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The Financial Crisis Inquiry Commission: What Investors Should Know

Medical Capital Private Placements. Schwab Yield Plus. CDOs. Auction Rate Securities. Morgan Keegan bonds. Lehman Brothers Principal Protected Notes. Credit Default Swaps. OTC derivatives. These and other Wall Street instruments have produced billions and billions of dollars in financial losses for individual and institutional investors over the past two years. And that's exactly why investors need to pay close attention to the Financial Crisis Inquiry Commission hearings.

The Financial Crisis Inquiry Commission is a bipartisan 10-member committee appointed by the President to investigate the root causes for the near-collapse of the financial markets in 2008 and 2009. As part of the investigation, some of Wall Street's biggest heavyweights - including CEOs from JP Morgan Chase, Goldman Sachs, Morgan Stanley and Bank of America - are giving their take on what happened. So far, their responses do very little to inspire confidence that history will not repeat itself.

In listening to various testimonies (which become quite lively at times and even argumentative), it's apparent that the investment banks don't have a pat reason for the onset of the nation's financial meltdown. It is clear, however, they view themselves as victims, not perpetrators, and the events that rocked the financial world as unusual happenstances.

Lloyd C. Blankfein, CEO of Goldman Sachs, compared Wall Street's demise to a hurricane that no one could have predicted.

Questioning of Blankfein becomes even more telling when he's asked about a subject Goldman Sachs has received considerable negative attention recently: shorting securities. Commission Chairman Phil Angelides probes Blankfein as to why Goldman Sachs would take bad financial assets, package them together as securities, sell them to investors and then short the securities it had just sold. In other words, why did Goldman make bets on the future failure of securities it was selling to investors?

Blankfein conceded that the behavior might have been improper, but he also defends it by saying, “There were professional investors who wanted [these securities].... I felt good about it.”

Angelides' response echoes what many people are now saying about the practice. Goldman Sachs essentially was double dipping.

“It seems like you were selling a car with faulty brakes and then buying an insurance policy on that car,” said Angelides. “It doesn't seem to me that that's a practice that inspires confidence.”

Blankfein's response: “We are market marketers” and “we are sorry people lost money.”

Goldman Sachs, meanwhile, is one of a few investment banks that emerged from the financial crisis relatively unscathed. Why? It sold some $40 billion in securities backed by risky mortgage-related loans while betting that the housing market would plummet.

On the subject of over-the-counter credit derivatives - contracts that shift risk from one investor to another - a question was posed to JP Morgan's CEO Jamie Dimon on how his bank had altered its approach to conducting business in the OTC market. Dimon's response: “Other than being more vigilant, not a lot.”

It's been said that those who do not learn from the past are destined to repeat it. If that is true, investors owe it to themselves to hear from those who were at the heart of the financial crisis. Their responses - and obvious unwillingness to take responsibility for their own reckless behavior - may indeed speak volumes for the future.