Commission Financial Crisis Inquiry Report 
By Walter Sorochan

Posted January 30, 2011.   Disclaimer The information displayed herein is intended to simplify the complexity of the global economy.

The report lacked unanimous agreement; it made soft recommendations lacking muscle, direction and a long term fix! 

Craig and DealBook Craig: Report summary summarized what the Congressional commission had to say on various report topics:

THE ROOTS OF THE CRISIS
“First, to pin this crisis on mortal flaws like greed and hubris would be simplistic. It was the failure to account for human weakness that is relevant to this crisis.”

“Money washed through the economy like water rushing through a broken dam.”

WALL STREET
“Solvency should be a simple financial concept: if your assets are worth more than your liabilities, you are solvent; if not, you are in danger of bankruptcy. But on the afternoon of Friday, September 12, 2008, experts from the country’s biggest commercial and investment banks met at the Wall Street offices of the Federal Reserve to ponder the fate of Lehman Brothers, and could not agree whether or not the 157-year-old firm was solvent.”

“Under (Henry) Paulson’s leadership, Goldman Sachs had played a central role in the creation and sale of mortgage securities.”

“The machine churning out CDOs would not have worked without the stamp of approval given to these deals by the three leading rating agencies: Moody’s, S&P, and Fitch.”

“[Charles] Prince and [Robert] Rubin [of Citigroup] appeared to believe up until the fall of 2007 that any downside risk in the CDO business was minuscule.”

“On October 30, when [Merrill CEO Stanley] O’Neal resigned, he left with a severance package worth $161.5 million — on top of the $91.4 million in total compensation he earned in 2006 when his company was still expanding its mortgage banking operations.”

“The initial collateral call was a shock to AIG’s senior executives, most of whom had not even known that the credit default swaps with Goldman contained collateral call provisions.”

MAIN STREET
“Main Street felt the tremors as the upheaval in the financial system rumbled through the U.S. economy. Seventeen trillion dollars in household wealth evaporated within 21 months, and reported unemployment hit 10.1 percent at its peak in October 2009.”

“The same system that was so efficient at creating millions of mortgage loans over the past decade has been ineffective at resolving problems in the housing market, including the efforts of homeowners to modify their mortgages.”

REGULATORS
“We do not accept the view that regulators lacked the power to protect the financial system. They had ample power in many arenas and they chose not to use it.”

“The Securities and Exchange Commission’s poor oversight of the five largest investment banks failed to restrict their risky activities and did not require them to hold adequate capital and liquidity for their activities, contributing to the failure or need for government bailouts of all five of the supervised investment banks during the financial crisis.” Craig: Report summary

 Summary: 

Lack of watchdog regulation:  The majority report finds fault with two Fed chairmen: Alan Greenspan, who led the central bank as the housing bubble expanded, and his successor, Ben S. Bernanke, who did not foresee the crisis but played a crucial role in the response. It criticizes Mr. Greenspan for advocating deregulation and cites a “pivotal failure to stem the flow of toxic mortgages” under his leadership as a “prime example” of negligence.

Politicians looking the other way:  It also criticizes the Bush administration’s “inconsistent response” to the crisis — allowing Lehman Brothers to collapse in September 2008 after earlier bailing out another bank, Bear Stearns, with Fed help — as having “added to the uncertainty and panic in the financial markets.”

Political spin:  Like Mr. Bernanke, Mr. Bush’s Treasury secretary, Henry M. Paulson Jr., predicted in 2007 — wrongly, it turned out — that the subprime collapse would be contained, the report notes.

Lack of transparency:  Democrats also come under fire. The decision in 2000 to shield the exotic financial instruments known as over-the-counter derivatives from regulation, made during the last year of President Bill Clinton’s term, is called “a key turning point in the march toward the financial crisis.”

Timothy F. Geithner, who was president of the Federal Reserve Bank of New York during the crisis and is now the Treasury secretary, was not unscathed; the report finds that the New York Fed missed signs of trouble at Citigroup and Lehman, though it did not have the main responsibility for overseeing them. Commission: report activities

Avoidable disaster:  A majority of the panel concluded that the 2008 financial crisis was an “avoidable” disaster caused by widespread failures in government regulation, corporate mismanagement and heedless risk-taking by Wall Street. Commission: report activities

Asleep at the wheel:  In its final report, the commission casts a wide net of blame, faulting the administrations of Bill Clinton and George W. Bush, the Federal Reserve and other regulators for permitting a calamitous concoction: shoddy mortgage lending, the excessive packaging and sale of loans to investors and risky bets on securities backed by the loans. Commission: report activities

The report names former Federal Reserve chief Alan Greenspan and current Chairman Ben Bernanke “as two of the main enablers of the credit bubble that led to the 2008 collapse,” Fortune says.

The report blames the agencies for missing the mortgage bubble and for turning a blind eye to Wall Street’s excessive risk taking that threatened to topple the economy.  Protess: harsh words

Government cover-up:  As late as summer of 2007, with housing already past its prime, the Federal Reserve chairman, Ben S. Bernanke and the Treasury secretary, Henry M. Paulson Jr., “offered public assurances that the turmoil in the subprime mortgage markets would be contained,” according to the report.  Protess: harsh words

Revolving door appointments:  The government treasury has been continuously headed by a former employee of the an independent cartel entity, the Federal Reserve Bank.  With these kind of appointments, it is like a "fox guarding the chicken-coop!"  It appears that the Federal Reserve plants its own henchmen to rule the nation's treasury and government. Putting it in another way, there is no national democracy in Washington! 

Obama's White House is applauding the work of a panel that investigated the causes of the financial crisis, but had no comment on its conclusion. The report found that government officials and Wall Street executives ignored warning signs and failed to manage risks. In its final report released on January 27, 2011, the congressionally appointed financial crisis commission also says the Clinton and Bush administrations, the current and previous Federal Reserve Chairman and Treasury Secretary Timothy Geithner bear responsibility for what happened.

Both the Senate and Congress are already reintroducing financial regulatory reform bills that have good bi-partisan support.

References:

Craig Susanne, "Legal/Regulatory Outtakes From the Crisis Commission Report," Deal Book, January 27, 2011.  Craig: Report summary

Financial Crisis Inquiry Commission. Jan. 25, 2011.  Commission: report activities

Protess Ben and Susanne Craig, "Harsh Words for Regulators in Crisis Commission Report," January 27, 2011.  Protess: harsh words

White House, "WH applauds financial commission's work," January 27, 2011.  Associated Press: financial crisis report