By Pam Martens and Russ Martens: April 19, 2021 ~
Wall Street Bank CEOs Are Grilled at House Hearing, February 11, 2009, As U.S. Economy Collapses from their Subprime and Derivative Activities
We’ve been closely monitoring the Senate Banking and House Financial Services Committees for the past 15 years. We can think of no other time when the Committees issued a joint statement to announce they were hauling the most powerful men on Wall Street to testify, without offering a scintilla of information on the topic of the hearing.
The press statement simply indicated that the Senate Banking Committee would hold its hearing on Wednesday, May 26 at 10 a.m. and the House Financial Services Committee would hold its hearing the following day on Thursday, May 27 at 12 noon.
The announcement indicated that the following CEOs are scheduled to testify: Jamie Dimon of JPMorgan Chase; David Solomon of Goldman Sachs; Jane Fraser of Citigroup; James Gorman of Morgan Stanley; Brian Moynihan of Bank of America; and Charles Scharf of Wells Fargo.
The joint press release did not give a title for the hearings nor the topic for the hearings. There is nothing on the websites for either Committee that sheds any further light on the matter.
The only conclusion that we can draw is that more than a month before the hearings are set to be conducted, the Chairs of these two Committees – Senator Sherrod Brown (D-OH) and Maxine Waters (D-CA) – wanted to send a message to Wall Street’s CEOs that they have them in their crosshairs.
If past is prologue, which we pray it is not, the hearings will use such a buckshot approach to questioning the witnesses that there will be no meaningful takeaway to the public from the hearings. In April of 2019, when CEOs from the same banks appeared before the House Financial Services Committee, the topics ranged from the banks’ financing of fossil fuel companies; to “pink lining” (discriminatory practices against women); to racial preferences in hiring and promotion; to Jamie Dimon’s failure to pay his bank tellers enough to raise a child without going into debt; and Wall Street’s decades long practice of sending all customers and employee claims of wrongdoing into its own private justice system called mandatory arbitration – effectively closing the nation’s courthouse doors and pitting David against Goliath in the pursuit of justice against the most rigged and historically corrupt industry in America.
While each of these issues are critical to the national debate, dumping them all into one hearing where the Congressional questioner together with the witness get just a combined five minutes does a disservice to the seriousness of each issue. In fact, this approach has served to hold back change on Wall Street as news reporters simply grab the single most titillating detail from each hearing and put that in a headline.
The Senate and House should do what the smart Senate Banking Committee of 1933 did to deal with the serial corruption on Wall Street that had collapsed the U.S. economy and led to the Great Depression of the 1930s. It hired a former Chief Assistant District Attorney, Ferdinand Pecora, named him as its Chief Counsel, and put him in charge of the questioning and building of the case against the Wall Street bank CEOs in hearings that ran for three years and generated bold headlines on the front pages of newspapers across America.
Had that Senate hearing structure occurred following Wall Street collapsing the U.S. economy in 2008, there might have been meaningful financial reform instead of the toothless Dodd-Frank Act that has left the U.S. today with the very same dangerous mega banks on Wall Street that existed in 2008.
One topic that should be front and center at the May hearings is the fact that these giant Wall Street trading houses, all of which own federally-insured/taxpayer-backstopped deposit-taking banks, have effectively found a way to loan out their balance sheets to hedge funds, including those super-secretive hedge funds called family offices.
The implosion in late March of Archegos Capital Management, a hedge fund styling itself as a family office, brought stunning new details to light regarding the reckless manner in which Wall Street’s mega banks are handling risk.
Archegos is reported to have had approximately $10 billion of its own capital which it had leveraged up to a reported $100 billion or more in a handful of concentrated stock positions. The leverage came in borrowings from some of the biggest banks on Wall Street. When those stock positions began to implode by declines of 30 to 50 percent, the banks called on Archegos to post more collateral (a margin call). But Archegos did not have the funds to meet the margin call so the banks sold out the account in order to stem their own losses.
Thus far, Morgan Stanley has belatedly announced a loss of $911 million from its involvement with Archegos; Nomura has indicated that its losses could reach $2 billion; while Credit Suisse has announced a staggering $4.7 billion loss. How many other banks are simply remaining silent on their losses to Archegos, justifying that to themselves on the basis that the loss was not “material” to final quarterly results, is an open question.
The most dangerous aspect of the Archegos matter is that the mega banks on Wall Street had created a way for these lucrative family office hedge funds to dodge both Federal Reserve margin rules and SEC reporting rules. Under the Fed’s Regulation T, the banks should have demanded 50 percent initial margin for the stock trades in a margin account at a broker-dealer. But the banks structured their arrangement with Archegos as a derivatives contract, not a margin account, which the banks assert kept the ownership of the stocks with them while giving Archegos the upside and downside of the stock performance. The banks collected lucrative fees for this arrangement.
This structure also prevented the hedge fund from having to file reports of its stock holdings (known as a form 13F filing) with the SEC. Thus Archegos was able to operate without the awareness of regulators.
There are approximately 3,000 family offices globally, raising the question as to just how many more Archegos-type blowups are still lurking out there.
Another deeply troubling aspect that deserves questioning at the upcoming hearings is the media reporting that the Wall Street banks were classifying what were effectively margin loans to a hedge fund as simply commercial loans. If this reporting is correct, then hundreds of billions of dollars in “commercial loans” reported by these banks, which Congress and regulators assumed were going into productive businesses and job growth for the general economy, were simply fueling a stock market bubble.
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