Too Much Little Ball? Day 2 of the Financial Inquiry Commission (Update)

After two days of hearings, the Financial Crisis Inquiry Commission seems to be drifting away from the biggest questions that haunt our economic system like the oligopoly of banks that are far too big to fail, the mal-distribution of wealth, and the failure to prevent destructive financial innovations.

It is understandable that the Financial Crisis Inquiry Commission would want to explore the many facets of mortgage fraud. After all, millions are suffering under all manner of predatory practices right now. By highlighting such fraud, the commission can help make the case for a new Financial Consumer Protection Agency that the major banks are trying to kill.

But as witnesses like Lisa Madigan, the Illinois Attorney General, makes clear, the demand for these products came a few major Wall Street firms who profited wildly by packaging and selling vast pools of high risk mortgages, (and then also sold layers of synthetic products based on the same debt to further leverage their bets.)

If the Commission follows Ms. Madigan’s lead, they will head back into Wall Street and ask the most fundamental questions: why were these toxic securities so profitable and where did all the wealth come from to buy them up?

Denise Crawford, the Texas Securities Commissioner, also recognized the larger implications when she said "The great minds of Wall Street are probably right now coming up with new securitization products" that could lead us to the next crash. It's not just mortgages. It's the entire structure of Wall Street and the super-wealthy that create the demand for new speculative products.

The commissioners should haul the Wall Street CEOs back and demand that they explain in detail how they are lobbying against consumer protections. The commission should ask the big bankers to explain how much profit they made from these toxic assets, before they crashed. Then they should ask how many of these assets they are still creating and how much profit comes from them.

Of course, we should eliminate mortgage fraud and a strong consumer protection agency could do so. But what about the big banks that created the demand for all of that fraudulent activty? Regulating them won’t do enough. Busting them up would be a good start.

So far we have heard precious little from the commissioners or the witnesses about busting up Goldman Sachs, Morgan Stanley, JP Morgan Chase, Bank of America and the other giant banks that are too big to fail.

Until the they show a willingness to dig deep into trust-busting, this commission, which has so much promise, will not speak to the fury of the American public. Nor will it get us nearer to the root causes of the crisis.

Les Leopold is the author of The Looting of America: How Wall Street's Game of Fantasy Finance destroyed our Jobs, Pensions and Prosperity, and What We Can Do About It [1] Chelsea Green Publishing, June 2009.