House on fire

The House Oversight Committee holds its much-publicized "financial collapse" hearings today, where Reps get to grill AIG and Lehman bigwigs over the AIG and Lehman bailout and bankruptcy, respectively.

The Reps' back-and-forth with the bigwigs (which anyone can watch, live, by clicking the link above) reflects a certain obvious reality: like the rest of America, Congress is still trying to figure out what exactly just happened. Waxman's crew asks the predictable questions, which means the rough transcript of the debate looks like this:

Rep: You said, back in 2007, that your business was sound. How can you justify lying to investors like this?
Bigwig: It was pretty awful, yeah.
Rep: Do we need to revisit deregulation, accepting that possibly the financial sector can't be trusted to avoid risk without some government supervision?
Bigwig: Probably not.
Rep: Should someone go to jail over this?
Bigwig: I really don't know.

What hurts, of course, is the obvious fact that the Reps in question can't ask the right questions because they don't even know what the right questions are. Sure, they've acquired the erudite language: credit default swaps, etc. But the companies in question were massively exposed, through multiple contracts, on a number of fronts. Their collapse was, to any outside observer, quite sudden.

What's becoming obvious, however, is that to the people on the inside, this collapse was anything but sudden. It was, if not predictable, at least forseeable. Unfortunately, the people in government whose job it was to foresee (Greenspan, Bernanke, the SEC) didn't make the right judgment calls.

Instead of admitting to its mistakes up front, the SEC has been obfuscating the issue - going so far as to censor potentially damaging reports from its own Inspector General. Not only did the SEC censor the first edition of this report, but when Bloomberg broke the news (this morning) that the SEC had censored the report, either the SEC (or someone else!) got Senator Chuck Grassley to take down the uncensored version he had posted on his Website. Which means the public can still only access the censored version.

It was never AIG and Lehman's job to protect the American people. That was the SEC and the Fed's job. And what is glaringly missing from the House hearings today and yesterday is any acknowledgment or examination of that fact.