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Students Talk Ethics with Sen. Carl Levin :: Video

3/28/2011 --

Senator says investigation of financial crisis showed conflicts of interest, lack of oversight at every level.

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ANN ARBOR, Mich. — U.S. Sen. Carl Levin (D-Mich.) has been investigating causes of the 2008 financial crisis for more than a year and saw conflicts of interest every step of the way — from the originators of toxic assets to those who bought, sold, traded, and shorted them.

During his conversation with students at Ross on March 21, Levin said business schools — and universities in general — play a role in reinforcing ethics to students. They are best equipped with the research and data to make the case that bad ethical choices ultimately produce bad business outcomes.

The 2008 crisis is rife with ethical lapses: Banks issued risky mortgage loans to unqualified lenders and securitized them. Bank regulators didn't do their jobs, and ratings agencies, paid by the banks creating the securities, granted high ratings to pools of risky mortgages. And Levin accuses some investment banks, Goldman Sachs in particular, of taking short positions on securities other people in the company sold to clients. Sure, some players clearly benefitted from these moves, but the negative fallout continues to ripple through the global economy.

"I want you to sense what I feel, which is anger," Levin said. "Where do you get the balance? Where do you learn? I hope you start in churches, synagogues, mosques, and the dinner table. To the extent schools can help you move in that direction, God bless you."

Levin, chairman of the Permanent Subcommittee for Investigations — which typically does long-term examinations — said the panel expects to issue a report on the financial crisis in a few weeks.

He outlined four steps in the investigation and the ethical issues he saw at each step. The committee looked hard at Washington Mutual, a Seattle bank that collapsed under the weight of toxic mortgages. Levin said internal documents show employees engaged in high-risk lending practices and in some cases were paid more for writing higher-risk mortgages. Levin said the bank "knowingly sold delinquency-prone loans to investors" after securitizing them.

"This is just like polluters poisoning a river," Levin said, "and downstream, Wall Street bottled the polluted water."

The regulators came in for scrutiny from Levin's subcommittee as the Office of Thrift Supervision identified more than 500 deficiencies at Washington Mutual the five years prior to its collapse, but didn't carry out any enforcement action. The conflict there, Levin said, was that the OTS was funded by the banks they were regulating.

That's why the Frank-Dodd financial reform act put most of the former responsibility of OTS into the Office of the Comptroller of the Currency.

"They didn't do their job," Levin said.

On Wall Street, Levin said ratings agencies were sometimes more concerned about market share than honestly rating securities for the market. The conflict there was that the ratings agencies were paid by the banks issuing securities and there was serious competition for market share.

Levin said regulation is too often described as an anathema to a free market. He appreciates the role banks and investment houses play in the economy. But he said markets have to be credible to be free.

"It's in everyone's self-interest for the markets to be clean, to be credible," Levin said. "It's not just about doing the right thing for ethical reasons, which is important. There's a self-interest here too."

Levin's public exchange with Goldman Sachs made headlines as he read from company emails describing deals as "s** tty." Levin asserted the bank sold securities to clients that it then shorted, which he says indicates the company knew it was a bad deal. Bank officials have said their description referred to how the deals performed after the fact, not the security itself.

Still, Levin said the documents subpoenaed by the committee show Goldman and other banks bet against deals they sold.

"I am stunned when I read these emails," he said. "How do you sell something to somebody that you believe is crap?"

Some students noted that with the government facing a huge deficit, regulatory agencies face some serious constraints. Levin said that's true, but "there are ways to do better with less resources." He would like to shift the focus to emphasize training and offer incentives for people who are effective at enforcement.

He also said regulatory agencies spend too much time going after "small fish" and should emphasize going after the big offenders.

—Terry Kosdrosky



For more information, contact:
Terry Kosdrosky, (734) 936-2502, terrykos@umich.edu