Who's most to blame for our current landmark financial crisis? Ask three of the business world's biggest financial names, and they'll give one of three answers: A. Ratings agencies; B. Managers of Wall Street companies; or C. All of the above.
Ratings agencies gave companies using risky investment strategies top ratings and "Wall Street put its head in the sand," said J.C. Flowers, the billionaire founder and chief executive of the investment firm J.C. Flowers & Co.
Flowers joined outspoken former AIG chief executive Hank Greenberg and Peter Peterson, the co-founder of private equity investment giant Blackstone Group, in a frank panel discussion today about today's financial crisis, what caused it and what the future may bring. Moderated by Vanity Fair columnist Michael Wolff, questions asked of the panelists included, "How do you get up in the morning?"
The discussion, though punctuated by some gallows humor, was expectedly grim.
"I'm not sure anybody knows what's going on," Flowers said.
The panelists echoed much of the criticism commonly levied against the financial industry: that corporate managers didn't have back-up plans in place to cope with the crash in housing prices, that they didn't understand the complex investments – like mortgage-backed securities -- their companies were making, that they leveraged or borrowed too much to make those investments, and that ratings agencies failed to accurately gauge how much risk these investments posed.
Wall Street "got carried away," said Greenberg, who accumulated billions of dollars worth of AIG stock before being ousted from the 2005. He has since seen that fortune dwindle as AIG received tens of billions in government dollars to keep it afloat. Greenberg directed specific criticism at the compensation paid to today's Wall Street executives.
"I don't think any individual working at a public company deserves a $50 million bonus," he said.
Though the panelists ranked Wall Street managers and rating agencies as those most responsible for the financial crisis, they didn't absolve the government's role, both in the past and today.
Taxpayers Pay the Price
Greenberg, despite his criticism of outsized bonuses, also said that the $500,000 compensation limits being enforced on bailed-out banks by the Obama administration would encourage talented people to choose to work at small start-up companies instead of the banks.
He said he also worried that, under government control, the bailed-out banks and firms like AIG, face poor prospects – and that, he said, doesn't bode well for taxpayers whose dollars were spent bailing out the firms.
"The taxpayer will not be paid back," he predicted.
Peterson, meanwhile, said he objected to the "self-righteous" comments made by government officials with respect to Fannie Mae and Freddie Mac, the stumbling mortgage financing giants that were also taken over by the government last year.
Peterson said he had heard that the Bush administration pressured Fannie and Freddie to invest in subprime loans – the mortgages that were the first to default at the start of the financial crisis – and nearly gave them a quota.
"The one thing that is not in short supply in Washington is hypocrisy," he said.
The good news, the panelists agreed, is that there will be those who learn how to seize opportunities in today's dire climate, particularly those who work with the government in its handling of the crisis, Flowers said.
"A lot of people," he said, "will make a lot of money on this mess."