Commissions are often created to defer tough decisions; to forge a consensus around a hard solution to a genuine problem; and, rarely, actually to delve into underlying facts. The Angelides commission, officially chartered by Congress this summer as the Financial Crisis Inquiry Commission, has the chance to be that third kind of commission, gathering the missing empirical data on fundamental questions that can guide future decision-making.
We already know an awful lot more about what happened last year than we did in 1932, when the legendary Pecora commission was created to investigate the Wall Street crash. We know the fundamental violations of sound banking practice and regulatory failures that brought us to the precipice. Yet there are still critical areas that would benefit from the commission's detailed analysis: four structural issues that have not yet received adequate attention and one particular transaction that is still highly ambiguous.
The first structural issue that Phil Angelides and his colleagues should investigate is what corporate boards knew about the state of corporations they governed and why they did so little to protect them. The commission should inquire about what information board members received about risk and leverage and how accurate that information was. We need to understand exactly what the boards of Citi, Lehman, Merrill, Goldman, and Bank of America were told. Tracing the information flow will also permit us to understand whether the risk analysis was wrong from its inception, ignored by those up the chain, or filtered as it went up the chain.
Second, the Angelides commission should dig into the corporate-compensation process. What, exactly, did compensation consultants and compensation committees say and do—and why? My one investigative experience in this area revealed a veritable swamp of conflicts and aberrant information flow. (Anybody with time to spare and a desire to read a horrifying tale of corporate failure should read Dan Webb's report about Dick Grasso's pay package.) The commission should dissect the actual e-mail traffic, determine what metrics were used by the comp consultants, and examine what information went to the comp committees of each of the companies that received any federal assistance. I would give long odds that they discover a welter of conflicts of interests—e.g., compensation consultants whose livelihoods depend on the good wishes of the CEO whose compensation package they are determining.
Third, the rating agencies must bare their souls to the world. We know that there is an inherent conflict of interest in the way ratings agencies are compensated, but we do not yet know whether their straight analytical skills were right, wrong, or somewhere in between. Examining their actual financial models might reveal that they were as sophisticated as possible—or that they were unforgivably sloppy.
Fourth, the commission must put the New York branch of the Fed under its microscope. The New York Fed was at the center of every major transaction during the meltdown, and it was the essential supervisor of the organizations and the credit markets beforehand. How did the New York Fed evaluate the risk, leverage, and stability of all the debt that accrued over the prior years. And what did New York Fed officials tell bank officials prior to and during the meltdown? The Fed has managed to avoid scrutiny for years. That should be permitted no longer. This record is too essential. Former New York Fed boss Geithner and Fed Chairman Bernanke misunderstood the impact that the sub-prime defaults would have on the broader credit markets: Was that a consequence of bad analytical work within the Fed? This question has enormous implications for how we respond, and it affects which institution should be vested with the so-called "systemic risk" regulator power.
The Angelides commission should also demand to see every piece of paper from the Fed, AIG, and all of the counterparties related to the AIG bailout.
If the Angelides commission issues subpoenas to investigate these five questions and promises to set these documents before the public, we will know it is for real and will serve a genuine public purpose. Populist anger is no better a policy guide than libertarian rhetoric. Only hard facts—facts that this commission can gather—will permit the debate to move beyond either one.