Goldman can’t be blamed alone

Goldman Sachs Group, in the billiard room, with a rope and a blood-stained collateralised debt obligation. That seemed to be the answer the Financial Crisis Inquiry Commission was aiming for yesterday as it kicked off a giant game of ‘Clue’ meant to solve the mystery of who killed the financial system.

Now don’t get me wrong. A bit of Goldman bashing is a good sport, since the firm is one of the biggest and most profitable on Wall Street. And there are plenty of serious questions that need probing regarding products it created and its dealings with the American International Group (AIG).

It’s just that the commission’s first day of public hearings needed to focus less on Goldman and more on the wider rot within the financial system . This misfire made for an inauspicious start for the panel, whose hot seat was filled by Goldman CEO Lloyd Blankfein, JPMorgan Chase CEO Jamie Dimon, Morgan Stanley chief John Mack and Bank of America’s newly-minted honcho, Brian Moynihan.

The poor showing will only reinforce the perception among many people that this commission, coming after financial-reform legislation has reached an advanced stage, is doomed to irrelevance. To avoid that fate, the commission in subsequent hearings, as well as in its final report due by year’s end, must do more than focus on the events of 2007 and 2008, or engage in academic discussions of risk-management practices.

PERFECT STORM

It’s imperative to employ a wider, and more historical, context than was displayed on the first day of hearings. That means questioning the very foundations of modern Wall Street and looking to which events over the past 20 years led the financial system to its current predicament.

Commission chairman Philip Angelides hinted at this possibility at one point, saying: “I do believe that one of the issues we must explore is: Was this purely a perfect storm, or was it a man-made perfect storm in which the clouds were seeded?”

Figuring that out means asking the likes of Blankfein or Dimon basic yet pointed questions such as whether their business model was, and possibly still is, broken.

That didn’t happen. Instead we got Commissioner John Thompson asking Morgan Stanley’s Mack for suggestions on ‘how to think about innovation and managing the risks associated with innovation.’

GOLDMAN’S SURVIVAL

Similarly, the commission needed to spend less time grappling with Blankfein over whether Goldman would have survived without government assistance. That’s an unanswerable question that does little more than let Dimon chuckle over how easy a ride he gets compared to Blankfein.

Commissioners also have to do more homework. Commissioner Peter Wallison wasted time quizzing the bankers about their leverage — borrowed money banks use to amplify returns. A staff member should have gone to the SEC website, called up the firms’ financial statements and plugged the balance-sheet figures into a spreadsheet. It’s that easy, and, once done, would have allowed Wallison to ask meaningful questions. The panel members also should lob questions at the right targets. It was surprising that Commissioner Brooksley Born aimed questions about OTC derivatives at Blankfein and Mack, rather than Dimon, whose bank is the biggest player in the area.

Let’s also be less solicitous of those testifying. The group’s stance should be adversarial, forcing witnesses to answer tough questions and cough up names of individuals who contributed to the crisis.

PINNING ACCOUNTABILITY

Holding individuals in government and on Wall Street accountable may well prove one of the commission’s toughest tasks. Yet it can’t shy away from it. And doing so means more than just playing pin the tail on Blankfein.