Crisis Panel Report Blames Wall Street, Washington

Financial Crisis Inquiry Commission Chairman Angelides
Phil Angelides, chairman of the Financial Crisis Inquiry Commission. Photographer: Andrew Harrer/Bloomberg

The congressionally appointed panel assigned to probe the origins of the 2008 credit crisis heaped blame on “reckless” Wall Street firms and “weak” federal regulators, concluding the meltdown could have been avoided.

“The captains of finance and the public stewards of our financial system ignored warnings and failed to question, understand and manage evolving risks within a system essential to the well-being of the American public,” the Financial Crisis Inquiry Commission wrote in a 545-page book outlining its conclusions. “Theirs was a big miss, not a stumble.”

A copy of the book obtained by Bloomberg News, a paperback emblazoned with a U.S. seal, faults the Securities and Exchange Commission and the Federal Reserve for failing to clamp down on the banks they supervised. It singles out former Fed Chairman Alan Greenspan for backing “30 years of deregulation.”

The findings, scheduled to be officially released tomorrow, were endorsed only by the commission’s Democratic majority. The four Republican members issued two separate dissents that accused Democrats of writing a long narrative account of what happened in the crisis while failing to uncover what caused it.

When it was created by Congress in 2009, the FCIC was heralded as the best chance of finding clear answers to what caused the credit crisis and holding wrongdoers accountable. Lawmakers compared it to the commission that investigated the Sept. 11 attacks, which after a series of hearings came out with unanimous recommendations that spurred new policies.

Partisan Bickering

The partisan bickering and divided report makes it less likely that the group’s work will have an impact on regulatory policy, people who have followed the commission said. Last year’s passage of the biggest financial-rules overhaul since the 1930s and the return to profitability of banks that got billions of dollars in U.S. aid during the crisis further undermined the panel’s relevance.

“I’m frustrated,” Republican member Keith Hennessey said of the outcome. “But lots of things in a policy environment are frustrating, so you do the most responsible thing you can given the cards you were dealt.”

U.S. Representative Darrell Issa, the chairman of the House Oversight and Government Reform Committee, has announced that he’s looking into allegations of partisanship, mismanagement and conflict of interest at the commission. The California Republican and two other lawmakers sent a letter yesterday renewing a demand for documents on the panel’s spending, its use of media consultants and its staff turnover.

Spurned Request

FCIC Chairman Phil Angelides, a Democrat who served as California’s state treasurer, spurned a similar request from Issa last year. In yesterday’s letter, Issa said he was concerned about “continued management problems” at the commission and asked for the material by Jan. 31.

The FCIC last year requested and received $1.8 million in additional funds from Congress, which had given the panel an $8 million budget.

The FCIC has received the most recent letter from Issa and will respond “in due time,” Tucker Warren, the commission’s spokesman, said today. He declined to comment on the report before its official release.

Along with Angelides, other Democratic members of the FCIC include former Commodity Futures Trading Commission chief Brooksley Born and former U.S. Senator Bob Graham of Florida. Former congressman Bill Thomas of California leads the Republican side.

The panel held hearings reviewing the actions of Moody’s Corp. and other bond-rating firms, on the failure of New York-based investment bank Bear Stearns Cos. and on the bailout of American International Group Inc., the insurer that blew up under the weight of its derivatives portfolio. Chief executives including Warren Buffett and Lloyd Blankfein of Goldman Sachs Group Inc. testified before the committee.

Poor Controls

In their report, the Democrats noted “dramatic failures of corporate governance and risk management” at financial companies including Fannie Mae, AIG and Bear Stearns. Poor controls led to excessive borrowing and risky investments in mortgages, the report said.

The report’s narrative weaves together a long series of events that by now are well-known to people who have read news accounts or seen congressional hearings on the crisis. It discusses the rise of the so-called shadow banking system, subprime lending and financial products like mortgage-backed securities, which allowed banks to package and sell risky home loans. The report also blames credit-rating firms for giving top ratings to securities that would later collapse, calling them “key enablers of the financial meltdown.”


The FCIC found particular fault with the Fed and former chairman Greenspan for failing to enforce a 1994 predatory lending law that could have prevented or slowed the spread of subprime and other lower-quality mortgages.

At the same time, the report largely gave a pass to borrowers who sought to capitalize on easy access to cheap credit.

“The Federal Reserve would not use the legal system to rein in predatory lenders,” the commission found. Greenspan told the commission in a March 2010 interview that he thought at the time that restricting subprime lending might be “harmful.”

Greenspan declined comment today through a spokeswoman.

In addition to the Fed, other regulators such as the SEC “had ample power in many arenas and they chose not to use it” to protect the financial system, the report said.

Former SEC Chairman Christopher Cox expressed “comfort about the capital cushions” at the big investment banks shortly before Bear Stearns collapsed in March 2008, the report said.

SEC Lapses

Democrats also singled out the SEC for helping fuel the sale of high-risk mortgage-backed securities. The SEC “failed to adequately enforce disclosure requirements” and “exempted some sales of such securities from its review.”

In an interview with the panel, former Treasury Secretary John Snow said regulators didn’t adequately address the proliferation of poor lending practices. He told the panel he called a meeting in late 2004 or early 2005 to urge them to take action. “The basic reaction from financial regulators was, ‘Well, there may be a problem but it’s not in my field of view,’” Snow said.

On AIG, the report said the insurance company took advantage of a “weak regulator” in the Office of Thrift Supervision to push products through the unregulated market, according to the panel. John Reich, the former director of the OTS, said in an interview with FCIC staff that the agency was “like a gnat on an elephant” when it tried to oversee AIG.

Reich also recalled a phone conversation after the crisis with then-New York Federal Reserve President Timothy F. Geithner, now the Treasury secretary.

Geithner’s Rebuke

“About all I can remember is the foul language that I heard on the other line,” Reich told the commission. Reich recalled Geithner complaining that the OTS had handed him “a bag of shit” with AIG, according to the report.

As AIG neared collapse, the report said, the Fed tried to get JPMorgan Chase & Co. and Goldman Sachs to gather a syndicate of banks that could come up with a $75 billion loan. The bankruptcy of Lehman Brothers Holdings Inc. derailed the idea, Thomas Baxter, general counsel of the New York Fed, told the commission.

Once Lehman filed, “everyone decided that, ‘We’ve got to protect our own balance sheet,’ and the banks that were going to provide the $75 billion decided they were not going to,” Baxter said.

The collapse of the New York-based insurance company was possible because of “sweeping deregulation of the over-the-counter derivatives, like credit default swaps, that effectively eliminated federal and state regulation of these products,” the commission concluded.

Fannie and Freddie

One area the majority report didn’t blame is government housing programs. Fannie Mae and Freddie Mac, the mortgage finance companies that have been operating under U.S. conservatorship since 2008, “contributed to, but were not a primary cause of, the financial crisis,” the report said.

The report cited a FCIC study showing that risky loans purchased by the two government-sponsored enterprises performed better than those packaged into securities by private issuers.

In addition, the report said mortgages that banks issued to satisfy federal community investment requirements “were not very risky.” For example, Citigroup Inc.’s 2002 pledge to lend $80 billion “consisted of entirely prime loans” to lower income households and minority borrowers, the report found.

Republicans Thomas, Hennessey and Douglas Holtz-Eakin placed a 27-page dissent in the book that detailed 10 causes for the crisis. Topping their list was the credit bubble, which the three commissioners said was inflated by increased investment in high-risk mortgages. U.S. monetary policy “may have contributed to the credit bubble, but did not cause it,” they wrote.

Blaming Bubble

The Republicans also blamed a housing bubble that began in the late part of the 20th century as well as the nontraditional mortgages pushed by firms such as Countrywide Financial Corp., Washington Mutual Inc. and Ameriquest Mortgage Securities Inc.

Peter Wallison, the fourth Republican appointee on the panel, wrote his own dissent that concluded U.S. housing policy during the administrations of Presidents Bill Clinton and George W. Bush caused the crisis. The push to make more people homeowners drove down lending standards and caused the creation of 27 million risky mortgages that were ready to default when the housing bubble collapsed, he wrote.

Both Republican dissents denounced Fannie Mae and Freddie Mac. The three-member dissent said the housing giants were vehicles for “socializing the losses” on bad loans.

Fannie and Freddie “contributed significantly in a number of ways” to the financial crisis, the three Republicans wrote.

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