Saturday, January 29, 2011
Official Report on Financial and Economic Crisis Names Usual Suspects, Will Change Nothing
After 18 months of inquiry, and interviews with some 700 people, the National Commission on the Causes of the Financial and Economic Crisis (has a nice ring to it, huh?) has released its findings.
In what will come as little surprise to anyone, the Commission concluded that the crisis was avoidable.
In fact, the government's official verdict on the financial crisis is facing criticism because it doesn't really tell us much we didn't already know.
As one might expect, the report found that: regulators didn't do what they were supposed to; there was a lack of transparency; investors behaved unethically; and credit rating agencies failed in their duties and responsibilities.
The findings also blamed the incompetence and recklessness of Wall St. managers, and the proliferation of exotic mortgages.
The report is 550 pages long and contains 6,711 footnotes.
For political reasons, all four Republicans members of the 10-member panel dissented from the report. In fact, the Republicans issued their own separate report, which is just 26 pages long and has only nine footnotes.
The Republicans took exception to the report's ultimate finding, issued right at the outset: "We conclude this financial crisis was avoidable."
It seems that the Republican dissenters are not only on the wrong side of that argument, but on the wrong side of history.
The commission conducted hundreds of hours of interviews, with industry insiders, policymakers, whistle-blowers and regulators. In the end, the blame was widespread and included the Clinton Administration, the GW Bush Administration and the Federal Reserve.
To no surprise, most of the usual suspects were called onto the carpet for — at a minimum — their acquiescence and ineptitude and — at worst — their complicity.
Former Fed Chairman Alan Greenspan and current Chairman Ben Bernanke were both called to task for their failures and negligence. Greenspan, in particular, was faulted for a “pivotal failure to stem the flow of toxic mortgages.”
Additionally, the findings noted the greed and ineptitude of financial institutions. But it also found that government regulators were completely derelict in their duties. The former is to be expected; the later is entirely unacceptable. Failure of this sort is an abomination to our democracy.
According to the report, regulators “lacked the political will” to scrutinize and hold accountable the institutions they were supposed to oversee. That should infuriate every American.
The financial industry spent $2.7 billion on lobbying from 1999 to 2008, while individuals and committees affiliated with it made more than $1 billion in campaign contributions.
Perhaps that had something to do with the lack of political will. Money talks — quite loudly.
Former Treasury Secretary Hank Paulson is faulted for wrongly predicting that that the subprime collapse would be contained.
Current Treasury Secretary Tim Geithner also faced criticism. The New York Fed, which Geithner then headed, was faulted for missing obvious signs of trouble at Lehman Brothers and Citigroup, even though it wasn't their primary regulator.
The Securities and Exchange Commission was blamed for not mandating higher capital requirements from banks, which would have buffered them from potential losses and prevented many risky practices.
For about every $40 the nation’s five largest investment banks had in assets, they had only $1 in capital to cover losses. Consequently, a mere 3 percent drop in asset values could have wiped out these firms. The banks hid their excessive leverage using derivatives, off-balance-sheet entities and other devices, the report found.
That's typically referred to a trickery, chicanery, deception, or just plain old fraudulent accounting.
The Office of Thrift Supervision and the Office of the Comptroller of the Currency were faulted for engaging in "turf wars" instead of curbing abuses. That will hardly sustain whatever is left of anyone's faith in these regulating agencies.
And the Democrats were faulted for their decision in 2000 (Bill Clinton's final year in office) not to regulate derivatives, which was called “a key turning point in the march toward the financial crisis.”
This toxic stew of failures, cronyism, turf wars, negligence and malfeasance created a perfect storm that led to a historic financial meltdown and subsequent recession, the effects of which we are still dealing with and will be for years to come.
We've come to expect the customary greed and recklessness of Wall St. However, we should be able to expect more from our government and we should, in fact, get more.
Many observers will be suspect of some of the commission's more dubious findings. For instance, the report doesn't lay blame on the Fed for the artificially low interest rates it set after the 2001 recession.
However, countless observers have noted the effects that all of that low-cost money flowing into the lending system had in promoting over-investment and mal-investment, particularly in the housing market.
The report also found that Fannie Mae, Freddie Mac and the aggressive homeownership goals set by the government were not major culprits. Those findings also seem highly questionable. It's fairly self-evident that loosening lending standards and repurchasing so many dubious, risky mortgages had to have negative consequences.
Obviously, the system was poised, if not rigged, for ultimate failure. What is entirely clear is that there was an abundance of greed, hubris, incompetence, complicity and carelessness.
No one has been arrested. No one has been charged. No one has been prosecuted. No one has been convicted. Nothing has really changed. Life goes on, much as it was before. And the chances of another collapse are as likely today as they were in 2008.
Wall St. owns Washington; it has bought and paid for it. Wall St. is the master and our government is its willing lapdog. We can't really trust anyone in positions of power or authority. The rule of law doesn't truly exist; at least not for the powerful and the connected.
This summation from the report's authors seems all too kind:
“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.”
You could just as easily conclude that government regulation doesn't work because our government is so corrupt and dysfunctional. Laws, rules and regulations don't work — and don't matter — when those charged with enforcing them don't want them to work.
When those in charge of regulation hold the needs and concerns of the regulated in higher regard than those of the general public — and the very nation itself — then regulation is a farce.
And so is the government that protects its Wall St. benefactors and does their bidding.