Subprime mortgages issued by Citigroup between 2005 and 2007. (Palantir Technologies/Center for Public Integrity)
WASHINGTON — The special bipartisan commission established by Congress to examine the causes of the financial crisis resumes its hearings Wednesday, taking on the heads of subprime lending institutions at the heart of the crisis and the government institutions responsible for overseeing those lenders.
The panel, called the Financial Crisis Inquiry Commission, comprises six Democrats and four Republicans and has broad authority to issue subpoenas, hold hearings and get testimony, and then refer people it considers lawbreakers to the relevant Attorneys General. A final report and recommendations must be completed by Dec. 15.
The hearings begin on Wednesday with former Chairman of the Federal Reserve Alan Greenspan, followed by current and former executives of subprime lenders.
The lineup includes Patricia Lindsay, a former executive for defunct subprime lender New Century Financial Corp, which was the provider of the third-highest volume of subprime loans between 2005 and 2007, according to the Center for Public Integrity (CPI). The company filed for Chapter 11 bankruptcy in April of 2007 amidst criminal probes into its lending practices. Three former top officers, not including Lindsay, now face charges of securities fraud for misleading investors.
Other testimony on Wednesday will come from embattled former executives at divisions of Citigroup Inc.
“Citigroup was largest beneficiary of government bailout by a long-shot,” according to John Dunbar, the primary author for the CPI’s report on the subprime meltdown.
Citigroup not only received billions in bailout money, much of which it has repaid, it the government also guaranteed $306 billion in loans and securities backed by residential mortgages, assets that remain on the Federal Reserve’s balance sheet.
“Everyone has sort of forgotten about these guaranteed assets,” says Dunbar. “What’s in that $306 billion pile of manure and what’s it mean to the taxpayer?”
On Thursday, Citigroup’s former CEO Charles Prince and former chairman of the executive committee Robert Rubin will provide testimony. Rubin, the former Clinton-era Treasury Secretary, has never publicly testified on the financial crisis, according to according to FCIC spokesman Tucker Warren .Their testimony will be followed by that of the current and former comptrollers of the Office of the Comptroller of the Currency. Arthur Wilmarth, law professor at George Washington University, believes the OCC along with the Office of Thrift Supervision had a lot to do with why subprime became as big a problem as it did by taking the power to supervise banks away from the states.
Lisa Madigan, the attorney general of Illinois, said in her testimony in January that the OCC was “particularly zealous in its efforts to thwart state authority over national lenders, and lax in its efforts to protect consumers from the coming crisis.”
On Friday, the commission will hear from former executives of Fannie Mae and Freddie Mac, as well as the former directors of the government body charged with regulating the two problematic government-back lenders, sometimes called government sponsored entities, that were nationalized in emergency measures in 2008 due to subprime lending exposure.
Mark Zandi, chief economist at Moody’s Analytics, which is not part of the ratings agency, said that this panel presents an important issue.
“It’s a very important question, goes to whether its government that’s the main culprit here or whether it’s the market. Everyone’s culpable, but it’s where the emphasis resides,” Zandi said. “Hopefully these series of testimony provides a way for the commission to come to some sort of consensus on the GSEs.”
The commission has so far collected 500,000 documents containing more than two million pages, and the chair and vice chair, Phil Angelides and Bill Thomas, respectively, have conducted more than 200 interviews in the efforts to understand the culpability of different parties, Warren said.
The commission’s findings can wind up affecting legislation. The Senate version of the bill on financial regulatory reform is still being finalized and can use the findings from these hearings, Warren said, though he maintains the findings from the hearings will be used regardless of whether they produce federal law.
“Real reform does not happen with a stroke of a pen,” Warren said.
So far the hearings have provided important dialogue on the financial crisis, but have not been too aggressive, GW’s Wilmarth said.
“The early hearings in January were actually better than I expected, but what we haven’t seen yet are the Pecora hearings,” said Wilmarth, referring to the rigorous investigation into Wall Street banking after the great depression led by prosecutor Ferdinand Pecora.