Infighting, Investigations Overshadow FCIC Report

'The Financial Crisis Inquiry Report'
Copies of "The Financial Crisis Inquiry Report" in Washington. Photographer: Joshua Roberts/Bloomberg

With the ink barely dry on the Financial Crisis Inquiry Commission’s assessment of the 2008 market meltdown, the group is turning to other pursuits: infighting and preparing for congressional investigations.

The report, published as a book and online today, blames Washington regulators and Wall Street banks equally for failures leading to the crisis. The findings weren’t endorsed by the commission’s four Republican members, who wrote two dissents and criticized decisions by the Democratic chairman, Phil Angelides.

Adding to the turmoil, Representative Darrell Issa this week demanded thousands of pages of documents from the FCIC as his House Oversight and Government Reform Committee ramps up an investigation into allegations of overspending, partisanship and conflicts of interest. The California Republican’s staff also sent letters to former commission employees, asking them to preserve documents.

The sideshow “makes it easy to chalk this up as just another chapter in the divisive politics in Washington,” rather than a serious investigation, said Michael Perino, a professor at St. John’s University’s law school in New York.

“The most likely outcome seems to be that this report gets put on a shelf to collect dust,” added Perino, whose 2010 book, “The Hellhound of Wall Street,” chronicled the 1930s congressional probe headed by Ferdinand Pecora that led to the creation of the Securities and Exchange Commission and the Federal Deposit Insurance Corp.

Congressional Creation

Angelides, the former California treasurer, said today the commission had “concluded first and foremost that this crisis was avoidable.”

At a Washington press conference announcing the official release of the report, he said, “The record is replete with evidence of failures. None of what happened was an act of God.”

The report blamed “reckless” Wall Street firms and “weak” federal regulators for contributing to the economic collapse. It faulted the SEC and the Federal Reserve and singled out former Fed Chairman Alan Greenspan for backing “30 years of deregulation.” Regulators “had ample power in many arenas and they chose not to use it” to protect the financial system, the report said.

The commission also pinned blame on the pay structures of Wall Street firms, which “had the unintended consequence of creating incentives to increase both risk and leverage,” according to the report.

Pecora Comparison

When it was established by Congress in 2009, the FCIC was heralded as a second coming of the Pecora Commission, the best chance for finding clear answers to what caused the credit crisis and holding wrongdoers accountable. Lawmakers also compared it to the commission that investigated the Sept. 11 attacks, which offered unanimous recommendations that spurred new policies.

Last year’s passage of the Dodd-Frank financial rules overhaul dealt another blow to the commission, taking away the chance that its conclusions would influence the policy debate. The commission did send some evidence it found to the Justice Department and other law enforcement agencies, though one member, Douglas Holtz-Eakin, said that news stories detailing the referrals earlier this week were “a publicity exercise.”

“They went out in September and October and we haven’t heard anything since,” he said of the referrals.

Tempers among commissioners flared this week as copies of the group’s report leaked out to media outlets. Republican members said they hadn’t even seen the final document. They also questioned Angelides’s decision to hire President Barack Obama’s former communications director Anita Dunn to handle public relations for the rollout.

Public Relations

FCIC Spokesman Tucker Warren said Angelides hired Dunn and her firm, SKDKnickerbocker, “to provide the commission with some assistance in releasing its final report,” which is published in book form and is available free on the Internet. “We felt it was important to have additional help in order to ensure the interest among the general public and the press was met and responded to.”

The public relations help is being paid out of the commission’s taxpayer-funded budget, Warren said. Federal panels like the Sept. 11 Commission, Iraq War Study Group and Weapons of Mass Destruction Commission have had similar representation, he said. Dunn didn’t return a call seeking comment.

The FCIC’s six Democratic appointees concluded that the financial crisis was triggered by a wide range of abuses, ranging from lax oversight of derivatives to poor decisions by credit rating firms to governance and risk management failures by large banks. The report also singled out “weak” supervision by federal banking and securities regulators.

‘Human Action’

“This crisis was the result of human action and inaction, not of Mother Nature or computer models gone haywire,” the Democrats found.

While there were “warning signs” that could have helped prevent the collapse, “they were ignored or discounted,” they wrote.

Republican commissioners Keith Hennessey, FCIC Vice Chairman Bill Thomas and Holtz-Eakin signed on to a dissent 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.

The Democrats are “looking at individuals and policy or regulatory failures, whereas we add into that and place greater influence on economic forces,” Hennessey said. “They basically don’t talk about a credit bubble, which is astonishing.”

Wallison Dissent

A fourth Republican, Peter Wallison, wrote his own dissent that concluded housing policy during the administrations of Presidents Bill Clinton and George W. Bush caused the crisis. The push to increase homeownership 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.

The Republicans also complained about the management of the commission, saying that they were often kept in the dark about decisions and that suggestions they made were ignored --comments that are likely to be probed by Issa in his review.

For example, Wallison said in his dissent that commission members were handed a list of public hearings in December 2009 and “never told why those particular subjects were important or why they were chosen as the key issues for a set of hearings that would form the backbone of all the commission’s work.”

The full group didn’t even meet to discuss the origins of the crisis until July of last year, he added.

In addition, when the panel’s staff interviewed witnesses, the commissioners weren’t notified, Wallison said, keeping them from asking questions or knowing the context of the statements.

Interview Log

FCIC spokesman Warren, who declined to comment specifically on Wallison’s dissent, did say the FCIC kept an interview log that “all the commissioners had access to and were notified when that log reflected new interviews that were scheduled.”

Hennessey, in an interview yesterday, said he was “frustrated” with 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,” he said.

Lawmakers will now have their chance to weigh in on the report, the dissents and the partisan divide on the commission.

The House Financial Services Committee is scheduled to hear testimony on the FCIC on Feb. 16. The law that created the commission requires Angelides to testify on the findings before the House panel and the Senate Banking Committee.

Political Divisions

Issa also is pressing on with his review. In the Jan. 25 letter, he noted that the political divisions within the group didn’t “bode well” for it turning out a “thorough, systematic and non-partisan examination” of the crisis.

He’s asked for documents by Jan. 31 relating to the commission’s contracts, travel and use of public relations consultants. He also wants to know why several senior staff members quit the panel in the middle of the probe.

Warren said Angelides will respond to Issa “in due time.”

The commission’s partisan divide will be on display today as the Republicans and Democrats hold separate news conferences to explain their findings.

Even the group’s private party, marking the end of its work isn’t expected to draw all the Republican members. Hennessey and Holtz-Eakin said they would be out of town.

The group has booked at a Greek restaurant in downtown Washington known for serving free cheese and olives at its bar. According to the invitation sent to staff members, beer, wine and appetizers are “complementary.” Mixed drinks aren’t covered. Commissioners and staff will cover the costs of the party, Warren said.


Before it's here, it's on the Bloomberg Terminal. LEARN MORE