Written on January 28, 2011
A government panel’s failure to reach a firm conclusion about what caused the financial crisis shows how complex Wall Street has become and how partisan Washington has grown.
The blurriness of its report comes months after a new law already has begun tightening financial rules to prevent another crisis.
All of which raises a question: Do the findings of the 633-page report matter?
In its report, the Financial Crisis Inquiry Commission blames a range of obvious culprits: Banks that made reckless bets. Credit rating agencies that endorsed risky mortgage bonds. Government regulators who overlooked danger signs until they threatened the global financial system.
It concludes that the crisis might have been prevented if banks had been more careful and regulators had asked tougher questions.
Those views have long since become mainstream in the more than two years since the crisis peaked. Yet among panel members, they sowed dissension. In the end, the commission’s six Democratic appointees embraced its conclusions. The four named by Republicans did not; they offered their own reasons for the crisis _ and three complained that the conclusions from the panel were too broad.
The absence of a clear and unifying message weakens the report’s impact, analysts say.
“If only one side is picking and pulling different facts and trying to weave them into a narrative, you don’t end up with a cohesive final product that’s useful in policymaking,” said Paul Atkins, a former member of the Securities and Exchange Commission.
The report’s conclusions are also too generic to help steer regulators who have been writing new rules for the financial overhaul law enacted last summer, Atkins said.
The crisis panel has been likened to the Pecora Commission, which investigated the cause of the 1929 stock market crash. It’s also drawn comparisons to the independent panel that investigated the causes of the September 2001 terrorist attacks.
Yet those reports were more influential than the financial crisis report is likely to be.
The Pecora hearings were held before Congress debated securities laws aimed at protecting investors in the future. And the 9/11 commission crafted conclusions that managed to command a unanimous backing from appointees of both political parties.
By contrast, the financial crisis report “is either too late, or it’s too early,” said Daniel Alpert, managing partner at the New York investment bank Westwood Capital LLC.
A year ago, the report might have shaped the new financial rules now taking effect. Alternatively, if the commissioners had waited a few years, they might have had the chance to detect weaknesses in the new law and to recommend improvements.
“The report is going to sit on people’s credenzas until we need to come up with additional policy alternatives” to address the next potential crisis, Alpert said.
The timing was largely out of the commissioners’ hands. The original deadline of Dec. 15, 2010 was written into the law that created the panel. That’s a full year after the House voted on the financial regulatory legislation. By then, the commission had only just begun to interview 700 witnesses, review millions of pages of documents and hold 19 days of public hearings.
Even if the panel had finished its work much earlier, the partisanship that divided the commissioners would have limited their ability to shape the regulatory overhaul. The Republican-appointed members didn’t even show up for the commission’s news conference presenting its final report.
Even members of the same party couldn’t agree.
One dissent by Republican commissioners blamed a global credit bubble fed by low interest rates. A separate lone dissent pointed a finger at policies that were intended to encourage homeownership. These included the government’s support of Fannie Mae and Freddie Mac.
The panel has referred cases of possible criminal wrongdoing to the Justice Department for investigation.
FCIC Chairman Phil Angelides told reporters that the group “fulfilled our obligations and referred matters to the appropriate authorities.”
The report and the dissenting findings found fault with Wall Street banks, mortgage lenders, people who failed to carefully review their mortgages, two presidential administrations, two Fed Chairmen and the current Treasury Secretary.
The commission criticized the view held by some regulators that markets are “self-correcting” and banks can police themselves. Former Fed Chairman Alan Greenspan pushed this hands-off approach for decades, at the urging of the financial industry, the report said.
As investments grew more complex, regulators allowed large parts of markets to develop with little oversight. That prevented them from seeing the problem early, or responding effectively, the report found.
A prime example was the Fed’s failure to stanch the flow of risky subprime mortgages. The complex investments backed by those mortgages were barely understood by regulators and banking executives. They relied on opinions from credit rating agencies.
The Fed was the only entity that could impose higher standards on mortgage lenders, the report said. Doing so would have slowed the torrent of deals that fed the crisis.
Experts say historians and scholars will see the report as one of numerous documents that will contribute to the story of the financial crisis.
“It’s going to matter,” said Douglas Elliott, a fellow at the Brookings Institution and former investment banker. “It just won’t matter nearly as much as if it were earlier or had a clearer message.”