Growls

According to the preface of the report of the Financial Crisis Inquiry Commission (FCIC), the commission was created to “examine the causes of the current financial and economic crisis in the United States.” The report “presents to the President, the Congress, and the American people the results of its examination and its conclusions as to the causes of the crisis. In addition, the preface says:

“More than two years after the worst of the financial crisis, our economy, as well as communities and families across the country, continues to experience the aftershocks. Millions of Americans have lost their jobs and their homes, and the economy is still struggling to rebound. This report is intended to provide a historical accounting of what brought our financial system and economy to a precipice and to help policy makers and the public better understand how this calamity came to be.

“The Commission was established as part of the Fraud Enforcement and Recovery Act (Public Law 111-21) passed by Congress and signed by the President in May. This independent, 10-member panel was composed of private citizens with experience in areas such as housing, economics, finance, market regulation, banking, and consumer protection. Six members of the Commission were appointed by the Democratic leadership of Congress and four members by the Republican leadership.

“The Commission’s statutory instructions set out  specific topics for inquiry and called for the examination of the collapse of major financial institutions that failed or would have failed if not for exceptional assistance from the government. This report fulfills these mandates. In addition, the Commission was instructed to refer to the at- torney general of the United States and any appropriate state attorney general any person that the Commission found may have violated the laws of the United States in relation to the crisis. Where the Commission found such potential violations, it referred those matters to the appropriate authorities. The Commission used the authority it was given to issue subpoenas to compel testimony and the production of documents, but in the vast majority of instances, companies and individuals voluntarily cooperated with this inquiry.”

The FCIC’s press release, titled, “This Crisis was Avoidable -- a Result of Human Actions, Inactions and Misjudgments; Warning Signs Were Ignored.” (requires Adobe) said, “The Commission concluded that the crisis was avoidable” and listed the following causes:

• Widespread failures in financial regulation, including the Federal Reserve’s failure to stem the tide of toxic mortgages;
• “Dramatic breakdowns in corporate governance including too many financial firms acting recklessly and taking on too much risk;
• “An explosive mix of excessive borrowing and risk by households and Wall Street that put the financial system on a collision course with crisis;
• “Key policy makers ill prepared for the crisis, lacking a full understanding of the financial system they oversaw;
• “And systemic breaches in accountability and ethics at all levels.”

Holman Jenkins of the Wall Street Journal writes in the weekend edition, “You could almost defend the Financial Crisis Inquiry Commission's (FCIC) new report if the question had been who, in hindsight, might have prevented the crisis.” Rather, he suggests the best portions of the report may be those with dissenting views, writing:

“The dissenters at least propose answers that might be answers. Peter Wallison focuses on U.S. housing policy, a diagnosis that has the advantage of being actionable.

“The other dissent, by Keith Hennessey, Bill Thomas and Douglas Holtz-Eakin, sees 10 causal factors, but emphasizes the pan-global nature of the housing bubble, which it attributes to ungovernable global capital flows.”

The editorial in today’s Washington Examiner says, “Taxpayers got the short end of the stick” when the FCIC report was released yesterday, adding:

“Rather than provide the bipartisan view of the origins of the financial crisis, as mandated by Congress, the panel split along partisan lines because of Angelides' refusal to incorporate the views of Republican members. So, instead of one consensus report, there are three competing assessments (that of the majority, a minority report signed by three Republican members, and an individual dissent by Commissioner Peter Wallison).”

Joe Nocera, reporting for the New York Times today in a story titled, “Inquiry Missing a Bottom Line,” concludes his analysis of the FCIC’s report this way:

“There is a telling moment in the commission’s report, when some A.I.G. executives are questioning whether they should stop insuring triple-A tranches of C.D.O.’s, which have become increasingly risky. In search of answers, they visit a housing analyst at Bear Stearns. One A.I.G. consultant later recalled that “the analyst was so optimistic about the housing market that they thought he was ‘out of his mind’ and ‘must be on drugs or something.’ ” But of course he wasn’t on drugs. His hallucinogen was the housing bubble.

“In pushing the idea that the crisis was avoidable, Mr. Angelides is also trying to make an additional point: if we just do it better next time, we will avoid the next crisis. I’m all for holding the bad actors accountable, and to the extent the F.C.I.C. has done that, I tip my hat. But mass delusions, alas, are part of the human condition, and no report, no matter how scathing, is going to change that.

"And thus the question really isn't whether it will happen again. It's when."

The Washington Post began their reporting of the FCIC’s account of the financial crisis on page A14 of today’s newspaper, by noting the FCIC report “casts blame on Goldman Sachs for fueling the subprime mortgage bubble, Merrill Lynch for not telling investors about the true state of its financial condition and the Federal Reserve for failing to stop dangerous lending practices.” They then add:

“Released to the public online and in the form of a 633-page paperback, the report does not contain any major revelation that would fundamentally alter popular perceptions of the crisis. But it weaves together many different strains of information, garnered with subpoena powers that allowed the commission to collect testimony from dozens of insiders and review the internal documents of federal regulators and banks.”

The Post nicely divided their report into sections, saying the following about federal regulators:

“While the report is scathing in its review of Wall Street, what's notable is how hard it comes down on federal regulators for missing warning signs, fighting turf wars and being shortsighted overall. "We conclude the government was ill-prepared for the crisis, and its inconsistent response added to the uncertainty and panic in the financial markets," the report says:"

And finally, the Post had this to say about Fannie Mae and Freddie Mac:

“The report tackles the role of Fannie Mae and Freddie Mac, the mortgage finance giants taken over by the government in the fall of 2008, and wades into the debate over whether they were the chief villains or simply co-conspirators. This question is what most divided the Republican and Democratic members of the commission.

“The report calls the firms "kings of leverage" that borrowed $75 for every dollar they had reserved as a financial cushion, and it chastises the companies' regulator, now called the Federal Housing Finance Agency, for failing to stop the companies' march into the subprime mortgage market.”

The future undoubtedly will have more to say about the causes of the financial and economic crisis. In the meantime, though, the New York Times had perhaps the most curious pieces of reporting trivia when Joe Nocera included this parenthetical comment:

“(It didn’t help that the Republicans had only 27 pages to express their views, compared to the Democrats’ 500-plus pages.)”

In their reporting today, Barron’s adds that one of the bad actors in the crisis are the credit rating agencies -- S&P, Moody’s and Finch, writing, “Without their imprimatur of triple-A, there would have been no way to stitch together billions of dollars' worth of silk purses from sows' ears.” In addition, they write:

“Wall Street greed always makes a good villain, and it no doubt drove the mortgage madness beyond anything previously imaginable. But that factor, even abetted by regulatory ineptitude, is not sufficient to explain the global character of the crisis.

“That lies at the heart of the dissent by FCIC Vice Chairman Bill Thomas and Commissioners Keith Hennessey and Douglas Holtz-Eakin, all Republicans.”

So be sure to read the dissenting opinions in the FCIC report.