Financial Crisis Commission Does Strike Some Common Ground

BY Murrey Jacobson  January 27, 2011 at 6:48 PM EST


If you listened to their respective press conferences Thursday and heard the sometimes bitter tones in their voices, you might have thought that the Republican and Democratic members of the Financial Crisis Inquiry Commission didn’t agree at all on some of the root causes of the crisis.

And that’s just not the case.

Yes, there are very big differences, huge ones even, in the emphasis and world views of how the five Democrats, four Republicans and one Independent see the crisis, which we are exploring on the NewsHour Thursday night. Among them: The majority of Democratic members, including Chair Phil Angelides, say the government missed all kinds of opportunities to intervene time and time again. And Democrats put a bigger shift of blame on Wall Street and the financial sector.

(And in fact, there’s far more to explore in the report than we can possibly do justice to here.)

For their part, Republicans like Vice-Chair Bill Thomas say commissioners were trying to “easily explain it all away with finger-pointing” at Wall Street, the greed of a so-called shadow-banking system and lapsed regulation while larger global forces, such as huge credit flows into the U.S. in the late 90′s and earlier this decade, played a very big role in the buildup of credit and housing bubbles. They also take issue with blaming former Fed Chairman Alan Greenspan or current Fed Chair Bernanke.

And one Republican member who issued his own dissent, Peter Wallison, blamed much of the problem on government housing policies that fostered home ownership to the point of what he saw as reckless disregard for people’s ability to pay for their homes. (Maybe this shouldn’t be such a surprise. Some historians still differ on how they see the causes and response to the Great Depression).

But if you read into the basic findings of their reports and the various dissents — and full disclosure, I have not had a chance yet to read all 700-plus pages of these papers yet so I don’t want to short-change that aspect of the story — you might be struck by the fact that there were problems that both sides can agree on.

For example, both sides do find fault with a number of mortgage lenders and the mortgage securitization process.

“Many mortgage lenders set the bar so low that lenders simply took eager borrowers’ qualification on faith, often with a willful disregard for a borrower’s ability to pay.”
Financial Crisis Inquiry Commission

“Many mortgage lenders set the bar so low that lenders simply took eager borrowers’ qualification on faith, often with a willful disregard for a borrower’s ability to pay,” the majority report reads. In 2005, it notes, an astonishing “68% of option ARM (adjustable rate mortgages) loans originated by Countrywide and Washington Mutual had low or no-documentation requirements.”

Here’s how Thomas, Douglas Holtz-Eakin, and Keith Hennessey discussed it in their dissent.

While taking issue with the criticism of the form of these financial mortgage instruments that were packaged and resold many times over to investors, they note that “Fannie Mae, Freddie Mac as well as Countrywide and other private label competitors all lowered the credit quality standards of the mortgages they securitized.”

Both reports also take it hard to the credit-rating agencies.

“Failures in credit rating and securitization transformed bad mortgages into toxic financial assets,” Thomas, Holtz-Eakin and Hennessey write. “Credit rating agencies erroneously rated mortgage-backed securities and their derivatives as safe investments.”

Here’s what Angelides and his colleagues on the panel wrote:

“The failure of credit-rating agencies were essential cogs in the wheels of financial destruction …The mortgage-related securities at the heart of the crisis could not have been marketed and sold without their seal of approval.”

This is not to minimize the differences, but it’s worth noting that there are some common areas of agreement.

One other point worth noting.

These documents are full of incredible numbers and statistics that may boggle your mind. While you may feel like you’ve heard and read as much about the financial crisis as you can bear, it’s worth perusing the report (here’s the link again).

A couple of interesting facts and statistics of note:

  • “From 1978 to 2007, the amount of debt held by the financial sector soared from $3 trillion to $36 trillion, more than doubling as a share of gross domestic product. The very nature of Wall Street firms changed…By 2005, the 10 largest U.S. commercial banks held 55% of the industry’s assets, more than double the level held in 1990.”

  • “As of 2007, the five major investment banks — Bear Stearns, Goldman Sachs, Lehman Brothers, Merrill Lynch and Morgan Stanley — were operating with extraordinarily thin capital. By one measure, their leverage ratios were as high as 40 to 1….Less than a 3% drop in assets could wipe out a firm.”

  • “At the end of 2007, Bear Stearns had $11.8 billion in equity and $383.6 billion in liabilities and was borrowing as much as $70 billion in the overnight market. It was the equivalent of a small business with $50,000 in equity borrowing $1.6 million, with $296,750 of that due each and every day.”

OK, this report may never catch on with the public the way the 9/11 Commission did. For one thing, the 9/11 Commission didn’t break apart into a huge public spat. And understanding the workings of Wall Street, banking, mortgages and derivatives is not easy stuff to digest. But the report and its dissents make for some very interesting reading.