By Ronald D. Orol, MarketWatch
WASHINGTON (MarketWatch) -- What precisely caused the financial crisis, and what can we do to make sure it doesn't happen again?
An outside commission, authorized by Congress, will begin seeking to formally answer these questions at hearings set for Wednesday and Thursday, with the chief executives of the nation's biggest banks and top U.S. government regulators scheduled to testify.
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On Wednesday, the Financial Crisis Inquiry Commission will hear from Lloyd Blankfein of Goldman Sachs Group /zigman2/quotes/209237603/composite GS -0.13% , Jamie Dimon of J.P. Morgan Chase & Co. /zigman2/quotes/205971034/composite JPM +0.03% , John Mack of Morgan Stanley /zigman2/quotes/209104354/composite MS -0.64% and Brian Moynihan, Bank of America Corp.'s /zigman2/quotes/200894270/composite BAC +0.32% new top executive.
The 10-member inquiry commission is headed by two Californians: Phil Angelides, the panel's chairman, who is a former Democratic California treasurer; and Bill Thomas, the vice chairman, a former GOP congressman who oversaw the House Ways and Means Committee.
Expect finger-pointing and political outrage. Panel members are likely to inundate the bank executives with their concerns about an expected wave of big bank bonuses at the largest financial institutions, despite unprecedented taxpayer assistance each institution received as part of a $700 billion Troubled Asset Relief Program.
Questions about risky practices employed by the banks, including their packaging and selling of toxic assets, are expected to come up as well as a discussion about the consequences of the 1999 repeal of the Glass-Steagall Act. That statute was approved in 1933 and prohibited a commercial bank with retail depositors from investment-banking activities, such as owning full-service brokerages.
'What we all have learned is that these large institutions have levels of explicit and implicit government support beyond just TARP funding.'
Richard Neiman, New York State Banking Dept.
"What we all have learned is that these large institutions have levels of explicit and implicit government support beyond just TARP funding," said Richard Neiman, superintendent of banks in the New York State Banking Department. "The bank CEOs should be asked what do they view their institution's obligations are to taxpayers and country with which they operate, in light of government support, with respect to lending, riskiness of activities they engage in and compensation of their employees."
The inquiry panel is required to produce a report by December, a month after the midterm elections, detailing what went wrong, with the intended goal of assisting regulators in rewriting the rules of finance so that such a crisis doesn't happen again.
However, any investigations and subsequent recommendations produced could have little, if any, impact on key financial regulatory-reform legislation, because the report is scheduled to come out long after lawmakers are expected to complete work on bills responding to the market meltdown. The House approved sweeping bank-reform legislation in December, and the Senate is expected to complete its work on the reform package by July at the latest.
"They may have given up on the idea that this body would shape financial regulatory-reform legislation, because bills responding to the crisis could be completed by the time the commission issues its report," said Columbia Law School Professor John Coffee.
However, Neiman argues that the inquiry commission will contribute to the debate as the Senate considers bank reform later this month or in February.
Daniel Pedrotty, AFL-CIO's director of the office of investments, said he worries that the panel will only act superficially rather than as a serious investigative body that will break new ground and consider the historical context that created "too-big-to-fail" institutions.
"This should be about uncovering the reasons for why we got here, not just an opportunity for bank CEOs to swipe off any concerns about them," he commented.
Pedrotty added that he hoped the panel's investigation will galvanize support for a proposed Consumer Financial Protection Agency, charged with writing rules for mortgage and credit-card products. The House narrowly approved the creation of the agency; however, the Senate Banking Committee has yet to act on it.