Coming to Terms with the Crisis

Anthony Kammer

Earlier this week, the Financial Crisis Inquiry Commission (FCIC) issued a report of its inquiry into the causes of the recent financial crisis. Modeled after the bipartisan 9/11 Commission created to examine the background of the 9/11 attacks, the FCIC was established by Congress in 2009 as a bipartisan panel designed to investigate the causes of the country’s recent financial crisis. According to the Commission’s report, critical to avoiding a repeat of the crisis is rejecting “the refrain that no one could have seen this coming and thus nothing could have been done.”

Although the Commission was somewhat split along partisan lines, the majority of the members agreed that the crisis was “avoidable” and identified a number of the entities most responsible. The following are the headings summarizing the Commission’s findings and conclusions:

• We conclude this financial crisis was avoidable.
• We conclude widespread failures in financial regulation and supervision proved devastating to the stability of the nation’s financial markets.
• We conclude dramatic failures of corporate governance and risk management at many systemically important inancial institutions were a key cause of this crisis.
• We conclude a combination of excessive borrowing, risky investments, and lack of transparency put the financial system on a collision course with crisis.
• We conclude the government was ill prepared for the crisis, and its inconsistent response added to the uncertainty and panic in the financial markets.
• We conclude there was a systemic breakdown in accountability and ethics.
• We conclude collapsing mortgage-lending standards and the mortgage securitization pipeline lit and spread the flame of contagion and crisis.
• We conclude over-the-counter derivatives contributed significantly to this crisis.
• We conclude the failures of credit rating agencies were essential cogs in the wheel of financial destruction.

The FCIC additionally referred several cases of potential wrongdoing to the Department of Justice, but it remains uncertain whether any charges will made, even though many of the conflicts of interest that exacerbated the crisis have been well understood and discussed for months.

Although the panel was unable to reach complete agreement, the dissenters did acknowledge failures in regulation, the over-concentration of risk, nontraditional mortgage practices, and failures in credit ratings and securitization. The main dissenting report, filed by three republican-appointed members, seemed chiefly to disagree with the majority’s explanations that failed to explain the near-identical crises that affected a number of European economies. One significant difference between the majority and minority of the panel, according to one of the dissenters, is that the majority viewed the financial crisis as avoidable.

Whether or not the last crisis was foreseeable, the FCIC has gathered much information about how we can make our economy more stable going forward. Given the large number of common conclusions between the majority and minority, perhaps some modest bipartisan reform proposals will start to emerge

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