Financial Crisis Commission's 10 Major Findings

Financial Crisis Inquiry Commission's 10 Major Findings


In a report released today, the Financial Crisis Inquiry Commission found that "reckless" Wall Street firms, an abundance of cheap credit and "weak" federal regulators caused the crisis.

"This financial crisis could have been avoided. Let us be clear," chairman Phil Angelides said at the Washington press conference marking the official release of the report. "The record is replete with evidence of failures. None of what happened was an act of God."

Former California treasurer Angelides confirmed that the bipartisan panel appointed by Congress to investigate the financial crisis concluded that several financial industry figures appear to have broken the law and has referred multiple cases to state or federal authorities for potential prosecution.

The report also revealed that Goldman Sachs collected $2.9 billion from the American International Group as payout on a speculative trade it placed for the benefit of its own account, receiving the bulk of those funds after AIG received an enormous taxpayer rescue, according to the FCIC.

The 662-page report, available online, and as a book, offers 10 main conclusions:

"This financial crisis was avoidable."
"Despite the expressed view of many on Wall Street and in Washington that the crisis could not have been foreseen or avoided, there were warning signs," the report reads."The tragedy was that they were ignored or discounted."

"Widespread failures in financial regulation and supervision proved devastating to the stability of the nation's financial markets."
"Securities and Exchange Commission could have required more capital and halted risky practices at the big investment banks. It did not," the report reads.


"The Federal Reserve Bank of New York and other regulators could have clamped down on Citigroup's excesses in the run-up to the crisis. They did not. Policy makers and regulators could have stopped the runaway mortgage securitization train. They did not.

"Dramatic failures of corporate governance and risk management at many systemically important financial institutions were a key cause of this crisis."
Financial institutions acted recklessly and depended too heavily on short term loans, the inquiry found. "Compensation systems--designed in an environment of cheap money, intense competition, and light regulation--too often rewarded the quick deal, the short-term gain--without proper consideration of long-term consequences," it reads.

"A combination of excessive borrowing, risky investments, and lack of transparency put the financial system on a collision course with crisis."
The inquiry found that in the years leading up to the crisis, American households, and institutions, borrowed too much and saved too little.

"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. What resulted was panic," the report reads. "We had reaped what we had sown."

"The government was ill prepared for the crisis, and its inconsistent response added to the uncertainty and panic in the financial markets."
Key government agencies, the Treasury Department, the Federal Reserve Board, and the Federal Reserve Bank of New York were behind the curve, the report concluded.

"They were hampered because they did not have a clear grasp of the financial system they were charged with overseeing, particularly as it had evolved in the years leading up to the crisis."

"There was a systemic breakdown in accountability and ethics."
Many borrowers lied about being able to pay mortgages, lenders made loans they knew borrowers couldn't afford, the report said.

"Countrywide executives recognized that many of the loans they were originating could result in 'catastrophic consequences.' Less than a year later, they noted that certain high-risk loans they were making could result not only in foreclosures but also in 'financial and reputational catastrophe' for the firm. But they did not stop."

"Collapsing mortgage-lending standards and the mortgage securitization pipeline lit and spread the flame of contagion and crisis."
The report found irresponsible lending was prevalent, and there were warnings, but "the Federal Reserve neglected its mission," and mortgage lenders passed the risk along.

"From the speculators who flipped houses to the mortgage brokers who scouted the loans, to the lenders who issued the mortgages, to the financial firms that created the mortgage-backed securities, collateralized debt obligations... no one in this pipeline of toxic mortgages had enough skin in the game."

"Over-the-counter derivatives contributed significantly to this crisis..."
Speculating on devices like collateralized debt obligations fanned the flames, with everyone from farmers to corporations to investors betting on prices and loan defaults. When the housing bubble popped, these were at the center of the fallout.

"The failures of credit rating agencies were essential cogs in the wheel of financial destruction..."
But, the report found, those bets wouldn't have been possible without the seal of approval from ratings agencies.

"This crisis could not have happened without the rating agencies. Their ratings helped the market soar and their down- grades through 2007 and 2008 wreaked havoc across markets and firms," the report reads.

Quit Your Complaining - The Economy is Fine - That's What CEOs Think.

Davos: Two Worlds, Ready or Not
by: Simon Johnson | The Baseline Scenario | News Analysis

The author was Chief Economist for the IMF, not known as a liberal organization. He currently works for the Pete Peterson group. Peterson, a billionaire, would like to do away with all entitlements especially Social Security. I do not know what Mr. Johnson's personal politics are. And it really doesn't matter; only the accuracy and validity of his points matters. (Atypical)

On the fringes of the World Economic Forum meeting in Davos this week, there was plenty of substantive discussion – including about the dangers posed by our "too big to fail"/"too big to save" banks, the consequences of widening inequality (reinforced by persistent unemployment in some countries), and why the jobs picture in the U.S. looks so bad.

But in the core keynote events and more generally around any kind of CEO-related interaction, such themes completely failed to resonate. There is, of course, variation in views across CEOs and the people work intellectual agendas on their behalf, but still the mood among this group was uniformly positive – it was hard to detect any note of serious concern.

Many of the people who control the world's largest corporations are quite comfortable with the status quo post-financial crisis. This makes sense for them – and poses a major problem for the rest of us.The thinking here is fairly obvious. The CEOs who provide the bedrock of financial support for Davos have mostly done well in the past few years. For the nonfinancial sector, there was a major scare in 2008-09; the disruption of credit was a big shock and dire consequences were feared. And for leaders of the financial sector this was more than an awkward moment – they stood accused, including by fellow CEOs at Davos in previous years, of incompetence, greed, and excessively capturing the state.

But all of this, from a CEO perspective, is now behind them. Profits are good – this is the best bounce back on average in the post-war period; given that so many small companies are struggling, it is reasonable to infer that the big companies have done disproportionately well (perhaps because their smaller would-be competitors are still having more trouble accessing credit). Executive compensation at the largest firms will no doubt reflect this in the months and years ahead.

In terms of public policy, the big players in the financial sector have prevailed – no responsible European, for example, can imagine a major bank being allowed to fail (in the sense of defaulting on any debt). And this government support for banks has translated into easier credit conditions for the major global corporations represented at Davos.

The public policy issue of the day, from the point of view of such CEOs, is simple. There needs to be sufficient fiscal austerity to strengthen public balance sheets – so that states can more effectively stand behind their banks in the future, and to keep currencies from moving too much. Leading bankers, in particular, insisted on the paramount importance of providing unlimited government support to their sector during 2008-09; now they insist with equal or greater vigor that support to all other parts of society be curtailed.

This is where cognitive dissonance creeps in. Most CEOs feel that the provision of general public goods is not their responsibility, although they are very happy to help guide (or capture) the provision of public goods specific to their firm.

But it is reckless decisions by some in the financial sector that produced the crisis and recession – this is what accounts for the 40 percent of GDP increase in net government debt held by the private sector in the United States (to be clear: it's the recession and mostly the consequent loss of tax revenue). And CEOs are happy to lead the charge both against raising taxes and in favor of deficit reduction.

This adds up to public goods being weak and so much under pressure around the world. No one can put significant resources to work helping to bring down unemployment. No one is seriously addressing the loss of skills faced by the long-term unemployed. No one is offering real resources to help improve education for lower-income children or adults who did not finish high school.

Self-anointed "fiscal conservatives" claim the budget issues we face are all about discretionary nonmilitary spending. This is nonsense. The U.S. faces an incipient fiscal crisis (a) in the shorter term, because of what the big banks did and what they are likely to do in the future, and (b) over the next few decades, if we fail to control rising health care costs (both in general and as funded by government budgets).

The gap between the CEOs' world and the real world should be bridged by the official sector. But where are the politicians and government officials who can explain what we need and why? Who can confront the CEOs in the highest profile public forums, and push them on the social responsibility broadly defined?

The biggest disappointment at Davos was not the attitude of the corporate sector; these people are just doing their jobs (as they see it). To the extent the U.S. or eurozone official sector showed up at all, it continued to demonstrate the deepest levels of intellectual capture. The reasoning seems to be: As long as we do what the big banks and big firms want, everything will turn out all right. There was zero high-profile public debate at Davos this week on anything related to this way of seeing the world.

Corporate Davos was borderline exuberant. Even if a deeper crisis looms, does the global business elite really care?