" on the person who buys the car.
The sparring between the two was the most contentious part of the first three-hour session. Blankfein said it was difficult to look at risk in hindsight after a major crisis. He noted that a person's assessment of the risk of a hurricane was greater after a season in which four major hurricanes hit.
"Acts of God are exempt," Angelides shot back. "These were acts of men and women."
Blankfein, Mack and Dimon -- all of whom headed major companies as the financial crisis approached -- testified on Capitol Hill for just the second time since the crisis began.