In an attempt to make the facts from the inquiry into the financial crisis fit into their rigid free market ideology the Republicans on the Financial Crisis Inquiry Commission are resorting to historical revision.
Harsh Words for Regulators in Crisis Commission Report
The Congressional commission’s scathing account of the financial crisis casts regulators in a rather unflattering light, as the sheriff who didn’t stop Wall Street from becoming the Wild West.
In its exhaustive report released on Thursday, the Financial Crisis Inquiry Commission lambastes an alphabet soup of federal regulatory agencies – including the Securities and Exchange Commission, the Treasury Department and the Federal Reserve. 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.
"The sentries were not at their posts," the report said.
The report called out several top regulators by name, including former the Federal Reserve chairman, Alan Greenspan, who "championed" deregulation, the commission said.
At the New Yorker John Cassidy writes:
Two Cheers for the Financial Crisis Inquiry Commission
The commissioners present the subprime blow-up as a product of deregulation, misaligned incentives, and misplaced faith in dodgy risk models; they criticize policymakers for being unprepared to deal with the crisis; and they say the decision to let Lehman Brothers fail was a big mistake.
Of course, my language was a bit more colorful than theirs, as evidenced by these examples:
HMF: "When historians come to write about ‘Greenspan Bubbles,’they will do with good cause: more than any other individual, the former Fed chairman was responsible for letting the hogs run wild."
FCIC: "More than 30 years of deregulation and reliance on self-regulation by financial institutions, championed by former Federal Reserve chairman Alan Greenspan and others...had stripped away key safeguards, which could have helped avoid catastrophe.
HMF: "At the risk of outraging some readers, I downplay character issues. Greed is ever present: it is what economists call a ‘primitive" of the capitalist model. Stupidity is equally ubiquitous, but I don’t think it played a big role here."
FCIC: "(T)o 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."
HMF: "(A)fter all the mergers that the government orchestrated during the crisis, six huge firms...now dominate the financial industry, wielding enormous power and influence...The ratings agencies remain unreformed, as do the myopic compensation packages for Wall Street traders and CEOs that helped bring on the crisis."
FCIC: "Our financial system is, in many respects, still unchanged from what existed on the eve of the crisis. Indeed, in the wake of the crisis, the U.S. financial sector is now more concentrated than ever in the hands of a few large, systemically significant institutions."
Given these likenesses, I obviously agree with the main thrust of the report, which is that the crisis could have been avoided: it wasn’t a once-in-a century natural disaster, as some people on Wall Street, and even Ben Bernanke, have intimated.
At the C.S. Monitor Mark Trumbull writes:
Causes of the financial crisis? Commission ends in hung jury
But the three Republicans lay out their own carefully traced chain of causation.
It started with a credit bubble, they argue, thus pulling to the forefront the issue of "excess liquidity" that the Democrats played down. Although traditional theory might expect such bubbles to be rooted in loose monetary policy by the Fed, they point to other forces as central: global flows of capital and the credit created by an evolving climate of risk taking in the finance industry.
The Republicans then cite follow-on events: a housing bubble, shoddy mortgage lending, rising "leverage" risk as financial firms held too small a cushion of capital relative to their assets, and a "common shock" when it turned out that many firms had essentially made the same bet on the housing market and mortgage-related securities.
Here are a few excerpts from the conclusions of the Financial Crisis Inquiry Commission.
CONCLUSIONS OF THE FINANCIAL CRISIS INQUIRY COMMISSION pdf
As this report goes to print, there are more than 26 million Americans who are out of work, cannot find full-time work, or have given up looking for work. About four million families have lost their homes to foreclosure and another four and a half million have slipped into the foreclosure process or are seriously behind on their mortgage payments. Nearly $11 trillion in household wealth has vanished, with retirement accounts and life savings swept away. Businesses, large and small, have felt the sting of a deep recession. There is much anger about what has transpired, and justifiably so. Many people who abided by all the rules now find themselves out of work and uncertain about their future prospects. 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. And the nation faces no easy path to renewed economic strength.
Yet all of us have been deeply affected by what we have learned in the course of our inquiry. We have been at various times fascinated, surprised, and even shocked by what we saw, heard, and read. Ours has been a journey of revelation.
• We conclude this financial crisis was avoidable. 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 within a system essential to the well-being of the American public. Theirs was a big miss, not a stumble. While the business cycle cannot be repealed, a crisis of this magnitude need not have occurred. To paraphrase Shakespeare, the fault lies not in the stars, but in us.
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 tragedy was that they were ignored or discounted. There was an explosion in risky subprime lending and securitization, an unsustainable rise in housing prices, widespread reports of egregious and predatory lending practices, dramatic increases in household mortgage debt, and exponential growth in financial firms’ trading activities, unregulated derivatives, and short-term "repo" lending markets, among many other red flags. Yet there was pervasive permissiveness; little meaningful action was taken to quell the threats in a timely manner.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 Federal Reserve was the one entity empowered to do so and it did not. The record of our examination is replete with evidence of other failures: financial institutions made, bought, and sold mortgage securities they never examined, did not care to examine, or knew to be defective; firms depended on tens of billions of dollars of borrowing that had to be renewed each and every night, secured by subprime mortgage securities; and major firms and investors blindly relied on credit rating agencies as their arbiters of risk. What else could one expect on a highway where there were neither speed limits nor neatly painted lines?
• We conclude widespread failures in financial regulation and supervision proved devastating to the stability of the nation’s financial markets. The sentries were not at their posts, in no small part due to the widely accepted faith in the selfcorrecting nature of the markets and the ability of financial institutions to effectively police themselves. More than 30 years of deregulation and reliance on self-regulation by financial institutions, championed by former Federal Reserve chairman Alan Greenspan and others, supported by successive administrations and Congresses, and actively pushed by the powerful financial industry at every turn, had stripped away key safeguards, which could have helped avoid catastrophe. This approach had opened up gaps in oversight of critical areas with trillions of dollars at risk, such as the shadow banking system and over-the-counter derivatives markets. In addition, the government permitted financial firms to pick their preferred regulators in what became a race to the weakest supervisor.
• We conclude dramatic failures of corporate governance and risk management at many systemically important financial institutions were a key cause of this crisis. There was a view that instincts for self-preservation inside major financial firms would shield them from fatal risk-taking without the need for a steady regulatory hand, which, the firms argued, would stifle innovation. Too many of these institutions acted recklessly, taking on too much risk, with too little capital, and with too much dependence on short-term funding. In many respects, this reflected a fundamental change in these institutions, particularly the large investment banks and bank holding companies, which focused their activities increasingly on risky trading activities that produced hefty profits. They took on enormous exposures in acquiring and supporting subprime lenders and creating, packaging, repackaging, and selling trillions of dollars in mortgage-related securities, including synthetic financial products. Like Icarus, they never feared flying ever closer to the sun.
In this instance, too big to fail meant too big to manage. Financial institutions and credit rating agencies embraced mathematical models as reliable predictors of risks, replacing judgment in too many instances. Too often, risk management became risk justification. 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. Often, those systems encouraged the big bet—where the payoff on the upside could be huge and the downside limited. This was the case up and down the line—from the corporate boardroom to the mortgage broker on the street.
And the leverage was often hidden—in derivatives positions, in off-balance-sheet entities, and through "window dressing" of financial reports available to the investing public.
Within the financial system, the dangers of this debt were magnified because transparency was not required or desired. Massive, short-term borrowing, combined with obligations unseen by others in the market, heightened the chances the system could rapidly unravel. In the early part of the 20th century, we erected a series of protections—
the Federal Reserve as a lender of last resort, federal deposit insurance, ample regulations—to provide a bulwark against the panics that had regularly plagued America’s banking system in the 19th century. Yet, over the past 30-plus years, we permitted the growth of a shadow banking system—opaque and laden with shortterm debt—that rivaled the size of the traditional banking system. Key components of the market—for example, the multitrillion-dollar repo lending market, off-balance- sheet entities, and the use of over-the-counter derivatives—were hidden from view, without the protections we had constructed to prevent financial meltdowns. We had a 21st-century financial system with 19th-century safeguards.
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. We had reaped what we had sown.
While there was some awareness of, or at least a debate about, the housing bubble, the record reflects that senior public officials did not recognize that a bursting of the bubble could threaten the entire financial system. Throughout the summer of 2007, both Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson offered public assurances that the turmoil in the subprime mortgage markets would be contained.
• We conclude there was a systemic breakdown in accountability and ethics. The integrity of our financial markets and the public’s trust in those markets are essential to the economic well-being of our nation. The soundness and the sustained prosperity of the financial system and our economy rely on the notions of fair dealing, responsibility, and transparency. In our economy, we expect businesses and individuals to pursue profits, at the same time that they produce products and services of quality and conduct themselves well.
Unfortunately—as has been the case in past speculative booms and busts we witnessed an erosion of standards of responsibility and ethics that exacerbated the financial crisis.
• We conclude over-the-counter derivatives contributed significantly to this crisis. The enactment of legislation in 2000 to ban the regulation by both the federal and state governments of over-the-counter (OTC) derivatives was a key turning point in the march toward the financial crisis.
• We conclude the failures of credit rating agencies were essential cogs in the wheel of financial destruction. The three credit rating agencies were key enablers of the financial meltdown. The mortgage-related securities at the heart of the crisis could not have been marketed and sold without their seal of approval. Investors relied
on them, often blindly. In some cases, they were obligated to use them, or regulatory capital standards were hinged on them. This crisis could not have happened without the rating agencies. Their ratings helped the market soar and their downgrades through 2007 and 2008 wreaked havoc across markets and firms. In our report, you will read about the breakdowns at Moody’s, examined by the Commission as a case study. From 2000 to 2007, Moody’s rated nearly 45,000 mortgage-related securities as triple-A. This compares with six private-sector companies in the United States that carried this coveted rating in early 2010. In 2006 alone, Moody’s put its triple-A stamp of approval on 30 mortgage-related securities every working day. The results were disastrous: 83% of the mortgage securities rated triple-A that year ultimately were downgraded.
You will also read about the forces at work behind the breakdowns at Moody’s, including the flawed computer models, the pressure from financial firms that paid for the ratings, the relentless drive for market share, the lack of resources to do the job despite record profits, and the absence of meaningful public oversight. And you will see that without the active participation of the rating agencies, the market for mortgage- related securities could not have been what it became.
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. In our inquiry, we found dramatic breakdowns of corporate governance, profound lapses in regulatory oversight, and near fatal flaws in our financial system We also found that a series of choices and actions led us toward a catastrophe for which we were ill prepared. These are serious matters that must be addressed and resolved to restore faith in our financial markets, to avoid the next crisis, and to rebuild a system of capital that provides the foundation for a new era of broadly shared prosperity.
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.
Naturally Wall Street hates the scathing conclusions of the Inquiry Commission so their unwavering servants, the Republican Party and its Fox Propaganda organ are desperately trying to kick dirt at the panel's conclusions.
Infighting, Investigations Overshadow FCIC Report
The Wall Street Journal gives us their contemptuous "Who us?" routine:
Culprits From Beltway Casting
The bankers-did-it-all narrative is unsatisfactory not because there is never any greed and foolish risk-taking in business, but because there always is.
The evil bankers did it. If you believe that, we have a Triple A collateralized debt obligation to sell you.
Here are some excerpts from the ideologically sanitized report by three of the Republicans on the Financial Crisis Inquiry Commission:
Dissenting Statement pdf
The majority’s approach to explaining the crisis suffers from the opposite problem-it is too broad. Not everything that went wrong during the financial crisis caused the crisis, and while some causes were essential, others had only a minor impact. Not every regulatory change related to housing or the financial system prior tothe crisis was a cause. The majority’s almost -page report is more an account ofbad events than a focused explanation of what happened and why. When everythingis important, nothing is.
The Republicans can't bring themselves to admit that a whole array of fragmented regulatory agencies with weak regulatory regimes could suffer the kind of cascading failures that we experienced during the financial meltdown.
We also reject as too simplistic the hypothesis that too little regulation caused the crisis, as well as its opposite, that too much regulation caused the crisis. We question this metric for determining the effectiveness of regulation. The amount of financial regulation should reflect the need to address particular failures in the financial system. For example, high-risk, nontraditional mortgage lending by nonbank lenders flourished in the 2000s and did tremendous damage in an ineffectively regulated environment, contributing to the financial crisis. Poorly designed government housing policies distorted market outcomes and contributed to the creation of unsound mortgages as well. Countrywide’s irresponsible lending and AIG’s failure were in part attributable to ineffective regulation and supervision, while Fannie Mae and Freddie Mac’s failures were the result of policymakers using the power of government to blend public purpose with private gains and then socializing the losses. Both the "too little government" and "too much government" approaches are too broad-brush to explain the crisis.
What's really simplistic is the Republicans' blind faith in self regulating markets. Then they sprinkle in some Fannie Mae and Freddie Mac to create a false equivalency between the miscalculations made by Fannie Mae and Freddie Mac to the unprecedented orgy of reckless greed underway on Wall Street.
The majority says the crisis was avoidable if only the United States had adopted across-the-board more restrictive regulations, in conjunction with more aggressive regulators and supervisors. This conclusion by the majority largely ignores the global nature of the crisis.
This avoids trying to explain why the American domino was the first to fall, yet the Republicans also talk about the phenomenon called contagion while carefully avoiding seeing it as the biggest factor in what followed as the crisis in America spread to European Markets.
The Republican panelists bent over backwards trying to make the financial collapse conform to the simplistic free market dogma embodied in the 2004 Republican Platform.
2004 Republican Platform pdf
Homeownership
Homeownership is central to the American dream, and Republicans want to makeit a reality for everyone. That starts with access to capital for entrepreneurs and access tocredit for consumers. Both have improved immensely in the past four years, resulting in record levels of homeownership. For the first time, more than half of all minorities own their home. We support the President’s goal of increasing the number of minority homeowners by at least 5.5 million families by the end of the decade.
Since President Bush announced his initiative in 2002, an additional 1.6 million minorities have become homeowners. The Self-Help Homeownership Opportunities Program helps low-income families purchase a home. The most significant barrier to homeownership is the down payment. We support efforts to reduce that barrier, like the American Dream Downpayment Act and Zero Downpayment Mortgages. The President and Congress have taken action to provide counseling and education to help first-time homebuyers navigate the process of buying a home. The Administration has also taken steps to alert people to the dangers of predatory lending, in an effort to help Americans maintain a positive credit history.
Yet during Bush's second term Americans were the victims of the biggest Bonanza for predatory mortgage lenders in American History.
In many areas, housing prices are higher than they need to be because of regulations that drive up building costs. Some regulation is of course necessary, and so is sensible zoning.
Republicans tried to blame excessive regulations as the problem driving the housing bubble. This is the only mention of the expanding housing bubble as a problem.
Much more importantly, because the President and Congress enacted pro-growth economic policies, the deficit is headed strongly in the right direction. Next year’s projected deficit, at 2.7 percent of GDP, would be smaller than those in 14 of the last 25 years. As Republicans in Congress work with the President to restrain spending and strengthen economic growth, the federal deficit will fall to 1.5 percent of the nation’s economic output in 2009 – well below the 2.2 percent average of the last 40 years.
We now know that Bush's neglecting financial regulation resulted in a financial crisis that wrecked the economy. That drastically reduced tax revenues, while at the same time multiplying demand for government services exploding the deficit.
PAYGO
Tax cuts and spending are not the same. They do not have the same effect on the economy or on the federal budget. Tax cuts allow American workers, families, business owners, and investors to keep more of their own money.
This tries to explain why exploding the Federal Debt to give out tax cuts (mostly to the wealthy) is s great idea.
This has to be the most laughable section of them all:
We applaud President Bush for vigorously enforcing the law to deter and punish further corporate abuses. He established an interagency Corporate Fraud Task Force to investigate and prosecute financial crimes; to recover the proceeds of those crimes; and to hold corporate criminals to account. Since the Task Force was established two years ago, over 700 violators have been charged and over 300 convictions or guilty pleas secured, including more than 25 former CEOs. More than $1 billion in forfeited funds has also been recovered from corporate wrongdoers for return to defrauded creditors and investors. Separately, the enforcement budget of the Securities and Exchange Commission (SEC) has more than doubled, and the SEC has issued new rules to ban latetrading and other fraudulent practices engaged in by certain mutual funds. Thanks to swift and decisive action by President Bush and the Congress, Americans can trust that corporate executives who operate outside the law will be prosecuted.
Republicans cling to their dogmatic delusions of a self correcting free market. The Right Wing Noise Machine has been busy marketing this self serving narrative to confuse Americans about the causes for the financial crisis. Their false narrative is meant to keep Americans from reaching a consensus on the true causes of our continuing economic calamity.