Bank CEOs: We made mistakes

"Anyone who says I wouldn't change a thing, I think, is crazy," Blankfein said. "Knowing now what happened, whatever we did, whatever what the standards of the time were -- It didn't work out well."

"Of course, I'd go back and wish we had done whatever it took not to find ourselves in the position we found ourselves in," he added.

The remarks came during a hearing of the Financial Crisis Inquiry Commission, a 10-member panel appointed last summer by Congress. Testifying were chiefs of some of the best-known and largest banks: Goldman Sachs (GS, Fortune 500), Morgan Stanley (MS, Fortune 500), J.P. Morgan Chase (JPM, Fortune 500) and Bank of America (BAC, Fortune 500).

The panel's chairman, Philip Angelides, said he wanted to hear about the banks' role in creating the crisis and benefiting from the Troubled Asset Relief Program, which was set up to provide them with liquidity.

During the hearing, Angelides cast doubt on Blankfein's defense of Goldman Sachs' actions in the mortgage markets -- such as buying parts of risky mortgages and then placing bets against such morgages -- as part of their job as a "market maker."

"It sounds to me a little like selling a car with faulty brakes and then buying an insurance policy on the buyers of those cars," Angelides said. "It doesn't seem to me that that's a practice that inspires confidence."

Blankfein responded that Goldman was just selling what investors wanted.

"These are the professional investors who want this exposure," he said. "Even today, people are coming for exposure to these very products. .. That's what a market is."

The chief executives -- Blankfein, John Mack of Morgan Stanley, Jamie Dimon of JPMorgan Chase, and Brian Moynihan of Bank of America -- testified under oath, standing up for a swearing-in during the public session.

The hearing lasted more than three hours and most of the testimony revolved around bad lending in the housing market.

Dimon said that one of the the banks' "big misses" was failing to "stress test" the housing market.

"We didn't stress test housing prices going down by 40%," Dimon said.

It has been suggested that this lack of accountability could be remedied if all of the firms and individuals involved in the creation of financial instruments had to "eat their own cooking." That would, for example, require that the bulk of their fees not be taken in cash, but in the securities they created, which they would be required to hold unhedged until maturity.

One commissioner asked Morgan Stanley's Mack if investment banks could have remediated the volume of illiquid toxic securities by eating "their own cooking," and taking fees for financial transactions via toxic securities, instead of cash. Mack said his firm did hold some of those securities.

"We did eat our own cooking and we choked on it," Mack said. " We kept positions and it did not work out."

'Sound' regulatory changes

Blankfein, Dimon and Mack all talked about the need for "sound" regulatory changes to help ward off future crises.

"I want to be clear that I do not blame the regulators ... however, it is important to examine how the system could have functioned better," Dimon said. "The current regulatory system is poorly organized with overlapping responsibilities, and many regulators did not have the statuatory resolution authority needed to address the failure of large, global financial companies."

In written testimony, the bank chiefs laid out their banks' mistakes that led to the crisis, detailing the housing bubble, with "new and poorly underwritten mortgage products," "excessive speculation," and mortgage securitization that allowed people to duck responsibility for poorly underwritten loans.

However, they added they didn't expect the financial crisis and especially its magnitude.

"After the fact, it is easy to be convinced that the signs were visible and compelling," Blankfein said. "In hindsight, events not only look predictable, but look like they were obvious or known. But none of us know what is going to happen."

In the past several weeks, the commission has talked to Treasury Secretary Tim Geithner and Federal Reserve Board Chairman Ben Bernanke, but that testimony isn't being made public yet.

Lawmakers say the commission was modeled after the Pecora Commission, a panel that was convened after the 1929 Wall Street crash and other events leading to the Great Depression.

The Pecora panel's findings led to an overhaul of federal banking laws, including the creation of the Glass-Steagall Act of 1933. Glass-Steagall divided investment banking from government-insured commercial banking; ending that separation in the 1990s was seen by some critics as contributing to the current crisis.

Slow start

The Financial Crisis Inquiry Commission has taken a while to get up on its feet.

The panel was appointed last July and held its first meeting in September. It has only started getting staffed up over the past few months.

It has new offices in downtown Washington, a few blocks northwest of the White House. Funded to the tune of $8 million, it aims to employ between 40 and 50 investigators and other staffers.

0:00/04:08How Mack managed the crisis

The crisis panel's one big goal is to complete a final report, sort of like the final 9/11 Commission report that found federal agencies missed signs of the impending terrorist attacks in 2001. The financial crisis report is due Dec. 15.

Critics have noted the panel's impact may be blunted by timing, as the House has already passed a bill to overhaul regulations and the Senate is deep in negotiations on similar proposals.

But panel members have consistently pledged their work will serve as more than window dressing for politicians worried about the appearance that they allowed the financial crisis to happen.

The panel, which has subpoena power, plans to issue interim reports as it collects data, Angelides has said.

The panel's second-in-command is Bill Thomas, a retired California Republican congressman described as strong-willed during his tenure running the powerful Ways and Means Committee.

Other key panel members include: Keith Hennessey, an economic adviser under President George W. Bush; former Sen. Bob Graham, a Florida Democrat; and Brooksley Born, a past chairwoman of the Commodities Futures Trading Commission, who called for stronger regulation of complex financial products such as derivatives in the 1990s. 

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