Wall Street's chiefs acknowledged taking on too much risk and having choked on their own cooking, but stopped short of an apology as they sparred with a commission looking into the origins of the financial crisis.
The first public hearing of the Financial Crisis Inquiry Commission came on Wednesday as the Obama administration readies a plan to recoup taxpayer bailout funds through a special bank fee and lawmakers wrestle with changes to financial regulation.
With U.S. unemployment near a 26-year-high after the worst recession in decades, public fury is growing over the cost of U.S. taxpayer bailouts and huge bonuses for bankers, now that the banking industry has stabilized from the 2008 meltdown.
Phil Angelides, chairman of the commission and a former state treasurer of California, confronted the pugnacious, arm-waving Lloyd Blankfein, chief executive of Goldman Sachs, over his firm's pre-meltdown practices.
Angelides compared Goldman's practice of creating, then betting against, certain subprime mortgage-backed securities to selling a car with faulty brakes and then buying an insurance policy on the buyer.
Blankfein responded that there was still demand for those products, and later compared the crisis that engulfed world capital markets to being hit by a series of hurricanes.
Angelides shot back: Mr. Blankfein, I want to say this. Having sat on the board of the California Earthquake Authority, acts of God will be exempt. These were acts of men and women.
Testifying with Blankfein to the commission were JPMorgan Chase CEO Jamie Dimon, Bank of America CEO Brian Moynihan and Morgan Stanley Chairman John Mack.
Thursday's session will feature regulators and enforcement officials, including U.S. Attorney General Eric Holder, Securities and Exchange Commission Chairman Mary Schapiro and Sheila Bair, who chairs the Federal Deposit Insurance Corp.
As the bankers were grilled by the panel, White House spokesman Robert Gibbs told reporters that an apology from Wall Street leaders would be the least of what anybody might expect.
Angelides' 10-member panel will hold hearings through the year and is expected to issue a report by December 15. It is modeled after the Pecora Commission, which investigated the 1929 Wall Street crash. Its findings helped lead to the creation of the SEC.
Whether the Angelides Commission has a similar impact remains to be seen but some are already skeptical, particularly as Congress is already weighing regulatory reforms.
The logical thing would be to have had a commission and then based reform around what they found, said Charles Elson, the director of the Weinberg Center for Corporate Governance at the University of Delaware.
RISK MANAGEMENT FAILURES
The four bankers conceded that the financial system became over-leveraged in the years before the crisis and that their firms failed to properly manage the risks that resulted.
We talked ourself into a complacency which we should not have gotten ourselves into, and which, after these events, will not happen again in my lifetime, Blankfein said.
Morgan Stanley's Mack acknowledged problems with mortgage-related securities created by his firm and others during the massive real estate bubble.
On some of the product in mortgages, we did our own cooking and we choked on it. We kept positions and it did not work out, he said, adding that Morgan Stanley did not put enough resources into risk management ahead of the crisis.
Dimon told the commission there may be legitimate concerns that bonuses contributed to excessive risk taking, but he said JPMorgan's pay practices have been and remain appropriate.
Elsewhere on Capitol Hill, Democratic Representative Barney Frank announced that the financial services committee he chairs will hold a January 22 hearing on financial industry pay, which he labeled a cause of concern for the country as a whole.
Angelides and others on the commission showed a willingness to challenge the financial world's most powerful figures with tough questions, but the panel may be hard-pressed to find new answers about the beginnings of the crisis.
From the real estate price bubble and subprime mortgages, to runaway securitization and exotic debt instruments, the reasons for the financial system's spectacular failure late in the Bush administration are widely recognized.
Dimon said that before the crisis, JPMorgan did not stress-test for house prices dropping dramatically.
On securitization, Blankfein said it was worth pursuing the idea of forcing lenders to retain some risk on their books of the loans they package and sell onto the secondary debt market.
Meanwhile, the U.S. Senate Banking Committee is engaged in sensitive closed-door negotiations on a sweeping overhaul of financial regulation with the aim of preventing another banking crisis.
The House of Representatives approved a regulation reform bill in December. Congress is expected to hammer out a House-Senate compromise early this year, to send to President Barack Obama to be signed into law.
(Additional reporting by Karey Wutkowski, Steve Eder, Dan Margolies, with Elinor Comlay in New York, Joe Rauch in Charlotte, N.C.; Editing by Tim Dobbyn)