Thanks to everyone who posted or emailed me questions for the bank CEOs. Let’s continue this transparency experiment.

Here is a working draft of questions I would like to ask the bank CEOs tomorrow. These are still evolving and I won’t get to all of them, but at least they demonstrate my general direction.

  • Whether or not your firm faced any risk of failure in 2008, do you think that investors then believed your firm was too big for the government to allow to fail?
  • In 2008, did you ever discuss the scenario of your firm failing with any members of your board? Did possible government rescue ever enter into those discussions as a mitigating factor?
  • Do you think your firm’s participation in the Capital Purchase Program and the stress tests has strengthened the perception of investors or your board members that the government will, if necessary, prevent your firm from failing?
  • Is your firm larger today than it was at the end of 2008?
  • Can you measure the impact this perception has on your firm? Has it provided you with a funding advantage relative to some of your smaller competitors?
  • Does this perception create what an economist would call moral hazard, an incentive for a firm’s managers to take bigger risks because they know they are partially protected from the downside costs of failure?
  • Do you want to have this protection, this put option to the government? Or would you prefer a policy environment in which your firm is subject to a similar failure process as almost any other American firm?
  • Obviously no manager wants their firm to fail. What have you done, or what are you doing, to prepare your firm for such a failure scenario?
  • What changes should policymakers make to allow large unsuccessful large financial firms to fail?


As you can see, I am focusing on the Too Big To Fail (TBTF) concept and how it changed perception and behavior. I am interested in how it affected two groups: managers and investors.

As a matter of public policy, I don’t particularly care how the managers of Caterpillar, Intel, Pfizer or Wal-Mart make decisions. That’s the domain of their boards and their investors.

The same is true for Tiny Bank & Trust or the $20 million Smith Family Hedge Fund – if they make bad decisions, it’s not a public policy issue. The upside and downside risks are internalized within the firm.

What I care about is that in the case of these firms, the government couldn’t let them fail, or at least policymakers perceived there was a big enough chance of disastrous consequences to the financial system that they (we) were not willing to let them fail. In some cases that perception might have been wrong, but if our current policy set remains in place I think it’s highly likely future policymakers in a similar circumstance would come to the same conclusion. Whether or not these firms are too big to actually fail, they are today so big and interconnected that policymakers will not allow them to fail.

My policy ideal is one in which large financial firms are like any other firm in the economy – the firm succeeds or fails on its merits, is subject to a level policy playing field, and, if unsuccessful, fails in a structured fashion.

I want to better understand how far we were (and are) from this ideal, and how we fix that.

Other questions

Some commenters and outside observers are focusing on specific business practices by these firms. These are super-important questions that I believe these firms need to answer, and that the commission needs to address. I anticipate submitting some of them as follow-up questions to the CEOs to be answered in writing after the hearing. (The reality is they will be answered by the firm’s staff, but in most cases I think that’s OK.) I am working today to winnow down this list.

A few public figures have joined the discussion. I have found excellent questions from:

In addition, I hope and anticipate a high likelihood that we will invite these firm leaders to testify again. A second round of questions after the staff have done more investigation would be even more productive that I expect from tomorrow’s session. Possibly more importantly, I believe the commission needs to hear from the leaders of large financial firms that failed or nearly failed, including Lehman, Merrill, AIG, IndyMac and WaMu, Citi, and of course Fannie Mae and Freddie Mac .

I want to signal now my primary areas of interest (with the big banks) beyond the TBTF issue, subject to later revision.

  1. leverage ratios and capital standards;
  2. reliance on unstable sources of short-term funding for liquidity; and
  3. informational advantages, especially with respect to clients and credit rating agencies.

You will notice that compensation is not on my list. Yes, I care about it, but not as much as I do about these other topics.

There are plenty of other topics in the financial crisis that interest me. The above list just covers my priorities with respect to the big surviving banks.


My outreach has received a little press attention thanks to a few Wall Street Journal and Time posts. I hope this experiment can demonstrate how easy transparency and two-way communication can be.

I debated whether to post my questions. I am telegraphing my shot to the witnesses, but this seems like a small cost, far outweighed by the benefits of getting feedback and provoking public discussion.

One downside is that I am overwhelmed by the volume of input, so I will here extend a thank you to everyone providing help, and apologize for not responding directly to each of the hundreds of emails and comments.

I invite even more input, especially from those with specific related expertise: kbh <dot> fcic <at> gmail <dot> com. I am interested today in help refining the above questions. I am fairly locked into this construct, but am still playing with phrasing and order. Also, I need to ask questions of other panelists – this is a two day hearing. What should I ask AG Holder, SEC Chair Shapiro, and FDIC Chair Bair on Thursday?

The FCIC website is supposed to go live today. I will post Wednesday’s testimony on this blog Wednesday at 9 AM EST, and Thursday’s testimony Thursday at 9 AM.

Finally, for the person who emailed me about being “a targeted individual by the intelligence apparatus and enduring its scorched earth on me professionally, and the CIA also is pimping women for their NSA functionaries,” the NSA usually implants their bugs behind the left ear.

(photo credit: too big to fail by jeffisageek)