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Liveblogging the Financial Crisis Inquiry Commission Hearing

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Why did Angelides wait until 3:00 to hit Dugan on preemption? He really went for it, and it was great. Angelides to Dugan: "You tied the hands of the states and then you sat on your hands."

Dugan responded by saying 50 different sets of rules and disclosures would be required if states could enforce predatory lending laws against national banks. This is wrong. In practice, the banks just apply the regulations of the most stringent state across their entire business.

Dugan wasn't defending abstract principles of efficiency when he implemented preemption. He was actively defending specific subprime lenders, most notably First Franklin, against states who were trying to fight mass foreclosures. There is no excuse for that.

Aside from actually defending abusive practices by national banks, Angelides also noted that national banks supported 21 of the 25 largest subprime lenders with financing. That totally contradicted Dugan's prior claim that national banks provided "little" financing to subprime lenders.

Well done, but a little late.

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3:05

Angelides is doing well here.

Angelides: "Did the investment bank culture come to dominate the commercial bank culture?"

Dugan: "Yes."

This has enormous implications for Glass-Steagall. Dugan here is acknowledging that Citigroup was subjugating the practices of its commercial lending to suit the activities of its investment bank. And there's plenty of evidence for this-- Citi's subprime mortgages went up to its investment bank, which packaged them into securities and sold them off to investors for a big profit.

If the Glass-Steagall repeal hadn't allowed Citi to combine an investment bank and a commercial bank, it wouldn't have made so many subprime loans.

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3:00

Angelides: "Citigroup-- too big to regulate?"

Dugan: "I don't think they're too big to regulate."

Me: Citigroup needed $45 billion in direct bailout funds, plus hundreds of billions in indirect bailouts. If Citigroup isn't too big to regulate, the regulators, including Dugan, should have been fired years ago.

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2:55

Hawke actually just contradicted Dugan. Hawke said that the "essence" of predatory lending is "underwriting without regard to a borrower's ability to repay." Dugan's opening statement is all about how underwriting practices across the banking industry came to ignore borrowers' ability to repay.

Byron Georgiou just called Dugan out on allowing banks to provide financing to abusive subprime lenders like Ameriquest and New Century. Better than nothing. "They didn't make [subprime loans] themselves . . . but they permitted them to be made by providing extensive . . . financing."

"This is a difficult area," Dugan said. "We've never viewed the scope of our activities as going that far."

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2:50

Wallison: "How much predatory lending do you see in the course of your work?"

Dugan: "We made very clear that predatory lending . . . was not something we would tolerate . . . honestly, those practices never really took root."

This is absolutely false: http://www.thenation.com/doc/20100315/carter

Nobody is calling Dugan out on it.

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2:15

Dugan: "I regret that we didn't act sooner on stated-income mortgages . . . it was an invitation to fraud because it invited people to lie about their income, which many people did."

Dugan is reinforcing the general misperception that mortgage fraud is perpetrated by borrowers trying to con banks into giving them mortgages they can't afford. This does happen, but most mortgage fraud-- 80% according to the FBI-- is perpetrated by the lender. The lender falsifies a borrower's mortgage application in order to make the loan, and then either packages that loan into a high-interest security, or sells it to another bank for securitization. Either way, the bank stands to make a big, short-term profit, no matter what happens to the borrower.

There's no rational incentive for a borrower to knowingly buy a house he can't afford. People aren't always rational, so this still occurs sometimes. But there's a very rational incentive for banks to push borrowers in homes they can't afford.

Stated-income mortgages are loans where the bank doesn't require any documentation of a borrower's income. That makes it very easy for either party to commit fraud.

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1:45

Dugan is complaining about restrictions included in Gramm-Leach-Bliley that make it difficult for regulators to regulate complex megabanks like Citigroup. What he's not mentioning is that Dugan was one of GLB's authors, and that he lobbied hard for that bill on behalf of the American Bankers Association.

Dugan essentially deregulated himself.

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1:40

Dugan and Hawke are two of the worst regulators in history. Why does the Commission keep talking to them as if they are authorities on banking rather than culprits who helped caused an economic catastrophe? Somebody ask Dugan how much he made as a bank lobbyist.

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1:33

Dugan is talking about finalizing "guidance" on commercial real estate in 2006. Regulatory "guidance" is meaningless-- it's a pseudo-regulation that includes no penalties in the event that a bank violates it. Dugan also enacted guidance on predatory lending in 2006, and the Fed and other regulators adopted subprime guidance in 2001. A regulation with no penalty is not a regulation, it's "pretty please."

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1:25

Peter Wallison is incredibly dangerous. He still blames the Community Reinvestment Act and Fannie and Freddie for the crisis, despite no supporting evidence and mountains of evidence to the contrary. He's a staunch partisan defender of the Bush administration. He's said repeatedly that deregulation didn't do anything . . . but even from his own blame Fannie/Freddie narrative, the Bush administration would be most to blame. It was Bush who allowed Fannie and Freddie to buy subprime mortgage securities and classify them as "affordable housing" efforts. This was preposterous, because subprime loans are, by definition, NOT AFFORDABLE. Subprime loans are high-interest loans. They are expensive and do not help poor people.

Of course, Wall Street went gangbusters into subprime well before Fannie and Freddie did, so it's ridiculous to blame the GSEs for the crisis.

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Unbelievable. Hawke:

"I don't think deregulation was a contributing factor" to the crisis.

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1:20

John Hawke's opening statement was mostly pointless, but he did note that it can be difficult to measure capital under conditions of financial distress. This is true, and it's an argument in favor of breaking up the big banks.

Rubin spent most of the morning-- and Greenspan spent most of yesterday-- arguing that the way to fix the system was to boost capital requirements. That should be done, but it's not enough. If we can't even measure capital when things go into crisis mode, we won't be able to take regulatory action to shore them up, either. It's one of the reasons why a "resolution mechanism" to allow big, complex financial firms to fail without heavy economic fallout will not work. If we're going to protect the economy from Wall Street excess, we have to break up the biggest banks into units that are small enough to fail. Regulators will be in chaos when banks find themselves on the brink. We cannot allow that chaos to destroy the broader economy.

"You can never raise capital when you need it," is one of the oldest adages in finance. We have to have a financial system that can allow every bank to go under. That means breaking up the big banks.

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1:10 p.m.

FCIC Commissioners: please stop asking technical questions and ask Dugan who he used to lobby for (hint: PNC Bank, JPMorgan Chase, and the top lobby organization for the banking industry, the American Bankers Association).

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1:00 p.m.

A grotesque deception from Dugan's opening statement:

"The rapid increase in market share by these unregulated brokers and originators put pressure on regulated banks to lower their underwriting standards, which they did, though not to the same extent as was true for unregulated mortgage lenders."

Dugan is correct to note that many subprime lenders like Ameriquest and New Century were virtually unregulated, but he's spinning their role in the crisis to protect the banks he used to lobby for. Since the Ameriquests of the world didn't accept consumer deposits, they weren't subject to traditional bank regulations.

But Wall Street banks, including OCC-regulated banks, directly supported mortgage brokers and Ameriquest-type companies. Banks providing them with direct funding, and banks bought up all of the mortgages these companies issued, creating artificial demand for their predatory loans. Bankers even went into these Ameriquest-type companies and told their employees exactly how to issue as many subprime mortgages as possible. Subprime mortgages could be packaged into pricey securities that the big banks could sell to investors, and the banks were hungry for as many of them as they could get their hands on.

In other words, these "non-bank" lenders were working directly with the banks every step of the way. Wall Street was in fact pressuring the "unregulated brokers and originators" to issued terrible loans, not the other way around.