Posted on Friday, February 4, 2011
In May 2009, Congress established the Financial Crisis Inquiry Commission to investigate the causes of the worst financial crisis since the Great Depression. The 10-member commission released the results of its findings in a scathing report published Thursday.
Their conclusion? The housing collapse and the economic crisis that followed could have been averted. The panel spread blame across a wide gamut, from Wall Street to Main Street to Pennsylvania Avenue.
In their report, the committee members said, “The Commission concluded that this crisis was avoidable. It found widespread failures in financial regulation; dramatic breakdowns in corporate governance; excessive borrowing and risk-taking by households and Wall Street; policy makers who were ill prepared for the crisis; and systemic breaches in accountability and ethics at all levels.”
The panel describes the events of 2007 and 2008 as neither bumps in the road nor an accentuated dip in the financial cycles that should characterize a free market economic system, but rather a “fundamental disruption – a financial upheaval, if you will – that wreaked havoc in communities and neighborhoods across this country.”
As the commission’s report went to print, its members note that there are more than 26 million Americans who are out of work, four million families who have lost their homes to foreclosure, another four and a half million families in the midst of a foreclosure or seriously delinquent on their mortgage payments, and nearly $11 trillion in household wealth that has simply vanished.
“Our mission was to ask and answer this central question,” the commission stated, “how did it come to pass that in 2008 our nation was forced to choose between two stark and painful alternatives – either risk the total collapse of our financial system and economy or inject trillions of taxpayer dollars into the financial system and an array of companies, as millions of Americans still lost their jobs, their savings, and their homes?”
While the vulnerabilities that created the potential for crisis were years in the making, the commission’s report
stresses that it was the collapse of the housing bubble – fueled by low interest rates, easy and available credit, scant regulation, and toxic mortgages – that ignited a full-blown crisis, thanks to trillions of dollars in risky mortgages that had become embedded throughout the financial system, as mortgage-related securities were packaged, repackaged, and sold to investors around the world.
So who’s responsible for the infestation of high-risk mortgages? The panel says the captains of finance and the public stewards of our financial system ignored warnings and failed to question the risks in what the report describes as “a big miss.”
“The prime example is the Federal Reserve’s pivotal failure to stem the flow of toxic mortgages, which it could have done by setting prudent mortgage-lending standards,” the report says.
Add to that more than 30 years of deregulation, supported by successive administrations and Congresses and “actively pushed by the powerful financial industry,” and you’ve got a model for disaster stripped of key safeguards, according to the commission.
The panel says its investigation also revealed “stunning instances” of breakdowns in corporate governance and irresponsibility. In the report, they point specifically to AIG senior management’s ignorance of the terms and risks of the company’s $79 billion derivatives exposure to mortgage-related securities; Fannie Mae’s quest for bigger market share, profits, and bonuses; and the costly surprise when Merrill Lynch’s top management realized that the company held $55 billion in ‘super-senior’ and supposedly ‘super-safe’ mortgage securities that resulted in billions of dollars in losses.
The panel finds fault with consumers, too, which the report says “borrowed to the hilt, leaving them vulnerable to financial distress.” From 2001 to 2007, the report notes, national mortgage debt almost doubled, and the amount of mortgage debt per household rose more than 63 percent from $91,500 to $149,500, even while wages were essentially stagnant.
The commission also concluded that the government’s key policy makers were ill prepared for the crisis, and their inconsistent response added to the uncertainty and panic in the financial markets.
“The impacts of this crisis are likely to be felt for a generation. And the nation faces no easy path to renewed economic strength,” the panel wrote in its report. “The greatest tragedy would be to accept the refrain that no one could have seen this coming and thus nothing could have been done. If we accept this notion, it will happen again.”
The Financial Crisis Inquiry Commission’s full 662-page report, as well as its “Conclusion” subset can be found here.
By: Carrie Bay DS NEWS