This post originally appeared on New Deal 2.0.
A terrific list of questions that the FCIC should ask banker executives, conceived by the trio of Eliot Spitzer, William Black and Frank Portnoy.
1. AIG: What was your firm's relationship with AIG?
How much exposure did you have to AIG? What information did you
publicly disclose about that exposure? Did you think AIG's CDS strategy
was "good business"? Do you think we still would have needed to rescue
AIG if its derivatives had been centrally cleared, as some in Congress
2. Disclosure: Were your financial statements
during 2005-08 accurate? What did your officers disclose to your board
about your bank's exposure to the nonprime mortgage markets before
2008? What specific information did you publicly disclose about your
exposure to derivatives and nonprime mortgages? When did officers or
employees of your firm recognize that there was a serious risk of a
housing bubble? What did they recommend, and what changes did the firm
implement, in response to the identification of this risk? Why?
3. Pay: What was your bank's total compensation for
officers for each year from 2001 to the present? What were the
components of that compensation? Identify and explain where
compensation created perverse incentives in the following contexts:
your bank, other banks, executive compensation advisory firms, audit
firms, appraisers, rating agencies, loan brokers, loan officers? What
aspects of compensation produced these perverse incentives? When did
employees of your bank become aware of the literature in economics,
criminology, and compensation warning of these perverse incentives?
What specific actions did the bank take in response? Which elements of
your bank's compensation system create perverse incentives?
4. Ratings: Why do you think the rating agencies
gave AAA ratings to toxic CDOs? Did you think CDO credit ratings
accurately reflected their credit worthiness? Did employees of your
bank ever express concerns internally/publicly about the judgment of
the ratings agencies? If so, when was the first time?
5. Moral hazard: What incentives at your
institution helped lead to the financial crisis? What conversations did
you have with the Fed regarding your exposure to CDS and other
derivatives? What monetary value would you place on the government
guarantee of your deposits?
6. Mortgage fraud: Name the three nonprime
specialty lenders with the worst reputations for originating fraudulent
mortgages. Name the three nonprime specialty lenders with the worst
reputations for originating predatory loans. Is there any legitimate
business reason why a secured lender would seek to induce appraisers to
inflate the value of the secured property? When did employees of your
bank become aware that coercion of appraisers to inflate appraised
values was becoming common? What action did they take or recommend when
they became aware?
7. Warnings: What were the three most significant
specific steps your banks took in response to the FBI's September 2004
warning that the developing "epidemic" of mortgage fraud would produce
a crisis if it were not stemmed? Why do you think the spread on
nonprime mortgages fell after this warning, and other warnings? Why did
bank loss reserves also fall during this time? What were your bank's
analyses of these risks and the adequacy of loss reserves
(industry-wide and at your bank) and how did they change as the markets
exhibited these perverse patterns? What did your bank's officers
recommend that the bank do in response to these perverse market
conditions and what actions did the bank actually take? Were the
industry reactions, and your bank's reactions, to the warnings
8. Lobbying: How much has your bank spent on
lobbying over the last five years? This year? How many additional
personnel has your bank hired full-time or as consultants to lobby the
9. Crimes: How many criminal referrals has your
bank made for mortgage-related frauds in each year beginning in 2002?
How many named your own officers or employees? Does the FBI have
adequate resources to investigate such frauds? Explain how an epidemic
of mortgage fraud must lead to widespread accounting and securities
fraud if the mortgage paper is to be resold.
10. Regulation: Did the passage of the Commodities
Futures Modernization Act of 2000 contribute to the crisis? Did the
federal regulators' efforts to preempt state regulation of predatory
mortgage lenders contribute to the crisis? Should the Federal Reserve
have used its authority under HOEPA to regulate nonprime lending during
the financial bubble? Provide any contemporaneous analyses of the role
of regulation, deregulation, and desupervision in contributing to the
crisis. Did your bank lobby (directly or indirectly through trade
associations) in support of deregulatory efforts that contributed to