Goldman Sachs defended its role in creating securities at the center of the financial crisis under tough questioning from a U.S. commission investigating the 2008 meltdown.
With U.S. unemployment near a 26-year-high after the worst recession in decades, public fury is growing over the crisis, taxpayer bailouts and huge bonuses for bankers.
The hearing took place as President Barack Obama, who has talked tough about bank bonuses and sought to strengthen regulations of the financial industry, prepared to unveil a plan for recouping some $120 billion in bailout funds by imposing a fee on banks.
Goldman Chief Executive Lloyd Blankfein faced questions focused on Goldman's creation of subprime housing-backed derivatives, while at the same time shorting them, or betting they would lose value.
These are professional investors who want this exposure, he said, interrupting at times Phil Angelides, chairman of the Financial Crisis Inquiry Commission.
Even today people are coming to us for exposure to these very instruments, Blankfein said.
The animated exchange got the hearing off to a lively start and showed Angelides was willing to challenge the commission's witnesses on complex financial issues.
It sounds to me a little bit like selling a car with faulty brakes and then buying an insurance policy on the buyer of those cars, Angelides said.
The four CEOs facing the commission defended the lucrative pay practices and huge size of their businesses, but conceded that the financial system became over-leveraged before the crisis and said that regulatory change is needed.
Sworn in to testify were Blankfein, JPMorgan Chase CEO Jamie Dimon, Bank of America CEO Brian Moynihan and Morgan Stanley Chairman John Mack. They sat at a long table facing the 10-member commission in a hearing room on Capitol Hill.
Angelides told the executives his panel will hold hearings through the year and take testimony from hundreds of people. People are angry. They have a right to be, he said, citing Wall Street's bonuses and profits.
Due to report by December 15, the panel created by Congress is modeled after the Pecora Commission, which investigated the Wall Street crash of 1929. Its findings helped lead to the formation of the U.S. Securities and Exchange Commission and other key reforms.
Whether the Angelides Commission has a similar impact, is yet to be determined.
GOLDMAN REAPED REWARDS
Blankfein said his firm reaped rewards from government support during the financial meltdown.
We believe that the government action was critical and we benefited from it, he said. The system clearly needs to be structured so that private capital, rather than government capital, is used to stabilize troubled firms promptly before a crisis metastasizes.
Dimon told the commission that there may be legitimate concerns that bonuses contributed to excessive risk taking, but he defended JPMorgan's pay practices, saying they have been and remain appropriate.
The commission's hearing could fuel popular resentment of the banks and at the government's role in rescuing a powerful industry seen by many Americans as greedy and irresponsible.
The basic causes of the crisis are well known. From a real estate bubble and subprime mortgages, to runaway securitization and exotic debt instruments, the financial system failed spectacularly in the final months of the Bush administration.
The commission may be hard-pressed to unearth new revelations on that score, but its work is still expected to have an impact, according to analysts.
We're in a very volatile period now, with all the bonuses and with the hearing starting tomorrow, said Greg Valliere, policy analyst at investment advisory firm Soleil Securities.
The hearings could be explosive and further intensify public indignation... You just have to wonder if the politicians can contain the anger, he said.
The hearings come as the U.S. Senate Banking Committee is engaged in sensitive closed-door negotiations on a sweeping overhaul of financial regulation, the aim being to prevent another banking crisis in the future.
The Obama administration and some senators are concerned about the timing and potential impact of the commission's hearings, said Joseph Engelhard, a policy analyst at investment advisory firm Capital Alpha Partners.
Worries center on any revelation which creates a populist outburst that could possibly derail compromises that are being made on the Hill, he said.
(Additional reporting by Karey Wutkowski, Steve Eder, Elinor Comlay, Joe Rauch; Editing by Tim Dobbyn)