Panel Blames All for Meltdown


The 2008 financial crisis was “avoidable” and brought on by the actions of government officials and private-sector players, according to a blue-ribbon panel’s draft report that spreads blame broadly for the meltdown.

The Financial Crisis Inquiry Commission’s draft report singles out federal banking regulators for particularly sharp criticism, saying that “the prime example” of the system’s shortcomings was “the Federal Reserve’s pivotal failure to stem the flow of toxic mortgages” over the past decade. But the report also has harsh words for both “captains of finance” and Main Street lenders.

The final version of the 10-member commission’s report is set to be released Thursday. While its scope is expansive—the panel interviewed hundreds of witnesses over its year-long investigation and collected millions of pages of documents—partisan divisions that emerged during its drafting likely will detract from its long-term impact on policy.

Congress passed a broad rewrite of federal banking laws last year. Lawmakers are expected to consider overhauling the nation’s housing-finance system, particularly the government-chartered mortgage giants Fannie Mae and Freddie Mac, an area in which the commission was particularly divided.

The draft report says “dramatic failures of corporate governance and risk management at many systemically important financial institutions were a key cause of this crisis.” It also points to “stunning instances of governance breakdowns and irresponsibility,” including at American International Group Inc., which made giant bets on the mortgage market, and Fannie Mae.

The report cites burgeoning mortgage fraud around the country in the years running up to the meltdown and notes that major financial institutions packaged loans into securities that they had reason to suspect didn’t meet their standards. It also cited the proliferation of exotic securities such as derivatives and the rise of a lightly regulated shadow banking system.

The draft report says that the failures were widespread, even including the public.

“As a nation, we must also accept responsibility for what we permitted to occur,” it says. Still, it says, “we do place special responsibility with the public leaders charged with protecting our financial system.…No one said, ‘No.’ ”

Three Republican members dissented from the final report and criticized the majority members, who were appointed by Democratic leaders, for taking too expansive a view of the crisis and cataloging every possible shortcoming.

The majority’s report “is more an account of bad events than a focused explanation of what happened and why,” the dissent says.

Overall, the GOP dissent puts more emphasis on economic factors and particularly the pressures produced by a global credit bubble.

Former Federal Reserve Chairman Alan Greenspan disputed some of the commission’s points, saying the Fed was responsive to congressional demands for changes in mortgage-lending rules. The real problem, he suggested, was the new demand for subprime-mortgage securities coming from Fannie Mae and Freddie Mac, as well as from European investors. “Nobody could handle it, so the system blew apart,” he said.

A fourth GOP commission member generally agreed with Mr. Greenspan about the role of Fannie and Freddie, which the majority concluded “were not a primary cause.”

The draft report finds plentiful warnings signs before the crisis. “Alarm bells were clanging inside financial institutions, regulatory offices, consumer service organizations, state law enforcement agencies, and corporations throughout America, as well as in neighborhoods across the country,” it said. Paul McCulley, a managing director at bond trading giant PIMCO, told the panel said he and his colleagues began worrying about a bubble back in 2005.

The commission’s report was eagerly awaited in part for its potential impact on Goldman Sachs Group Inc., a repeated focus of attention during the hearings. The FCIC’s draft recounts numerous email and phone conversations detailing the firm’s high-stakes interactions with AIG, Lehman Brothers Inc. and other victims of the meltdown.

“We’re [unintelligible] f***ed basically,” on AIG executive bemoaned as Goldman demanded more cash from AIG to back up its investment positions.

The report’s focus on corporate disclosures could cause problems for companies defending securities lawsuits. And the commission has referred several matters relating to securities transactions to law-enforcement agencies, according to people familiar with the situation.

For all the dissension, the majority’s draft contains similarities to the Republicans’ effort. For example, both versions cite financial institutions excessive leverage, as well as over-reliance on credit-rating agencies that graded issues.

Ideological differences began to affect the commission’s work almost from its outset, and deepened around Election Day. Republicans charged that the majority—appointed by the congressional Democratic leadership—was preparing a political “hit job” focusing on Wall Street firms. The majority dismissed that, suggesting that GOP members were engaging in political maneuvering of their own.

Chairman Phil Angelides, a former California treasurer, synthesized vast amounts of information and neatly cut through witnesses’ obfuscations. But he reportedly had a micromanaging style that irritated some members and also seemed to slow down the commission. A commission spokesman declined to comment.

Democratic appointees generally supported Mr. Angelides. But the commission underwent notable staff turnover. Internal differences ultimately helped lead the panel to delay its final report from Dec. 15 until this week.


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