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Wall Street Blame Rift May Blunt Impact of U.S. Crisis Panel

Bob Graham, former U.S. senator from Florida. Photographer: Jay Mallin/Bloomberg
Bob Graham, former U.S. senator from Florida. Photographer: Jay Mallin/Bloomberg

Dec. 16 (Bloomberg) -- The partisan split on the federal panel exploring the origins of the financial crisis may undermine the impact of its findings on the banks, bond-rating firms and regulators it investigated, legal scholars and former national commission members said.

Democrats and Republicans on the Financial Crisis Inquiry Commission, struggling for months to find consensus behind the scenes, haven’t even been able to agree on whether to include the phrases “Wall Street” and “shadow banking” in the final report. The report is now scheduled to be published in January and is likely to include dissents, FCIC members said yesterday.

The four Republicans on the 10-member panel made their views public in a nine-page document yesterday, saying they place much of the blame for the 2008 crisis on the government and mortgage firms Fannie Mae and Freddie Mac rather than banks.

“To be successful, one of these commissions has to be 100 percent, or close to 100 percent, accurate in their findings,” said Lance Cole, a Pennsylvania State University law professor who served as a consultant to the Sept. 11 commission. “If there is any split or any controversy about the underlying facts, then it totally undermines their credibility.”

When it was created by Congress in 2009, the FCIC was heralded by House Speaker Nancy Pelosi, a California Democrat, as an effort to get a “detailed and clear-eyed examination” of the worst economic collapse since the Great Depression and “bring accountability” to the financial system.

Buffett and Blankfein

Former California treasurer Phil Angelides, 57, a Democrat, was named to head the group. The panel held hearings on the role of bond-rating firms including Moody’s Corp., on the failure of New York-based investment bank Bear Stearns Cos. and on the bailout of American International Group Inc., the New York-based insurer. Chief executives including Warren Buffett and Lloyd Blankfein of Goldman Sachs Group Inc. testified for the panel.

The commission focused on Goldman Sachs for its role in AIG’s troubles. Angelides and former Representative Bill Thomas, the panel’s Republican vice chairman, also accused the firm, the most profitable in Wall Street’s history, of engaging in a document “dump” designed to hamper investigators. The commission responded by issuing a subpoena for more records.

The unity in the efforts to pull information from Goldman Sachs has broken down, commissioners said yesterday.

Early Optimism

One model for the FCIC was the panel that explored the 2001 terror attacks on New York and Washington, which had members of both parties and reached a unanimous conclusion.

Bob Graham, 74, a Florida Democrat and former U.S. senator who is an FCIC member, said he and his colleagues at first expected to put partisan concerns aside. He said he thought unanimity would be possible because the FCIC’s mandate was to outline the causes of the crisis rather than debate recommendations to Congress.

By this fall, he said, hopes of comity were over.

Commissioners have had “an increasingly strained relationship and it appeared less likely that we were going to get a unanimous assessment of what the historical facts were,” said Graham, who also serves as co-chairman of the national commission investigating the BP oil spill in the Gulf of Mexico.

Graham said the political process for selecting commission members contributed to the problem. “You start off with people whose loyalty is to the person who appointed them and generally they were appointed because of their loyalty to that person or party,” he said.

Word Ban

The divide intensified when Thomas proposed in the last few weeks deleting a series of words Republicans thought were pejorative or not precise enough to refer to a financial system that included mortgage lending or insurance firms, for example. Included in the proposal, according to Brooksley Born, a Democrat on the panel, were the words “Wall Street,” “deregulation” and “shadow banking.”

The proposal was defeated by a majority of the commissioners, Born, 70, said in an interview.

“I felt the deletions would detract from our providing a full, fair and understandable report,” said Born, a former chairman of the Commodity Futures Trading Commission.

Republicans said their decision to release initial findings before the final report came after the commission, in a 6-4 vote, decided to limit to nine the number of pages each commissioner could supply to the print edition of the final book to express their views. Thus, Republican dissent would total a maximum of 36 pages in a 500-page book.

Timing Dispute

The law setting up the commission called for it to release its final report yesterday. Amid the disputes, Democratic commissioners decided to delay the report for about a month.

In the preview of their findings, the Republican members said yesterday that a “social policy” decision by the U.S. to push affordable housing and fund it via Fannie Mae and Freddie Mac was a recipe for disaster.

“The risk of a housing collapse was simply not appreciated,” the four wrote. “Not by homeowners, not by investors, not by banks, not by rating agencies and not by regulators.”

Keith Hennessey, a Republican commissioner and the former director of President George W. Bush’s National Economic Council, said in a blog post yesterday that the Republican outline was “not a report or a response” but a “primer on the issues we think will be important to cover in the final report of the commission.”

‘Comply With the Law’

The document was drafted to “comply with the law,” according to Hennessey.

Representative John Larson, a Connecticut Democrat who led the push to create the panel called the breakdown “truly disappointing and disheartening.”

“If Americans from both political parties can come together on anything, I would hope it would be this issue,” Larson said in a statement yesterday.

To be sure, the commission has obtained thousands of documents it hasn’t yet released, and those could eventually contribute to public understanding of the financial meltdown.

Tucker Warren, the FCIC’s spokesman, said the final report “will be the result of an investigation that includes over 700 interviews with witnesses in public and private, the review of hundreds of thousands of documents and over 19 days of public hearings.”

At the least, the report may be important for scholars, said Robert Litan, vice president for research and policy at the Kauffman Foundation in Kansas City, Missouri.

‘Statement for History’

“This is more or less a statement for history and maybe a marker for what happens when we have the next crisis,” Litan, a former Clinton administration budget official, said in a phone interview.

The report also may play a role in shaping the overhaul of Washington-based Fannie Mae and McLean, Va.-based Freddie Mac, the government-owned mortgage companies that own or guarantee more than half of U.S. home loans. It may affect the actual implementation of the financial overhaul law by providing “ammunition in filing comments and for potential litigation,” Litan said.

Still, in the aftermath of a crisis that has resulted in few arrests, the panel has done little to stoke public interest by unveiling information in its hearings, said William Black, an associate professor of economics and law at the University of Missouri-Kansas City and a former U.S. bank regulator. In the 1930s, it was public theater and hard questioning by Ferdinand Pecora that pushed transformational reforms, Black said.

Clearing the Path

Pecora, who served as the chief counsel to the U.S. Senate Committee on Banking and Currency, helped clear the political path for legislative overhauls including the Glass-Steagall Act and the Securities Act of 1933.

“They haven’t delivered any bombshells,” Cole, the Penn State professor, said of the current commission. “There is a necessity to provide some political theater if you want to get results.”

In the end, the biggest obstacle faced by the commission in its quest for impact may have been beyond its control. In July, Congress enacted the Dodd-Frank regulatory overhaul, designed to prevent another financial collapse.

“This commission’s timing is very bad,” said former Senator Bob Kerrey, a Nebraska Democrat who served on the Sept. 11 Commission. “It’s not just that they are late, but the moment is gone.”

To contact the reporters on this story: Robert Schmidt in Washington at; Phil Mattingly in Washington at

To contact the editor responsible for this story: Lawrence Roberts at

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