Financial Crisis Inquiry Commission Fails Us

Posted by AzBlueMeanie:

On Thursday, the Financial Crisis Inquiry Commission released its final report, a 576-page book that is supposed to explain the causes of, and assign blame for, the great financial crash of 2007-08. Not so much.

The panel issued three reports, with two ideologically driven minority reports from Republican members who defended the free-market, unregulated shadow banking system for derivatives (casino capitalism) that caused the crisis. Republicans are such true believers in this failed politico-economic theory that they are unable to accept the reality of obvious facts and simple truths. It is their religion, it is a question of faith. Which makes finding rational solutions to the problem impossible.

The New York Times reported Financial Crisis Was Avoidable, Inquiry Concludes:

The 2008 financial crisis was an “avoidable” disaster caused by widespread failures in government regulation, corporate mismanagement and heedless risk-taking by Wall Street, according to the conclusions of a federal inquiry.

The commission that investigated the crisis casts a wide net of blame, faulting two administrations, the Federal Reserve and other regulators for permitting a calamitous concoction: shoddy mortgage lending, the excessive packaging and sale of loans to investors and risky bets on securities backed by the loans.

“The greatest tragedy would be to accept the refrain that no one could have seen this coming and thus nothing could have been done,” the panel wrote in the report’s conclusions, which were read by The New York Times. “If we accept this notion, it will happen again.”

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The majority report finds fault with two Fed chairmen: Alan Greenspan, who led the central bank as the housing bubble expanded, and his successor, Ben S. Bernanke, who did not foresee the crisis but played a crucial role in the response. It criticizes Mr. Greenspan for advocating deregulation and cites a “pivotal failure to stem the flow of toxic mortgages” under his leadership as a “prime example” of negligence.

It also criticizes the Bush administration’s “inconsistent response” to the crisis — allowing Lehman Brothers to collapse in September 2008 after earlier bailing out another bank, Bear Stearns, with Fed help — as having “added to the uncertainty and panic in the financial markets.”

Like Mr. Bernanke, Mr. Bush’s Treasury secretary, Henry M. Paulson Jr., predicted in 2007 — wrongly, it turned out — that the subprime collapse would be contained, the report notes.

Democrats also come under fire. The decision in 2000 to shield the exotic financial instruments known as over-the-counter derivatives from regulation, made during the last year of President Bill Clinton’s term, is called “a key turning point in the march toward the financial crisis.”

Timothy F. Geithner, who was president of the Federal Reserve Bank of New York during the crisis and is now the Treasury secretary, was not unscathed; the report finds that the New York Fed missed signs of trouble at Citigroup and Lehman, though it did not have the main responsibility for overseeing them.

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The report does knock down — at least partly — several early theories for the financial crisis. It says the low interest rates brought about by the Fed after the 2001 recession; Fannie Mae and Freddie Mac, the mortgage finance giants; and the “aggressive homeownership goals” set by the government as part of a “philosophy of opportunity” were not major culprits.

On the other hand, the report is harsh on regulators. It finds that the Securities and Exchange Commission failed to require big banks to hold more capital to cushion potential losses and halt risky practices, and that the Fed “neglected its mission.”

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By one measure, for about every $40 in assets, the nation’s five largest investment banks had only $1 in capital to cover losses, meaning that a 3 percent drop in asset values could have wiped out the firm. The banks hid their excessive leverage using derivatives, off-balance-sheet entities and other devices, the report found. The speculative binge was abetted by a giant “shadow banking system” in which the banks relied heavily on short-term debt.

“When the housing and mortgage markets cratered, the lack of transparency, the extraordinary debt loads, the short-term loans and the risky assets all came home to roost,” the report found. “What resulted was panic. We had reaped what we had sown.”

On Wall Street, analysts were already scouring 1,200 supporting documents the panel released on its Web site; an additional 700 documents and some 300 transcripts of audio interviews are to be posted before the panel’s mandate expires Feb. 13.

The Commission referred a handful of cases involving potential wrongdoing to the Justice Department. Financial Crisis Panel Is Said to Refer Cases to Justice Dept. "[A] civil investigation would be the most likely outcome of the referrals and that criminal charges were unlikely." In other words, nobody is going to emergency, nobody is going to jail. The banksters of Wall Street will walk.

When the commission was first announced, the great hope was that it would serve a purpose similar to the famous Pecora Committee hearings held in the aftermath of the Great Depression. During the course of those hearings Pecora became a public hero, and his efforts laid the groundwork for the Securities Act of 1933, the Glass-Steagall Act of 1933 and the Securities Exchange Act of 1934. A partisan divide big enough to swallow the financial crash – How the World Works – Salon.com:

But what does it all add up to? As I wrote in December, when the news broke that the Republican appointees to the commission intended to dissent from the panel's findings and had even gone so far as to try to ban the words "shadow banking," "Wall Street," "interconnected" and "deregulation" from the final report, the FCIC's deliberations aren't ultimately going to be good for much more than demonstrating "how the partisan divide is utterly crippling any attempt by the U.S. government to rationally confront our economic challenges."

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One of the Republican appointees to the commission, Peter Wallison, is releasing his own dissent, reports the Times, that argues government encouragement of home ownership was the prime culprit in the disaster. Nobody who is familiar with Wallison's background could be surprised at that, but it's still worth marveling at. Any honest appraisal of the financial crisis has to start from the premise that a confluence of multiple factors came together to create our global mess. Many different villains shared culpability. But Wallison has always and forever opposed regulation of the financial sector, so government interference must be the guilty party.

"Against such willful ignorance, the gods themselves contend in vain."