TOPICS > Economy

Financial Crisis Commission Divided Over Causes, Culprits Behind Meltdown

January 27, 2011 at 4:31 PM EDT
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A bipartisan commission charged with investigating the causes of the financial crisis released its findings Thursday, but the members' conclusions fell along party lines. Judy Woodruff speaks with the chairman, Phil Angelides, and Douglas Holtz-Eakin, who was part of the dissenting Republican minority.

JIM LEHRER: Finally tonight: What caused the financial crisis?

A major commission provided some answers today, but there was much disagreement, even among its own members.

Judy Woodruff has the story.

JUDY WOODRUFF: In the end, the commission, composed of six Democrats and four Republicans, broke up along party lines. We’re going to talk with both sides.

And we’re going to begin with the majority’s conclusions. Among its findings: Government regulators from two administrations, as well as former Federal Reserve Chair Alan Greenspan and current Fed Chairman Ben Bernanke, all missed opportunities to help prevent the crisis. Mortgage lenders, Wall Street and a shadow banking system knowingly engaged in risky lending and excessive borrowing while leveraging debt to dangerously high levels. And there was a systemic breakdown in ethics.

Phil Angelides is the chairman of the commission. And he joins us now.

Thank you for being here.

PHIL ANGELIDES, chairman, Financial Crisis Inquiry Commission: It’s good to be with you.

JUDY WOODRUFF: Let’s start with Wall Street and the financial institutions. What were the mistakes that were made by the people there?

PHIL ANGELIDES: Well, what we found in our report, which, by the way, is a some 500-page report, detailed, based on 700 interviews, 19 public hearings, and reviews of millions of pages of documents, is on Wall Street, we found dramatic breakdowns in corporate governance and risk management.

We found astounding instances where corporate executives didn’t know the risks their companies were taking or did know what they were taking and did so knowingly. So, for example, at AIG, most of the major executives of that company had no idea of the risks associated with their $80 billion bet on subprime mortgages.

And we saw this in a number of institutions, from Fannie Mae and Freddie Mac to Citigroup.

JUDY WOODRUFF: And you’re saying they should have known…

PHIL ANGELIDES: Oh, absolutely.

JUDY WOODRUFF: … that the information was available to them?

PHIL ANGELIDES: Should have known, absolutely.

And I think we also had instances where they were buying, selling, packaging mortgage securities without bothering to examine or without caring to know the quality of those mortgages and selling them to investors across the world.

So, we saw high leverage, high risk, without the kind of discipline you would expect from major financial institutions. And because of their systemic importance, of course, it washed out and damaged the economy and the financial system as a whole.

JUDY WOODRUFF: And did you find government regulators equally at fault? And, if so, what are some specific things that…


JUDY WOODRUFF: … they should have done differently or could have done differently?

PHIL ANGELIDES: Well, I think we found two things.

First of all, we did find dramatic failures in government regulation. And let me just give you a couple of examples. In the early 2000s, late 1990s, there was widespread evidence of egregious predatory-lending practices, the subprime lending beginning to spin out of control.

The Federal Reserve had several opportunities. They were the one entity empowered to set mortgage-lending standards. They didn’t. In 2001, they adopted rules which controlled only 1 percent of subprime lending, by 2006, voluntary rules — they didn’t even finally act to close the door on abusive ending until 2008, when the game was over.

JUDY WOODRUFF: And are you saying there’s new information in here that wasn’t disclosed before? Because there have been books written about the crisis. Reams of reporting has been done.


Well, first of all, I think there’s a number of things that are new about this book. It’s the first official government report on the inquiry. It contains information from documents never before seen, government bank examination reports, internal corporate documents.

And there’s many specific pieces of information that add new depth and understanding to the events of this crisis. We learned, for example, just as one example, that, already, Fannie Mae and Freddie Mac have demanded that a set of banks purchase back $35 billion of loans where those banks, Fannie and Freddie say, breached their representations and warranties.

Already, those banks have ponied up $20 billion. We — we found instances where banks didn’t disclose to investors what they knew about the mortgage securities they were selling.

So, there’s lots of new information in this…

JUDY WOODRUFF: So, a lot of information to pore over.

Let me read to you what the dissenters — there were four dissenters, the four Republicans. Three of them together came forward. And, among other things, they say, “It is dangerous to conclude that this could have been avoided only if the regulators had done more and if there had been more responsible bankers.”

They’re saying that that essentially is a simplistic conclusion that leads — is going lead to simplistic changes.

PHIL ANGELIDES: Well, first of all, sometimes simple is powerful and right.

Our conclusions were based on an exhaustive, yearlong inquiry. And here’s what we believe very strongly. This didn’t need to happen. It was avoidable. It wasn’t a force of nature. It wasn’t Mother Nature. It wasn’t a wind that blew in.

Lloyd Blankfein from Goldman Sachs referred to it as a hurricane. In our view, based on the facts, it was a result of human action, inaction, and misjudgments.

And I will just quickly give you a few: the Federal Reserve not clamping down on out-of-control lending; the decision to deregulate derivatives; the willingness to allow a $13 trillion shadow banking system with light regulation, bigger than a traditional banking system, to emerge.

So, we believe very strongly that both the captains of finance and the public stewards of our financial system let us down.

JUDY WOODRUFF: The 10 of you spent months working on this, though, and now you have this significant dissent, six of you in the majority, four in the minority, two different dissents.

How much does that dissent undermine, do you think, the force of what you have done here?

PHIL ANGELIDES: Well, two things.

First of all, I would hope the bulk of the report, almost 500 pages, are the facts of what occurred. And those facts, in my view, are indisputable. They’re the facts of what occurred in this country from the 1980s on and through the crisis. And I think that’s important for people to understand, wipe away the mythology.

I would also add — and I wouldn’t want to speak for the dissenters — but, in their own, I think, dissent, they acknowledge that they agreed with many of the conclusions of the majority. And there are places where we found common ground.

We agreed on the failures of the credit-rating agencies. We agreed on a fact that there was lax regulation in some instances. We believe it was pervasive, them less so. But there are a number of areas of agreement.

So, if you look at the report, I do think you will find some common ground. But the facts, the facts in evidence, I believe, are very important, and I believe the report stands on its own merit there.

JUDY WOODRUFF: And, very quickly, to their complaint that they were left out of some of the organizing and decision-making of this commission.

PHIL ANGELIDES: I don’t agree with that. Every commission member had the opportunity to participate fully.

In the end, we had some policy disagreements, but, all along the way, every commission member could comment, could participate. And I believe it was a very thorough process. And what I would like to say in the end is we’ll stand on the facts and the merit of the report. Let people are make their own judgments when they read the report.

JUDY WOODRUFF: All right, Phil Angelides, the chairman of this commission, we appreciate your being with us.

PHIL ANGELIDES: Thank you very much.


And now: how other members of the commission see it.

As we were just saying, a minority dissent from three commissioners put their emphasis on larger economic forces, including a global credit bubble that encouraged risky lending practices, not simply the U.S. financial industry, and a housing bubble that was also due in part to population shifts.

Douglas Holtz-Eakin was a member of the minority. And he joins us again tonight.

Doug Holtz-Eakin, you just heard Phil Angelides. How much does the dissent, in your view, undermine the force of these recommendations, the findings?

DOUGLAS HOLTZ-EAKIN, commissioner, Financial Crisis Inquiry Commission: Well, I certainly believe that, along with Bill Thomas and Keith Hennessey, the others who — who wrote along with me, that we have a much stronger theory of the case, that, in looking at the facts, we have assembled a much more compelling response to what Congress asked us to do, which is to explain those things which delivered such a traumatic financial crisis.

I would agree with Phil, though, that we should congratulate the staff of the FCIC and we should be proud of the legacy and the archive that we left behind. Those are facts available to the public, historians. And, much like that Great Depression, I suspect the real causes of the financial crisis of 2008 will be debated for years.

And I would fully expect that someone smarter than me, better positioned than me years from now, can use those materials and will come up with yet another explanation.

JUDY WOODRUFF: I have to ask you, because I did participate in a conference call that you and the other dissenters had today, what about this complaint that several of you raised that the chairman didn’t allow the minority members to participate in decision-making as much as you felt you should have been?

DOUGLAS HOLTZ-EAKIN: Well, and we have very clearly made the case that we didn’t feel that, in the end, our substantive critiques of drafts of the report were reflected as time went on.

And if you continue to say, I’m not happy with the way this is written, and it comes back looking the same, you get dissatisfied. And toward the end, I think it’s now publicly well-known that the cooperation broke down nearly completely.

JUDY WOODRUFF: All right, well, let’s talk about now the substance of what’s in there and the substance of your disagreement.

You talk about economic forces broader than just the individuals involved. What do you mean by that?

DOUGLAS HOLTZ-EAKIN: Well, I think there are three levels at which we disagree. And the top level is — although they’re not mutually exclusive, we are nervous about simple narratives, however powerful, may not be right.

So, a simple narrative that it’s Wall Street greed left run amuck by regulators makes us nervous, and on the other side, a simple narrative that it was all bad government policy. We believe it’s a very complicated narrative.

The second level is the focus of the majority report really is on people, institutions, this bank, that bank, transactions. We do believe that this was a global credit bubble. There was a housing bubble in Spain. There was a credit bubble in England. The kinds of regulation we saw at banks, we — the majority focuses on the Fed.

We had very different supervision in Germany. Still had troubles with the banks. In the United Kingdom, they had to rescue their banks. The notion that we’re so centered on the United States is missing the real evidence in the case.

JUDY WOODRUFF: But if there is evidence, as we just heard Mr. Angelides say — and in reading the report, if there is evidence that mistakes were made by bankers who should have known better, who should not have let a lot of these things get out of hand, and by government regulators, who should have been in a position to correct it, why not point the finger at those individuals?

DOUGLAS HOLTZ-EAKIN: As I said, we don’t have mutually exclusive explanations by any means. There are lots of things that we would agree with. And there are lots both mistakes made and there was lots of bad action and bad actors. All of that is true.

What the Congress asked us to do is to say what things were present that caused the financial crisis, not name everything — bad thing that happened, because if you just list all the bad things, that’s not really an explanation. And don’t name everything that’s wrong with the financial regulatory system. There are lots of things there that had nothing do with the crisis. What are the things that caused the crisis?

We came up with a list of 10. We think those 10, no more, no less, explain what went on in 2008.

JUDY WOODRUFF: Is it — is it — some of the observers today are looking at what you and the other dissenters are saying. There’s just — and they’re saying there’s a reluctance there to put blame, to put responsibility, accountability where it belongs.

DOUGLAS HOLTZ-EAKIN: I don’t think so.

We have made very clear that a big part of the problem was a concentration of risk on the balance sheets of big financial institutions, housing-related risk, that it was their job to manage their risks. Again and again, we saw in testimony that they didn’t.

The same sort of complaints about AIG, I would echo. They — they did not even understand the contracts they’re engaged in. But the difference is, we don’t think that derivatives per se were a big part of the financial crisis. There was one derivative, credit default swaps from AIG, that figured prominently in it. The rest of derivatives, whatever you may think of them, weren’t really a cause of the financial crisis.

JUDY WOODRUFF: And, in their view and in the view of the majority, that was a huge part for what happened.

DOUGLAS HOLTZ-EAKIN: And they make a sweeping statement about credit — you know, derivatives caused the financial crisis. We think that’s just mistaken.

JUDY WOODRUFF: What about the view of the fourth Republican, Peter Wallison, who put forward his own dissent in all of this?


JUDY WOODRUFF: And he puts the blame on government policies promoting housing for lower-income individuals, and in particular points a finger at Fannie Mae and Freddie Mac. He — for him, that was the principal driver behind what went wrong.


JUDY WOODRUFF: But for you?

DOUGLAS HOLTZ-EAKIN: … our view, that’s a bit too simple.

A way to say Peter’s thesis is that government policy drove so many bad mortgages that, when they went bad, that alone was enough to explain the losses in the system. We don’t think so, neither on the facts that government policy alone drove it — other factors drove bad lending practices — or that those losses alone were big enough to cause the crisis.

You needed to have the credit rating agencies in there mispricing these things. You needed to have some real fear about the solvency of your counterparties to have caused a panic. And, in the end, this was a panic. This was like the 19th century, where the depositors wanted their money out. We just couldn’t see it, because that’s the modern version of taking the deposits out is, I want my commercial paper back; I want the security I lent overnight back.

But it was really a crisis. And in a panic, rationality disappears.

JUDY WOODRUFF: What do you want to come out of this divided — now divided report?

DOUGLAS HOLTZ-EAKIN: I — I will go back to what I said before. I’m pleased that the evidence will be there. People can make their own judgments.

I think if people read our theory of the case, what the evidence really tells us about the crisis, we have the most compelling explanation. And certainly, the simple narrative of too little or too much regulation, I don’t think answers the problem.

We had a lot of regulation in Fannie Mae, Freddie Mac. We used them in many ways. But that doesn’t alone explain the crisis. We had too little regulation in some places. There were a lot of bad mortgages. We know that. But that also doesn’t explain everything, because other countries had the same problem.

JUDY WOODRUFF: Doug Holtz-Eakin, a member of the commission, we appreciate it.