Financial Conditions

September 20, 2013

The Fed really pushed the envelope too far this time. The Federal Reserve shocked the markets Wednesday with its decision to furlough QEtapering.” The Bernanke Fed, having for years prioritized a clear communications strategy, threw unsettled global markets for a loop.

Much has been written the past few days addressing the Fed’s change of heart. I’ll provide my own take, noting first and foremost my belief that Wednesday’s decision likely marks a critical inflection point. A marketplace that had been willing to ignore shortcomings and give the Federal Reserve the benefit of the doubt must now reevaluate. After all the fun and games, the markets will have to come to terms with a divided and confused Fed that has lost its bearings. As much as the Bernanke Fed was committed to the notion of market-pleasing transparency, it had kind of come to the end of the rope and was forced to just throw up its hands.

I’ll make an attempt to place the Fed and markets’ predicament in some context at least in the context of my analytical framework. This requires some background rehash.

Credit is inherently unstable. When Credit is expanding briskly, the underlying expansion of Credit works to validate the optimistic view (spurring borrowing, spending, investing, speculating and rising asset prices) – which tends to stimulate added self-reinforcing Credit expansion. When Credit contracts, asset prices and economic output tend to retreat, which works against confidence in system Credit and the financial institutions exposed to deteriorating Credit, asset prices and economic conditions. One can say Credit is “recursive.” And with Credit and asset markets feeding upon each another, I’ll paraphrase George Soros’ Theory of Reflexivity: Perceptions tend to create their own reality. Credit cycles have been around for a very, very long time. We’re in the midst of a historic one.

Credit fundamentally changed in the nineties, with the proliferation of market-based Credit (securitizations, the GSEs, derivatives, “repos”, hedge funds and “Wall Street finance”). Unbeknownst at the time perhaps to this day - marketable securities-based Credit created additional layers of instability compared to traditional (bank loan-centric) Credit.

These new instabilities and attendant fragilities should have been recognized with the bursting of a speculative Bubble in bonds/MBS/derivatives (along with the Mexican collapse) back in 1994/5. Fatefully, policy measures moved in the direction of bailouts, market interventions and backstops. Credit and speculative excesses were accommodated, ensuring a protracted period of serial booms, busts and policy reflations.

Monetary policy fundamentally changed to meet the demands of this New Age marketable securities-based, highly-leveraged and speculation-rife Credit apparatus. The Greenspan Fed adopted its “asymmetric policy approach, ensuring the most timidtightening measures in the face of excess and the most aggressive market interventions when speculative Bubbles inevitably faltered. Greenspan adopted a strategy of “peggingshort-term rates and telegraphing the future course of policymaking. This was apparently to help stabilize the markets. In reality, these measures were instrumental in a historic expansion of Credit, financial leveraging and speculation. The Fed has been fighting ever bigger battles – with increasingly experimental measures - to sustain this inflating monster ever since.

I am a strong proponent of “free market Capitalism.” I just don’t believe financial market pricing mechanisms function effectively within a backdrop of unconstrained Credit, unlimited liquidity and government backstops. I believe this ongoing period of unconstrained global Credit is unique in history. Indeed, this is an open-ended experiment in electronic/digitalizedmoney” and Credit. This experiment has necessitated an experiment in “activistmonetary management and inflationism. At the same time, these experiments have accommodated an experimental global economic structure. The U.S. economy is an experiment in a services and consumption-based structure with perpetual trade and Current Account Deficits. The global economy is an experiment in unmatched – and persistent - financial and economic imbalances.

U.S. and global economies are at this point dependent upon ongoing rampant Credit expansion. Highly interrelated global financial markets have grown dependent upon the rapid expansion of Credit and marketplace liquidity. The Fed and global central banks have for some time now been desperately trying about everything to spur ongoing Credit expansion (to inflate Credit). Curiously, they avoid discussing the topic and frame the issues much differently.

The Fed pushed short-term rates down to 3% to spur Credit inflation during the early-nineties. Rates were forced all the way down to 1% - and the Fed resorted to talk of the “government printing press” and “helicopter money” in desperate measures to spur sufficient reflationary Credit growth after the bursting of the “technologyBubble. Even zero rates were insufficient to incite private Credit expansion after the collapse of the mortgage finance Bubble.

With this New Age (experimental) marketable Credit infrastructure crumbling, the Bernanke Fed resorted to a massive inflation of the Fed’s balance sheet – an unprecedented monetization of government debt and mortgage-backed securities. What unfolded was a historic reflation of global securities prices, along with further massive issuance of marketable debt securities. In spite of all the “deleveragingtalk, the growth of outstanding global debt securities went parabolic. Central bank holdings of these securities grew exponentially. Instrumental to the Credit boom, Fed policy spurred Trillions to leave the safety of “money” for long-term U.S. fixed income, international securities and the emerging markets (EM). It is unknown how many Trillions of leveraged speculative positions were incentivized by global central bankers. The combination of an unprecedented policy-induced inflation of prices across securities markets and a low tolerance for investor/speculator losses creates a very serious and ongoing dilemma for the Fed and its global central bank cohorts.

Over the years, I’ve chronicled monetary management descending down the proverbialslippery slope.” Actually, monetary history is rather clear on the matter: Loose money and monetary inflations just don’t bring out the best in people, policymakers or markets. I definitely don’t believe a massive Bubble in marketable debt and equity securities is conducive to policymaker veracity. I don’t believe a multi-Trillion dollar pool of leveraged speculative finance – that can position bullishly leveraged long or abruptly sell and go short - promotes policy candor. Actually, let me suggest that a global Credit and speculative Bubble naturally promotes obfuscation and malfeasance. Invariably, it regresses into a grand confidence game with all the inherent compromises such an endeavor implies.

I titled a February 2011 CBBNo Exit.” This was in response to the details of the Fed’s plan for normalizing its balance sheet after it had bloated to $2.4 TN (from $875bn in June of ’08). There was simply no way the Fed was going to be able to sell hundreds of billions of securities into the marketplace without inciting risk aversion and de-leveraging. I assumed the Fed’s balance sheet would continue to inflate, though never did I contemplate the Fed resorting to $85bn monthly QE in a non-crisis environment.

I speculated a year ago that the Fed had told “a little white lie.” The Fed was responding to rapidly escalating global risksright along with the Draghi ECB, the Bank of Japan, the Chinese and others. Open-ended QE was, I believe, wrapped in a veil of an American unemployment problem for political expediency. Meanwhile, the Fed has pushed forward with “transparencybelieving it gave them only more control over market prices. And, at the end of the day, the $85bn monthly QE, the unemployment rate target, and long-term (zero rate) “forward guidanceprovided a securities market pricing transmission mechanism that must have made Alan Greenspan envious.

The bottom line is that the $160bn (Fed and Bank of Japan) experiment in ongoing monthly QE (along with Draghi’s backstop) only worked to exacerbate global fragilities that were surfacing last summer. I believe increasingly conspicuous signs of excess had the Fed wanting to begin pulling back. Yet just the mention of a most timid reduction of QE had global markets in a tizzy. After backing away from an exit strategy, the Fed has for now backtracked on tapering. It seems I am on an almost weekly basis now restating how once aggressive monetary inflation is commenced it becomes almost imposible to stop.

In my July 12, 2013 CBB, “Bernanke’s Comment,” I highlighted what I thought at the time was a comment for the history books: “If financial conditions were to tighten to the extent that they jeopardized the achievement of our inflation and employment objectives, then we would have to push back against that.”

As someone who placesFinancial Conditions” at the heart of market and economic analysis, I felt Bernanke had opened a real can of worms on the policy and communications front.

From Wednesday’s FOMC statement: “The committee sees the downside risks to the outlook for the economy and the labor market as having diminished, on net, since last fall, but the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labor market. The committee recognizes that inflation persistently below its 2% objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term.”

Have Financial Conditions really tightened in recent months? Stock prices have surged to all-time record highs. The S&P500 has gained 7.7% in three months, with Nasdaq up 12.4%. The small cap Russell 2000 has surged 11.3% in three months. The Nasdaq Biotech index has jumped 24.8%, increasing its 2013 gain to 53.3% (2-yr gain of 116%). Internet stocks enjoy a three-month gain of 12.6%. The average stock (Value Line Arithmetic) is up 11.2% in three months. Stock prices indicate the opposite of tightening.

Last week set an all-time weekly record for corporate debt issuance. The year is on track for record junk bond issuance and on near-record pace for overall corporate debt issuance. At 350 bps, junk bond spreads are near 5-year lows (5-yr avg. 655bps). At about 70 bps, investment grade Credit spreads closed Thursday at the lowest level since 2007 (5-yr avg. 114bps). It's a huge year for M&A. And with the return of “cov-lite” and abundant cheap finance for leveraged lending generally, U.S. corporate debt markets are screaming the opposite of tightening.

August existing home sales were the strongest since February 2007. National home prices are now rising at double-digit rates. An increasing number of local marketscertainly including many in California – are showing signs of overheating. Prices at the upper-end in many markets are back to all-time highs. And despite a backup in mortgage borrowing costs from record lows, housing markets have yet to indicate a tightening of Financial Conditions. Clearly benefiting from loose lending conditions, August auto sales were the strongest since 2006.

Provide the marketplace a policy target for the unemployment rate and let the economic analysis and forecasting begin. Ditto for CPI and GDP. But “Financial Conditions”? This is an altogether different animal, subjectively in the eye of the beholder - not easily quantified. In my analysis of Financial Conditions, I talk of a broad globalmosaic.” I closely examine scores of indicators, data and markets, doing my best to discern subtle changes in “Financial Conditions,” and speculative and market liquidity dynamics. And within this mosaic, the pertinent and key indicators are in a constant state of flux. I discuss such challenging analysis in terms of a science and an art. How does the Fed define Financial Conditions? Does this imply a market liquidity backstop? Which markets? Under what circumstances? How?

Within my Financial Conditions analytical framework, I view the “leveraged speculating community” as the marginal source of marketplace liquidity. When the hedge funds and others are embracing market risk and leverage, this ensures abundant liquidity and resulting loose Financial Conditions. A move to de-risking/de-leveraging implies a tightening of Financial Conditions. QE only complicates already challenging analysis. The initial QE chiefly involved accommodating speculative de-leveraging (a shifting of positions from the speculators to the Fed’s balance sheet). As such, it actually had a much more muted impact on market liquidity than most appreciated at the time.

Non-crisis QE, on the other hand, has had a profound impact. It has directly injected liquidity into the marketplace, while at the same time inciting additional risk-taking and speculative leveraging. Moreover, this added liquidity and heightened speculation hit already highly speculative/overheated global markets. In short, recent QE had a major inflationary impact on global speculative Bubbles. From this perspective, it’s not too difficult to appreciate why global markets convulsed on the mere talk of even timid Fed tapering. On the margin, today’s QE has unprecedented impact – and this market addiction will not be easily conquered.

So how is it possible that the Fed speaks of a tightening of Financial Conditions with stock prices at record highs, corporate debt yields near record lows and benchmark MBS yields at only 3.43% (10-yr avg. 4.60%)?

Here’s how I see it. For going on five years now, experimental Fed policy purposely inflated bond and stock prices. Bond prices/yields were pushed to unprecedented extremes, with artificially low market yields now suppressed only through ongoing aggressive Fed buying. Similarly, securities and asset price Bubbles have been inflated around the globe. Emerging markets and EM economies, in particular, have suffered from gross Bubble-related excess and maladjustment. Trillions have flowed into various (inflated) markets at home and abroad with little appreciation for the risks monetary policies have created. Just the prospect of a gradual reduction in QE was enough to instigate a destabilizing reversal of speculator and investor flows.

What the Fed likely views as a tightening of Financial Conditions, I see as initial – and inevitable - cracks in the "global government finance Bubble.” The Fed wants to “push backagainst a rise in mortgage borrowing costs, while likely content to “push back” on EM fragility as well. A weaker dollar surely helps push back against the unwind of “carry trades” and other speculative de-leveraging. And the Fed surely would prefer to counter some of the tightening that has developed in municipal finance.

Bubble analysis plays prominently in my Financial Conditions analytical framework. Financial Conditions will typically tighten first at the “periphery” – as the weakest (“marginal”) borrower begins to lose access to cheap finance. This marks a key inflection point for Bubbles- and the Fed would clearly want to push back against any risk of a bursting Bubble. After all, faltering liquidity and heightened risk aversion at the fringes tend over time to have expanding contagion effects. May and June saw cracks, and Fed back-peddling continued through Wednesday’s meeting.

After trading as high as 6.37% in July 2007, benchmark MBS yields dropped all the way down to almost 5% by January 2008. The Fed’s response to initial cracks at the periphery of mortgage finance (subprime) actually only extended the problematic inflation at the Bubble’s core (almost $1.1 TN of risky mortgage Credit growth in ’07) – not to mention $145 crude and synchronized global risk market Bubbles. The initial European response to the Greek collapse extended the period of problematic excess and imbalances at Europe’s core. The Fed’s concern for the recent tightening of Financial Conditions at the “periphery” (EM, muni Credit and, perhaps, mortgages) ensures only more time for excess to build at the Bubble’s core (Treasuries, corporate debt, junk and leveraged lending, equities and, basically, anything with a yield).

My chronicling of the Greatest Bubble in History is going on five years now. This thesis is based upon the global nature of current Credit and speculative excess, along with attendant financial imbalances and economic maladjustment. My thesis is premised upon Bubble excess having, after decades, made it to the heart of government finance and contemporarymoney.” This implies acute – and intransigentfragilities, which ensure policymakers won’t have the grit to pull back. As was made even clearer Wednesday, the Fed is foremost determined to push back. And that’s precisely the mindset that has allowed the “granddaddy of all Bubbles” to get completely out of hand.

I believe the Bernanke Federal Reserve made yet another major blunder this week, and the likely price will be only greater market instability.

America’s Labor Market by the Numbers

Mohamed A. El-Erian

23 September 2013

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NEWPORT BEACH Politicians and economists now join investors in a ritual that typically takes place on the first Friday of each month and has important consequences for global markets: anticipating, internalizing, and reacting to the monthly employment report released by the United States Bureau of Labor Statistics (BLS). Over the last few years, the report has evolved in a significant waynot only providing an assessment of the economy’s past and current state, but, increasingly, containing insights into its future as well.
Think of the BLS’s employment report as a comprehensive monthly check-up for the American labor market. Among its many interesting statistics, it tells you how many jobs are created and where; how earnings and hours worked are evolving; and the number, age, and education of those seeking employment.
Despite the data’s richness, only two indicators consistently attract widespread attention: net monthly job creation (which amounted to 169,000 in August) and the unemployment rate (7.3% in August, the lowest since December 2008). Together they point to a gradual and steady improvement in overall labor-market conditions.
This is certainly good news. It is not long ago that job creation was negative and the unemployment rate stood at 10%. The problem is that the headline numbers shed only partial light on what may lie ahead.
The figure for monthly job creation, for example, is distorted by the growing importance of part-time employment, and it fails to convey the reality of stagnant earnings. Meanwhile, the headline unemployment rate does not reflect the growing number of Americans who have left the work force – a phenomenon vividly reflected by the decline in the labor participation rate to just 63.2%, a 35-year low.
To get a real sense of the labor market’s health, we need to look elsewhere in the BLS’s report. What these other numbers have to tell us – about both the present and the future – is far from reassuring.
Consider the statistics on the duration of unemployment. After all, the longer one is unemployed, the harder it is to find a full-time job at a decent wage.
In August, the BLS classified 4.3 million Americans as long-term unemployed, or 37.9% of the total unemployed – a worrisome figure, given that the global financial crisis was five years ago. And, remember, this number excludes all the discouraged Americans who are no longer looking for a job. In fact, the more comprehensive employment/population ratio stands at only 58.6%.
The teenage-unemployment rate is another under-appreciated indicator that is at an alarming level. At 22.7%, too many American teenagers, lacking steady work experience early in their professional careers, risk going from unemployed to unemployable.
Then there are the indicators that link educational attainment and employment status. Most notable here is the growing gap between those with a college degree (where the unemployment rate is only 3.5%) and those lacking a high school diploma (11.3%).
Rather than confirming the paradigm of gradual and steady improvement, these disaggregated numbers attest to a highly segmented, multi-speed labor marketone with features that could become more deeply embedded in the structure of the economy. If current trends persist, the BLS’s report will continue to evolve from a snapshot of the past and present to a preview of the future.
Undoubtedly, the US labor market’s uneven recovery has much to do with the structural and policy gaps exposed by the 2008 global financial crisis and the recession that followed. The economy is still struggling to provide a sufficient number of jobs for those who were previously employed in leverage-driven activities that are no longer sustainable (let alone desirable).
Moreover, US schools, particularly at the primary and secondary levels, continue to slip down the global scale, constraining Americans’ ability to benefit from globalization. Meanwhile, existing and newly created jobs provide less of an earnings upside. And political polarization narrows the scope for effective tactical and structural policy responses.
This combination of factors is particularly burdensome for the most vulnerable segments of the US populationparticularly those with limited educational attainment, first-time labor-market entrants, and those who have been out of work for an extended period.
So while net job creation will continue and the unemployment rate will maintain its downward trajectory – both highly welcome – the labor market’s evolution risks fueling rather than countering already-significant income and wealth inequalities, as well as poverty. Overburdened social support mechanisms would thus come under even greater pressure. And all of this would amplify rather than attenuate political polarization, placing other urgent policy priorities at even greater risk.
If this interpretation is correct, the heightened attention given to the monthly BLS headline indicators needs to be accompanied by a broader analysis and a different mindset. After all, the report is much more than a scorecard on America’s performance in confronting a persistent economic, political, and social challenge; it is also an urgent call for a more focused corrective effort involving both government and business.
A better mix of fiscal and monetary policies and sustained measures to enhance productivity and competitiveness remain necessary conditions for addressing America’s labor-market challenges. But they are not sufficient.
Both the public and private sectorsindividually and through scalable and durable partnershipsneed to think much more seriously about labor retraining and retooling programs, enhanced labor mobility, vocational training, and internships. President Barack Obama’s appointment of a “jobs czar” would also help to enhance the credibility, accountability, and coordination required to overcome today’s significant and rising employment challenges.
Yes, the headline numbers will continue to signal overall improvement in the labor market. The urgent task now is to ensure that lasting progress is not undermined by the worrisome compositional trends that the BLS’s report highlights month after month.
Mohamed A. El-Erian is CEO and co-Chief Investment Officer of the global investment company PIMCO, with approximately $2 trillion in assets under management. He previously worked at the International Monetary Fund and the Harvard Management Company, the entity that manages Harvard University's endowment. He was named one of Foreign Policy's Top 100 Global Thinkers in 2009, 2010, 2011, and 2012. His book When Markets Collide was the Financial Times/Goldman Sachs Book of the Year and was named a best book of 2008 by The Economist.

September 21, 2013

Was This Whistle-Blower Muzzled?


THE fifth anniversary of Lehman Brothers’ bankruptcy has occasioned one legacy-spinning defense after another. We’ve heard from Ben S. Bernanke, chairman of the Federal Reserve; Henry M. Paulson Jr., the Treasury secretary at the time; and Timothy F. Geithner, then the New York Fed president and later Mr. Paulson’s successor at Treasury, about their historic decisions to use trillions of dollars of taxpayers’ money to bail out the banking system.

But will we ever know what really happened behind all those closed doors? The seemingly appalling treatment afforded Richard M. Bowen III, a former Citigroup executive who blew the whistle on years of malfeasance there, shows that we may not. Thanks to political pressure and the revolving door between Washington and Wall Street, the events leading up to the financial crisis remain obscured and may never be fully revealed.

Mr. Bowen, who was featured in a piercing60 Minutessegment in December 2011, had discovered that for years before the crisis, Citigroup, like many other Wall Street firms, had been purchasing tens of billions of dollars’ worth of risky home mortgages and then packaging and selling them as investments. “When I started screaming,” he told me, “I was just trying to do my job. Silly me.” At wits’ end, on Nov. 3, 2007, Mr. Bowen sent an e-mail to a small group of Citigroup executives, including Robert E. Rubin, a former Goldman Sachs executive and former Treasury secretary who was then chairman of the bank’s executive committee (and who received $126 million during his decade at Citigroup). “The reason for this urgent e-mail concerns breakdowns of internal controls and resulting significant but possibly unrecognized financial losses existing within our organization,” Mr. Bowen wrote.

Mr. Bowen told me that the following Tuesday, a Citigroup lawyer told him of his e-mail: We’re taking it seriously. Don’t call us. We’ll call you. He sent more e-mails to the lawyer, but heard nothing. “I mean, silence,” he said. (Months later, the two men did talk about Mr. Bowen’s e-mail to Mr. Rubin.)

Mr. Bowen, who is now 66 and teaches accounting at the University of Texas, Dallas, was fired in January 2009. (After signing a separation and confidentiality agreement, he received a severance package of less than $1 million.) And Citigroup went on to receive a $45 billion bailout from the taxpayers, plus guarantees on nearly $300 billion of securities, some of which were most likely crammed with the very low-quality mortgages Mr. Bowen had warned about.

America became inured to the sight of one extremely wealthy former Goldman Sachs senior partner turned Treasury secretary (Mr. Rubin) asking another (Mr. Paulson) for a favor. But what Mr. Bowen believes happened to him after Citigroup fired him still has the power to shock anyone who cares about accountability and justice. He feels he was muzzled; others involved are adamant that he was not.

In 2008, after his note to Mr. Rubin and after his responsibilities were vastly reduced at Citigroup, but before he was fired, Mr. Bowen decided to become a whistle-blower. That April, he filed a complaint, under the Sarbanes-Oxley Act of 2002, with the Occupational Safety and Health Administration claiming he had been retaliated against after writing his e-mail to Mr. Rubin. (The complaint was settled as part of his separation agreement with Citigroup.) Then, in July, Mr. Bowen went to the Securities and Exchange Commission. “I testified before the S.E.C.,” he told an audience in Texas earlier this year. “I told them what had happened.” He gave the S.E.C. more than 1,000 pages of documents. “Mr. Bowen, we are going to pursue this,” the agency told him. He never heard back. “Not only did they bury my testimony, they locked it up,” he said in his speech. (The S.E.C. has denied my numerous requests under the Freedom of Information Act for access to Mr. Bowen’s file, even though he has given his permission, claiming that the material was “confidential” and included Citigroup trade secrets.” On Sept. 11, the S.E.C. denied my administrative appeal of its decision.)

In May 2009, Congress created the 10-member Financial Crisis Inquiry Commission, or F.C.I.C., to examine the causes of the financial crisis. Led by Phil Angelides, a former state treasurer of California, it was empowered to get to the bottom of what had happened and why. The F.C.I.C. invited Mr. Bowen to an interview after an investigator read his Sarbanes-Oxley complaint.

Mr. Bowen was excited to finally be able to share his story. What’s more, he told me, he could tell all, freed from various provisions of his confidentiality agreement with Citigroup.

On Feb. 27, 2010, Mr. Bowen met with Victor J. Cunicelli and Tom Borgers, two F.C.I.C. investigators, and, briefly, with Bradley J. Bondi, the commission’s deputy general counsel. For four hours, with his own two lawyers present, Mr. Bowen told them his story. “This was placing the company in extreme risk with regard to losses, and I made that known,” he told the commission staff.

The investigators told him they found his accountvery compelling,” and Mr. Bowen was subsequently invited to testify publicly before the commission, on April 7, 2010. Mr. Bowen’s conversation, like hundreds of others, was recorded (including mine when, as the author of two books on the financial crisis, I was interviewed).

Unlike those other conversations, though, Mr. Bowen’s Feb. 27 interview, a transcript of which I have read, is not publicly available. Instead, the document, along with the commission’s other records, was sealed and sent off to the National Archives, where it may be reviewed beginning in 2016. “Why five years?” Mr. Bowen wondered. “I don’t know. I’m sure it’s just a coincidence that five years is the statute of limitation for fraud.”

On March 22, J. Thomas Greene, the commission’s executive director, gave Mr. Bowen a week to write a statement to accompany his April 7 oral testimony. Mr. Bowen says he was told he could have 30 pages. “Tell us what you told us behind closed doors,” he says the F.C.I.C. staff told him. He took that to mean he should feel free to name names, as he had on Feb. 27, and to explain what happened to him after he wrote to Mr. Rubin.

A week later, he finished his 28-page testimony. Just as he sent it to the commission, the Treasury announced that it intended to sell 7.7 billion shares of Citigroup stock — with an estimated value at the time of $32.2 billion. The projected profit at the time, $7.2 billion, would be among the largest from the government bailouts. (The government ultimately made about $12 billion.) Mr. Bowen suggested, in his Dallas speech, that it was probably just a coincidence, but that he had some lingering doubts.

On March 30, one of Mr. Bowen’s attorneys, Steve Kardell, a partner at the Dallas law firm Clouse Dunn, told Mr. Bowen, in an e-mail, that the F.C.I.C.’s Mr. Bondi suggestedsome substantial changes” to his testimony and “thinks that the way it’s written now, Citi will declare war on both you and the F.C.I.C., and it will primarily consist of an effort to discredit you.” While Mr. Kardell noted that the F.C.I.C. investigators said they didn’t want to influence his testimony, he said that Mr. Bondi suggested trimming it by 10 pages. Peeved, Mr. Bowen instructed him to find out what changes the F.C.I.C. staff wanted to make. The next day, Mr. Kardell e-mailed Mr. Bowen, “I get the impression that the revisions are non-negotiable.”

Mr. Bowen says the F.C.I.C. wanted him to delete his concern that Citi may have materially misrepresented its certifications of internal controls, which require corporate officers to certify the accuracy of their financial statements under Sarbanes-Oxley.

Remove the names of people at Citi, he says he was told. Take out his post-Rubin denouement, his conversations with the bank’s internal lawyers and the fact that Citigroup’s outside attorneys at Paul, Weiss, Rifkind, Wharton & Garrison LLP were conducting an investigation of his charges.

Mr. Kardell also said he thought the F.C.I.C. was “catching some serious, serious heat this morning.”

Who are they catching heat from?” Mr. Bowen asked, according to a transcript of the call provided by Mr. Bowen.

Umm, Citi,” Mr. Kardell replied, adding, “It’s just a complete all battle stations with Citi about you testifying.” He then dropped the bombshell that Brad S. Karp, managing partner of the law firm Paul, Weiss, had “gotten involved” and thatour guys” on the F.C.I.C. staff, “who are still extremely pro Dick Bowenalthough I think there’s pressure to yank Dick Bowen — our guys want to see something plain vanilla pretty fast.” A stunned Mr. Bowen told Mr. Kardell, “So much for an independent Congressional commission.”

But after a night of prayer, Mr. Bowen acquiesced. He cut the offending passages and his testimony by eight pages. “It’s better to get something on record than nothing,” he decided. He also figured that when he testified on April 7, he’d be able to provide more detail. But that morning, he had breakfast with Mr. Kardell, who told him that Mr. Bondi had said that he was not to respond to the commissioners’ questions about his departure from Citigroup. If the commissioners asked him, for instance, what happened after he e-mailed Mr. Rubin, he was to be silent, and claimemployment issues” as justification. When one commissioner, Peter J. Wallison, asked what had happened, Mr. Angelides cut him off.

Mr. Karp, while conceding that he regularly spoke with Mr. Bondi about Citigroup matters before the F.C.I.C., vehemently denies trying to pressure Mr. Bondi about Mr. Bowen’s testimony. Paul, Weiss, representing Citi, did notpressure’ the F.C.I.C.,” he wrote me. “We represented and defended Citi. And I am certain that the F.C.I.C. would confirm that.”

Mr. Bondi, now a partner at the law firm Cadwalader, Wickersham & Taft, which counts Citigroup among its clients, also rejected the idea that he had been unduly influenced to ask Mr. Bowen to change his testimony. “The F.C.I.C. staff team that investigated issues related to the financial crisis, and Citi in particular, acted impartially and with the highest integrity at each step of the investigation,” he wrote in an e-mail. “Any allegation that information relevant to the Citi investigation was suppressed is untrue.”

Mr. Angelides told me that he had no knowledge of Mr. Bowen’s being censored, but that he was aware that the commission’s staff would generally work with witnesses to focus their testimony “on the most salient facts.” The final report, he said, gave prominence to Mr. Bowen’s most substantial charges, including the e-mail to Mr. Rubin. But, he conceded, the Wall Street banks “and their phalanx of attorneys were putting enormous pressure” on the commissionevery day of every week with every witness” in an effort “to discredit people who were testifying against their interests.”

Of course, it’s the old story on Wall Street: One man’s aggressive lobbying is another man’s undue influence. Mr. Kardell believes that “there’s no question that Richard was censored.”

Mr. Bowen told me that, despite the denials from Mr. Karp and Mr. Bondi, he continues to believe he was censored and bullied into changing his testimony. The experience has shaken his faith in the country’s institutions.

“It was devastating,” he said. “It truly was. From my standpoint, the corruption extends to the highest levels of government. I feel absolutely, completely violated. Every principle that I grew up with, and even when I did a brief stint in the R.O.T.C. and the Air Force, it’s just completely violated.”

He plans to keep talking about what happened to him. By God, I’ve got to leave this country better off than the way I found it.”

William D. Cohan is a former Wall Street investment banker, a contributor to Bloomberg View and Vanity Fair and the author, most recently, of “Money and Power: How Goldman Sachs Came to Rule the World.”