Bernanke: all but one major firm at risk in 2008

WASHINGTON Thu Jan 27, 2011 5:46pm EST

Chairman of the Federal Reserve Ben Bernanke speaks during the Financial Stability Oversight Council meeting at the Treasury Department to discuss the Volker Rule from the Dodd-Frank Act in Washington, January 18, 2011. REUTERS/Larry Downing

Chairman of the Federal Reserve Ben Bernanke speaks during the Financial Stability Oversight Council meeting at the Treasury Department to discuss the Volker Rule from the Dodd-Frank Act in Washington, January 18, 2011.

Credit: Reuters/Larry Downing

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WASHINGTON (Reuters) - Twelve of the 13 most important U.S. financial firms were at the brink of failure at the height of the credit crisis in 2008, according to previously undisclosed remarks made by Federal Reserve Chairman Ben Bernanke in November 2009 to an investigative panel.

He told the Financial Crisis Inquiry Commission in a private interview that even the most powerful U.S. investment bank Goldman Sachs was among those he feared would topple in a crisis he described as the worst in financial history, even exceeding the Great Depression.

The notes from the interview were released on Thursday by the commission as part of its final report.

"If you look at the firms that came under pressure in that period ... only one ... was not at serious risk of failure," Bernanke told the commission. "Even Goldman Sachs, we thought there was a real chance that they would go under."

Bernanke's stark assessment of Goldman's vulnerability goes further than that of chief executive Lloyd Blankfein, who told the commission he was "very nervous" during the crisis but said Goldman maintained "tremendous liquidity" throughout.

The report did not identify which of the 13 firms was not considered by Bernanke to be in danger of failure.

The deeply divided 10-member panel's final report was endorsed only by its six Democratic members. It criticized the culture of deregulation championed by former Federal Reserve Chairman Alan Greenspan and said the government had ample power to avert the crisis but chose not to use it.

The commission was set up by Congress to get at the roots of the crisis, but its final product was marred by the lack of consensus and comes after last year's passage of the Dodd-Frank financial reform law, further blunting its impact.

A competing minority report from three Republican commissioners largely exonerated Greenspan, a fellow Republican, saying, "U.S. monetary policy may have contributed to the credit bubble but did not cause it."

Through a spokeswoman, Greenspan declined to comment.

A fourth Republican on the panel issued yet another report, focused mostly on U.S. housing policy in explaining the origins of the crisis.

FODDER FOR BOTH SIDES

In the fight between pro-reform Democrats and anti-reform Republicans, the main report and the two dissents provide fodder for both sides, while highlighting partisan fault lines that today pervade political Washington, from financial regulation, to health care, to addressing the budget deficit.

The unveiling of the three reports was seen by markets as a nonevent that did not pose a fresh threat to financial firms.

"The market is not really going to react -- the market already has a very good idea of what happened," said Matt McCormick, portfolio manager at Bahl & Gaynor Investment Counsel Inc in Cincinnati, which owns bank shares.

One Wall Street investor, who asked not to be named, said: "We still face the same problems we did before. I don't think we're learning much from it. This is total rehash of stuff that has surfaced and been discussed and chewed over."

As banks have pulled back from the brink over the last 12 months and returned to profits, some senior bankers have gone on the offensive against critics.

Barclays Plc's chief executive Bob Diamond told UK lawmakers earlier this month that it was time for banks to stop apologizing for the mistakes that caused the financial crisis.

"There was a period of remorse and apology for banks and I think that period needs to be over," Diamond told a committee during 2-1/2 hours of questioning.

Jamie Dimon, chief executive of JPMorgan Chase & Co said not all banks were in trouble during the crisis. "There is a huge misconception. Not all banks needed that (rescue money). Not all banks would have failed," Dimon said on Thursday at the World Economic Forum in Davos.

French President Nicolas Sarkozy clashed with Dimon at a later Davos session, telling him, "The world has paid with tens of millions of unemployed, who were in no way to blame and who paid for everything."

MOUNTAIN OF NOTES, DOCUMENTS

Regardless of the policy implications, a mountain of interview notes and internal documents obtained by the panel contained some revelations.

For instance, the main report says Goldman Sachs capitalized on the government's bailout of American International Group to get even more payments from the beleaguered insurer, including $2.9 billion from proprietary trades Goldman placed for its own profit.

The FCIC says that beyond the $14 billion in AIG bailout funds that Goldman distributed to clients, Goldman received an additional $3.4 billion from AIG related to credit default swaps; that the bulk of that was made possible by the AIG bailout; and that Goldman kept $2.9 billion for its own books.

Goldman has long said it did not profit in any way from AIG's bailout.

The crisis that peaked in the fall of 2008 pushed some of the most storied financial firms to the brink of collapse. Some, such as AIG, were bailed out by the government; others, such as Lehman Brothers, were not and vanished.

Democratic commissioner Brooksley Born told a news conference that the panel made "several" referrals to authorities about potential violations of U.S. law related to the crisis, but panel members declined to give further details.

The commission was set up by Congress in May 2009. The hope was that its work would rip the lid off the crisis in the comprehensive way that the Pecora Commission did in the 1930s during the Great Depression.

Arthur Levitt, a former head of the U.S. Securities and Exchange Commission and now an advisor with The Carlyle Group, said the FCIC paled in comparison to the Pecora Commission, whose findings laid the groundwork for creating the SEC.

"This particular commission was so political from start to finish in terms of both its composition and leadership that it was doomed from the outset," Levitt told Reuters.

All three of the FCIC's reports generally agree the crisis was not, as some bankers have tried to portray it, some sort of unavoidable natural phenomenon.

"We conclude this financial crisis was avoidable. The crisis was the result of human action and inaction, not Mother Nature or computer models gone haywire," said the majority report of the six Democrats.

Democratic commissioner Byron Georgiou, speaking at the news conference, was skeptical that global markets are much safer, noting Dodd-Frank did little to loosen the concentration of assets that occurred due to mega-mergers tied to the crisis. "Our financial system is really not very different today in 2011 than it was in the run up to this crisis," he said.

(Reporting by Dave Clarke and Kevin Drawbaugh; Additional reporting by Maria Aspan, Ben Berkowitz and Daniel Wilchins in New York, and Joe Rauch in Charlotte; Editing by Tim Dobbyn)

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Comments (12)
Gotthardbahn wrote:
Evidently Mr. Greenspan will now be made the scapegoat for this fading crisis. Given how Capitol Hill lavished praise on him prior to his retirement in 2006 – ‘greatest central banker ever’, &c. – it’s not surprising that these politicians are now quite happy to stab him in the back. Which is not to say Mr. Greenspan is blameless, not at all, but it is unlikely that Washington politicians will ever point to their own as possibly, maybe, perhaps to a tiny degree at the margin being culpable as well. A warning lesson to others who gain the praise of politicians: beware.

Jan 27, 2011 11:13am EST  --  Report as abuse
DSrts wrote:
Crisis would not have happened if risky Mortgages had been not lent, packaged, sliced, diced and sold to unsuspecting investors. Who is to blame? 1. Government for ’strongly’ encouraging risky mortgages 2. Financial institutions for creating and selling them.

Jan 27, 2011 11:53am EST  --  Report as abuse
uc8tcme wrote:
Why should we focus on who or what caused the crisis, let’s just learn and do not forget what happened. There were too many factors in place to exactly pass the blame on one entity – this was a perfect storm. Now there should not be a next time – as the great words of GW sums it up – “Fool me once shame on me — you ain’t going to fool me a second time”.

Jan 27, 2011 12:31pm EST  --  Report as abuse
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California state worker Albert Jagow (L) goes over his retirement options with Calpers Retirement Program Specialist JeanAnn Kirkpatrick at the Calpers regional office in Sacramento, California October 21, 2009. Calpers, the largest U.S. public pension fund, manages retirement benefits for more than 1.6 million people, with assets comparable in value to the entire GDP of Israel. The Calpers investment portfolio had a historic drop in value, going from a peak of $250 billion in the fall of 2007 to $167 billion in March 2009, a loss of about a third during that period. It is now around $200 billion. REUTERS/Max Whittaker   (UNITED STATES) - RTXPWOZ

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