The Financial Crisis Inquiry Commission is currently interviewing bank CEOs in order to examine the cause of the current financial crisis.  So far, it sounds like the bankers are very concerned about their bonuses and are shirking off the cause of the financial crisis as a nothingburger.

We keep hearing the bankers say “We need to pay out big bonuses in order to recruit and retain the most talented and brightest workers.”  If indeed that is true, then why didn’t these talented and bright workers lead their banks into the biggest financial crisis of our time?  I’m guessing the bank CEOs need to pay bonuses to the hired help in order to justify receiving their own bonuses. 

Dr. Krugman and CalculatedRisk do a nice job of analyzing day one. CR says the Commission needs to interview the regulators in private and the comission must understand the originate-to-sell model of the mortgage lending business.

If the Commission really does want to learn WHO knew what, when, then they’re interviewing the wrong people.

They need to interview the line workers.  Mortgage loan processors, managers, escrow closers, underwriters from the banks, private mortgage insurance companies as well as wholesale lending, loan servicing default and loss mitigation workers and even consumers. Seasoned mortgage industry veterans who have proof in the form of saved memos or emails, that they informed senior management of the red flags, predatory lending, and the insane relaxation of underwriting guidelines that started to pop up as early as 2001 and 2002 yet were ignored or whose concerns were dismissed.

I am willing to bet that if the commission opened up a public comment period for testimony, they would have all the evidence they need to prove all these hoocoodanode banksters definitely did know but their own pay and bonus structure set up an external incentive to keep the dice rolling.  Who wants to be a Debbie Downer CEO and be the first banker to take away the punch bowl when the money party is still going full on?  Anyone? Anyone…Buehler?

Whoever moved first would have run the risk of watching their company lose billions of dollars in revenue at the tail end of the bubble, while their competitors gobbled up the last of the subprime, Pay Option ARM, stated income time bombs and all the bonus income that came with it.  Imagine what it would be like to lose millions, perhaps billions in revenue as your “best and brightest” loan originators (debatable) quit and moved to a competitor because the competing lenders were still selling the subprime/Alt-A/Option ARM drugs to the LO drug dealers who were selling them to the consumer and Realtor junkies. Imagine having to face the board and face the stockholders, trying to explain why you were tightening underwriting guidelines.  The only reason to cut the cord was if consequences started overshadowing the revenue and by then, the damage had been done.  If we continue to reward the bankers for risk taking with no personal consequences we get what we deserve. I’m sure there will still be plenty of people willing to take the helm at corporations; even with more personal liability at stake. 

What would the commission do with hundreds of thousands of comments from mortgage lending industry workers from around the United States? I’d like to find out.

The bank CEOs apparently pre-arranged their stories and flipped a coin to see which one of them would take the Hurricane Katrina angle, and who would say “this stuff happens every 5 to 7 years.”  The thing to do now is to put them in separate rooms and interview them alone.  The Prisoner’s Dilemma teaches us that they will break their agreement if separated and at least one will cave.

The bank CEOs win if they can pretend like this whole mess is nobody’s fault.  This case is not unlike the Space Shuttle Challenger Disaster.  There was one person, an engineer, Roger Boisjoly, who warned that the O-ring seals would fail when temperatures were too low. He was ignored by people in senior positions and the commission decided the accident was nobody’s fault.

There is no reason to ignore the thousands of people out there who warned management.