The near-meltdown of the financial system had many causes and could have been avoided, according to the Financial Crisis Inquiry Commission’s majority report to Congress released Thursday. “The crisis was the result of human action and inaction, not of Mother Nature or computer models gone haywire. The captains of finance and the public stewards of our financial system ignored warnings and failed to question, understand and manage evolving risks,” the report said.
Well….okay. I don’t feel enlightened by that statement. Nor did I feel enlightened by anything in the report that I actually read – mainly the headlines and the chapter titles. The fact that I would have to use 662 pages to print the report (more than one ream of paper!) to read the report in its entirety is the only thing holding me back from reading it (ha!). Seriously, let me share with you the findings through their headlines.
- We conclude this financial crisis was avoidable. The report actually quotes Shakespeare – “the fault lies not in the stars, but in us.” They tell us there were warnings signs. Who out there doesn’t think there were warning signs – give me a show of hands.
- We conclude widespread failures in financial regulation and supervision proved devastating to the stability of the nation’s financial markets. I do believe the banks were complicit in the failures but I notice they didn’t mention in their conclusion or find any fault in the pressure of the Community Reinvestment Act to have financial institutions make home ownership available to more people through easier access to credit.
- We conclude dramatic failures of corporate governance and risk management at many systemically important financial institutions were a key cause of this crisis. The commission talks about the banks taking on enormous exposures in acquiring and supporting subprime lenders and creating, packaging, repacking, and selling trillions of dollars in mortgage-related securities. Oh and here they liken the bankers to Icarus – “like Icarus, they never feared flying ever closer to the sun.” I think we all understand the gargantuan profits being made by the investment banks.
- We conclude a combination of excessive borrowing, risky investments, and lack of transparency put the financial system on a collision course with crisis. Yep, we get that part too.
- 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 commission does take a swipe at Ben Bernanke and Hank Paulson here, basically saying they had never had a grasp on the full measure of the dire financial conditions at Fannie Mae and Freddie Mac. They continue to say however, that “in making these observations, we deeply respect and appreciate the efforts made by Secretary Paulson, Chairman Bernanke…” I wouldn’t expect a commission to express respect and appreciation for efforts – do the authors report to these guys?
- We conclude there was a systemic breakdown in accountability and ethics – this is a shocker.
- We conclude collapsing mortgage-lending standards and the mortgage securitization pipeline lit and spread the flame of contagion and crisis. Again, I think the lending standards were under pressure to be relaxed due to the fear of being prohibited from growing or expanding due to non-compliance with CRA regulations. Once the bankers got a taste of the ginormous profits to be made, there was nothing short of additional regulation that would have caused them to turn back. Not every player got fully swept up in the frenzy. I believe Wells Fargo was able to weather the storm because they chose not to play so much. You gotta love those Minnesotans (CEO John Stumpf via Norwest merger).
- We conclude over-the-counter derivatives contributed significantly to this crisis. This refers to the deregulation of OTC derivatives and the use of derivatives to hedge against price changes. Credit default swaps (CDS), collateralized debt obligations (CDOs) and the lack of capital reserves at companies such as AIG led to some very big bailouts. I think most Americans are well aware of how the government (us) had to mop up that catastrophe.
So there it is. This 18 months of work concludes with the statement that “while we have not been charged with making policy recommendations, the very purpose of our report has been to take stock of what happened so we can plot a new course. ” It seems to me that a lot of new course plotting has been going on without the report, most notably via the Dodd Frank Act. It took 22 chapters, a Chairman, a Vice Chairman, 8 Commissioners, and Executive Director, General Counsel, Director of Investigations, Director of Research, and 83 Staffers to review millions of pages of documents, interview more than 700 witnesses, and hold 19 days of public hearings. The Commission felt grateful to be “accorded the honor of this public service.”
Am I wrong to feel that there is very little that hasn’t already been digested about the crisis by all of us? And am I wrong to think this is just a tad bit much more than two years after the fact?