One of the immediate fallouts from the big budget cut of the GAO was that we lost the New York office. I lost the people up there who helped do a lot of this work. I always gave them two directions: one, we want to be focusing on where the assets are—the big markets—and two, we want to focus on where the risk is. And that’s the way this derivatives report came about. It was growing rapidly, lot of exposure and big risk that no one was looking at.
TA: What do you think about how the press covers regulation?
JB: I think over the years the press, with a couple of key exceptions, the finance press is heavily influenced by industry. They take their side. To write their stories, financial reporters need to develop and maintain knowledgeable sources willing to speak on the record. These sources almost all come from the industry and naturally present the industry’s point of view. It is much more difficult for reporters to find informed, unbiased analysts willing to speak on the record. There is usually nothing in it for them to do so.
TA: Is the press more or less influenced than the regulators? Regulators from the last couple of administrations have identified with the industry and come from the industry…
JB: And this administration, too.
You get Larry Summers. You get Gary Gensler, who is actually the one who actively put in the deregulatory measure (Gensler, along with Phil Gramm, pushed the infamous Commodity Futures Modernization Act, which prevented the regulation of derivatives, most crucially the credit-default swaps that helped create the financial crisis). Then you’ve got their understudies. You’ve got Geithner. And then to take Geithner’s place at the Federal Reserve Bank of New York you get (William C.) Dudley. Well, Dudley is a former chief economist at Goldman Sachs.
President Obama needs to get away from this Wall Street-captured stuff.
TA: If the press identifies too much with the industry, what stories should it be doing now? What’s it missing?
JB: I think they’re concentrating too much on the proposals du jour without understanding or pointing out the fact that no one really understands what caused this financial collapse in this country and this incredible loss of wealth and this pain. And until you understand those causes you’re not going to be able to craft the correct solution.
But I don’t think the press can get at it. Unless you can get some examiner at Citigroup to talk on the record about “My God, we knew this place was a disaster, but Comptroller Dugan wouldn’t let us do anything about it.
TA: Which is unlikely.
JB: Extremely unlikely.
TA: Inside these agencies are people afraid to speak out?
JB: Oh, sure. You can pay a big price.
TA: How optimistic are you that the necessary reforms will be made?
JB: I think the same thing that happened (back in 1994), is going to be the same thing that’s going to happen now. The industry is already fighting back against anything really meaningful, but they’ll—as they did back then—they’ll form a study group and come up with some marginal stuff that won’t impinge upon their fees and upon their profitability. And that will be it.
TA: What should we be doing?
JB: This should never happen again—and it could have been prevented, actually. Congress should set up an independent investigative committee. Independent of members of Congress, and Wall Street, the administration, and the prior administration.
The commission I think ought to be created, ought to have subpoena power and available to them all the bank examination reports going back eight years for each of these large institutions that failed. They need to look at these examination reports. What was missed? Maybe it wasn’t missed. Maybe the examiners made recommendations up the line but they weren’t followed.
Let’s get to the bottom of this. What happened and why it happened? And let’s start identifying the failures) in corporate governance and why they occurred, the failures in risk management, and the regulatory failures and why they occurred.
TA: Well, what do you think happened?
JB: I think there are four main factors: