When I began listening to the recorded testimony of Wall Street banking executives to Congress Wednesday on C-Span, I started to feel like I was sitting in a circle at an Alcoholics Anonymous meeting, listening to my fellow attendees as they told the rest of us the terrible things they had done to get to the point where they could finally be honest with themselves. After listening a little longer, though, I began to wonder if the bankers really thought anyone was buying what they were selling. Goldman Sachs chairman Lloyd Blankfein basically explained, after his obligatory mea culpa, that there should have been more regulation, and appeared to insinuate that a part of the blame for the financial crisis should be shared by the government agencies charged with making sure companies like his operated inside the regulatory guidelines.

The CEO’s of our nation’s largest banks have testified in front of Congress so many times in the last year it seems they’ve finally figured out a better strategy -- apologize profusely, talk openly about some of the high profile mistakes they’ve made, and promise not to do it again. Blankfein seemed to be having fun, smiling as he detailed how much his firm had cut the compensation of their employees, up to and including himself.

I actually originated some of the loans the Financial Crisis Inquiry Commission members were so curious about. Listening to Commissioner Byron Georgiou’s mile long, multi-part question about mortgage loan origination, a question that seemed to indicate a desire to pinpoint the one specific area responsible for the entire financial meltdown, I understood why Blankfein was smiling so much. The politicians asking the questions didn’t understand the mortgage business well-enough to ask about anything that could be truly embarrassing, and even if they did, it would unlikely that much of the viewing public would either.

As I listened to the questioners and the bankers drone on and on, I thought about the borrowers I’d worked with over the years. Most of them, even the better educated ones, were at an obvious disadvantage throughout the process, relying on their mortgage professional for the most part to steer them in the right direction and get them the best deal possible. But mortgage lenders do not have a fiduciary responsibility to their clients, the same way Wall Street bankers do not have a fiduciary responsibility to Congress.

If our Financial Crisis Inquiry Commission members really wanted to make a difference, they wouldn’t have wasted time asking the questions they did about AIG or salaries. They would have focused instead on the structural and institutional guidelines that were altered or loosened before the crash, and asked the sixty four thousand dollar question -- why did such a small group of firms get such a sweetheart deal?

In 2004, the SEC allowed five firms — three that have collapsed plus Goldman Sachs and Morgan Stanley — to more than double the leverage they were allowed to keep on their balance sheets and remove discounts that had been applied to the assets they had been required to keep to protect them from defaults.

The so-called net capital rule was created in 1975 to allow the SEC to oversee broker-dealers, or companies that trade securities for customers as well as their own accounts. The net capital rule requires that broker dealers limit their debt-to-net capital ratio to 12-to-1, although they must issue an early warning if they begin approaching this limit, and are forced to stop trading if they exceed it, so broker dealers often keep their debt-to-net capital ratios much lower."

Using computerized models, the SEC, under its Consolidated Supervised Entities program, allowed broker dealers to increase their debt-to-net-capital ratios, sometimes, as in the case of Merrill Lynch, to as high as 40-to-1. It also removed the method for applying haircuts, relying instead on another math-based model for calculating risk that led to a much smaller discount.

"Ex-SEC Official Blames Agency For Blow-Up Of Broker-Dealers"

The New York Sun

Blankfein would only admit to a debt-to-net-capital ratio in the 20-to-1 range on the record, and with no way to challenge him, Commissioner Peter Wallison had to move on.

If you've been in the financial services game long enough, even on the mortgage broker side, like I was, you had to learn the "Four C's" of a lending transaction -- character, capacity, credit, and collateral. Ignoring any one of these items meant you couldn't properly qualify the risk in front of you. In this case, the argument was and will continue to be that the track record and the reputation these companies possessed was the deciding factor in making a decision to increase their debt-to-net capital ratio. Ironically, THIS was the same methodology we used to make stated income loans.

Maybe Congress didn’t do its homework well enough on this debt-to-net-capital detail and the many others like it that helped our corporate titans give the people what they wanted -- big dream houses with low initial payments that they could buy with little or no money down.    

Something tells me these guys from Wall Street were smiling all the way back to their banks after testifying.