Commission puts U.S. banks under the spotlight

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America's politicians have put Wall Street on trial, but they aren't waiting for a verdict to mete out punishment.

President Barack Obama is expected Thursday to explain in detail how he intends to recoup about $100-billion (U.S.) from the financial industry, a sum that represents what the administration expects to lose on last year's bailout of the country's biggest lenders.

Mr. Obama's proposed levy, which is expected to be spread over 10 years and tied to a firm's liabilities, comes as a congressionally appointed commission begins an 11-month inquisition into what caused the banking system to melt down in the autumn of 2008.

The tax and the scrutiny combine to form an uncommon assault on an industry that has a well-documented history of spending considerable time and money to stay on the good side of politicians and regulators in Washington.

The White House and Congress are concerned with the populist outrage over the role financial institutions played. Goldman Sachs Group Inc., JPMorgan Chase & Co. and other financial firms are putting up record profits - and paying out big bonuses - even as the rest of the economy struggles to gain momentum amid a record budget deficit and an unemployment rate of 10 per cent.

If there was any doubt about the desire of politicians to distance themselves and the banks, it was put to rest Wednesday as the 10-member Financial Crisis Inquiry Commission, led by former California treasurer Phil Angelides, ensured the public would know that its work had begun by summoning as its first witnesses Lloyd Blankfein, Jamie Dimon, John Mack and Brian Moynihan - the chief executives of Goldman Sachs, JPMorgan, Morgan Stanley and Bank of America Corp. respectively.

The decision to begin the inquiry by making the likes of Mr. Blankfein and Mr. Dimon squirm under the spotlight successfully created the impression that the bankers would get no quarter from a commission that will also grill regulators, former officials and experts before presenting its report in December.

Mr. Angelides and his vice-chairman, former Republican congressman Bill Thomas, must overcome some doubt about the relevancy of an inquiry that will conclude its work months after the Obama administration and their allies in Congress implement a raft of new financial regulations.

There were no revelations in Wednesday's testimony, as the bankers mostly repeated defences of their actions, while sprinkling in a dose of contrition of getting carried away with risky bets on assets tied to the subprime mortgages.

"We understand the anger felt by many citizens," said Mr. Moynihan. "… Over the course of the crisis, we as an industry caused a lot of damage."

But like truth commissions everywhere, Mr. Angelides and Mr. Thomas have the opportunity to restore the public's faith in the financial system, even if the public is likely to be appalled by some of what it learns.

"It's important. It will help frame how people think," Douglas Elliot, a fellow at the Brookings Institution in Washington and a former investment banker at JPMorgan Chase, said of the crisis commission. "To the extent they pay attention, people are going to be surprised by how Wall Street and the regulators work. A lot of things we wouldn't care about in normal time are going to look pretty bad."

At one moment during Wednesday's testimony, Mr. Dimon appeared dismissive of the clamour around the financial crisis, suggesting financial markets were due for a correction. Mr. Dimon told the panel that at one point his daughter asked him what a financial crisis was. His response: "It's something that happens every five to seven years."

Mr. Dimon was simply reflecting the "creative destruction" theory that is pervasive on Wall Street: Markets will eventually correct, but the gains and innovations made during their rise always outweigh the losses.

Voters, who had little reason to care about Wall Street philosophy while their retirement plans were growing, could come around to curbing banks' behaviour the more they are exposed to attitudes of that sort, said Rob Johnson, a senior fellow at the Roosevelt Institute and director of the Washington-based research group's work on financial regulation.

"Not everyone wants to go to the rodeo," Mr. Johnson said.

Mr. Blankfein, who was the main target of panelists, was forced to defend again Goldman's controversial decision to find buyers for clients seeking to sell assets backed by subprime mortgages even as the firm itself bet against the toxic securities.

The Goldman Sachs chief said his firm simply matched sophisticated buyers with sophisticated sellers. Yes, Goldman Sachs was betting against the housing market, but many others on Wall Street believed it would rise. It's not a moral issue; Goldman Sachs just happened to call it right, Mr. Blankfein said.

That's not the response Mr. Angelides was looking for.

"Mr. Blankfein himself never admitted that there was any responsibility of Goldman Sachs to make sure the products themselves were good products," Mr. Angelides told reporters after the hearing, according to Bloomberg News. "That's very troublesome."