Bankers, regulators, government - even homeowners - all to blame for
credit crunch, says Financial Crisis Inquiry Commission
Dominic Rushe in New York
Friday January 28 2011
guardian.co.uk
http://www.guardian.co.uk/business/2011/jan/27/financial-crisis-avoidable-fcic-report
Wall Street bankers, regulators, government officials and even
homeowners all share part of the blame for the 2008 financial crisis
[http://www.guardian.co.uk/business/2010/feb/22/america-neoliberal-
dream-imf" title="the 2008 financial crisis], according to a scathing
US official investigation into the meltdown published today.
The 545-page Financial Crisis Inquiry Commission (FCIC) report [http://
www.fcic.gov/" title="545 page Financial Crisis Inquiry Commission
(FCIC)] reads like a financial thriller in which there are very few
heroes. One chapter on the boom and bust fiasco is entitled "The
Madness".
The commission concludes that the crisis was avoidable and was caused
by:
- Widespread failures in financial regulation, including the Federal
Reserve's failure to stem the "tide of toxic mortgages".
- Dramatic breakdowns in corporate governance, with too many firms
acting recklessly and taking on too much risk.
- An explosive mix of excessive borrowing and risk by households and
Wall Street.
- Policymakers who were ill-prepared for the crisis and lacked a "full
understanding of the financial system they oversaw".
- Systemic breaches of accountability and ethics at all levels.
Mortgage-holders took out loans they never intended to pay; lenders
made loans they knew the borrowers could not afford.
"As this report goes to print, there are 26 million Americans who are
out of work ... Nearly $11tn in household wealth has vanished ... The
collateral damage of this crisis has been real people and real
communities. The impacts of this crisis are likely to be felt for a
generation," the report says.
So far, the 2008 financial crisis has led to few prosecutions. The
authors interviewed more than 700 witnesses to compile the report and
said they had referred potential violations to the appropriate
authorities.
While the crisis was years in the making, it was the collapse of the
housing bubble that triggered the 2008 collapse. Trillions of dollars
in risky, sub-prime mortgages had been embedded in the system. When
the housing bubble burst, the impact was magnified by complex
financial derivatives based on those loans, whose risks had been
woefully underestimated.
Behind the collapse was the rewiring of Wall Street. From 1987 to
2007, the amount of debt held by financial sector soared from $3tn to
$36tn (?1.88tn to ?22.5tn). Subprime mortgage loans went from 5% of
loans in 1994 to 20% in 2006. At the same time, financial services
firms constituted an increasingly disproportionate part of the US
economy ? 27% of all corporate profits in the US compared with 15% in
1980.
The crisis itself was avoidable ? the result of "human action and
inaction, not of Mother Nature or computer models gone haywire". And
in large part it was led by government mismanagement.
The Federal Reserve played a central role in enabling the crisis. It
failed in its duty to set more prudent limits. Financial firms "made,
bought and sold mortgage securities they never examined". They
invested blindly and did not care if the investments were defective.
Compensation "too often rewarded the quick deal, the short-term gain"
and "encouraged the big bet", the report concludes.
Aggressive expansion left banks unable to manage their own assets ?
and few escaped blame.
For Citigroup, singled out for heavy criticism, "too big to fail meant
too big to manage". Goldman Sachs multiplied the effects of the
collapse of sub-prime loans by funding and creating billions of
dollars of bets based on the back of the loans. AIG's senior
management was ignorant of the terms and risks of the insurer's $79bn
derivatives exposure. It was a "costly surprise" to Merrill Lynch's
top managers that their $55bn investment in "super-safe" mortgage
securities had resulted in billions of dollars in losses.
Top officials, including Alan Greenspan, the former Federal Reserve
chairman, were also blamed. The FCIC said the drive towards
deregulation over the past 30 years helped to create the conditions
for disaster [http://www.guardian.co.uk/business/2008/oct/24/economics-
creditcrunch-federal-reserve-greenspan" title="helped to create the
conditions for disaster]. "What else could one expect on a highway
where there were neither speed limits nor painted lines?" asks the
report.
Minority report
The FCIC panel failed to reach a majority agreement, with the major
report signed off only by its Democrat members.
In a dissenting opinion, Republican members questioned many of the
report's conclusions. "The commission's majority used its extensive
statutory investigative authority to seek only the facts that
supported its initial assumptions ? that the crisis was caused by
'deregulation' or lax regulation, greed and recklessness on Wall
Street, predatory lending in the mortgage market, unregulated
derivatives and a financial system addicted to excessive risk-taking."
guardian.co.uk Copyright (c) Guardian News and Media Limited. 2011
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