More on the FCIC Report

As Professor cummings noted the FCIC report has been released. Initial reactions to the report can be found here, here, here. Reaction to the rebuttals to the report can be found here. If you have been reading the Corporate Justice Blog, you won't be surprised at the findings of the committee. If you have been following the passage of the Dodd-Frank financial reform bill many of these findings were addressed, even if the sufficiency of some of those measures might remain in question. The commission found:

There was an explosion in risky sub-prime 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 lags. Yet there was pervasive permissiveness; little meaningful action was taken to quell the threats in a timely manner.

What is more telling about the report is what the commission found were not causes of the financial collapse. These causes, having been used by conservatives to advance their free market and deregulation prerogatives, have NOT found a welcome home with the commission. Here are some examples:

1) Fannie Mae and Freddie Mac were the cause of the financial crisis. The commission writes, "We conclude that these two entities contributed to the crisis, but were not a primary cause. Importantly, GSE mortgage securities essentially maintained their value throughout the crisis and did not contribute to the significant financial firm losses that were central to the financial crisis. " The commission goes on to say that rather than leaders in the sub-prime market that the GSEs were followers and that the delinquency rates on sub-prime loans purchased by the GSEs was less than other financial firms. While certainly the GSEs were not innocent in the crisis, as this blog has noted the performance of Fannie Mae and Freddie Mac were much more a symptom than the illness that was the financial crisis.

2) The Community Reinvestment Act played a role in the financial crisis. The commission finds "the CRA was not a signiicant factor in subprime lending or the crisis. Many subprime lenders were not subject to the CRA. Research indicates only 6% of high-cost loans—a proxy for subprime loans—had any connection to the law. Loans made by CRA-regulated lenders in the neighborhoods in which they were required to lend were half as likely to default as similar loans made in the same neighborhoods by independent mortgage originators not subject to the law." While the commission goes on to question the national priority of homeownership, one President George W. Bush called the "American Dream," it doesn't place the blame on poor Americans looking for help entering the middle class.

3) The deficit. One of the now popular conservative arguments, and one that has enveloped the mainstream media, is that the deficit is the cause of our economic problems. Unsurprisingly, the deficit does not receive a mention in the commission's report. While many conservative leaders propose harsh austerity measures, they fail to note that these very measures in the United Kingdom have them headed towards a double dip recession, while the stimulative measures initiated by President Obama has the US on a slow but steady course of growth.

4) Excessive regulation and failure to let the free market work was the cause of the crisis. One thing you have undoubtedly heard is that "uncertainty" and "hostility" towards business is the reason that the economy fails to grow. The commission found, "The sentries were not at their posts, in no small part due to the widely accepted faith in the self-correcting nature of the markets and the ability of inancial 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." The commission has harsh words for those who believe that just letting the free market work is an acceptable strategy for a functioning economy. The belief of those on Wall Street that they were "market makers" and "wealth creators" who had found ways to remove all risk from their transactions and could "beat the market" has ended up to be unfounded. This culture remains on Wall Street and is the reasoning behind the still excessive bonuses received on Wall Street.