By Leah Spiro
|The Financial Crisis Inquiry Report: Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States |
By the Financial Crisis Inquiry Commission
Starting in mid-2009, a parade of luminaries testified before the Financial Crisis Inquiry Commission, from Lloyd Blankfein to Warren Buffett to Ben Bernanke. The commission’s stated purpose was to “examine the causes of the current financial and economic crisis in the United States.”
Think of the FCIC as the National Transportation Safety Board, whose staff collects debris from plane wrecks to figure out what actually caused the crash: Canadian geese in the engine or pilot error? It wisely avoided making any policy recommendations and gave the dissenting Republicans a few chapters of their own.
The commission’s conclusion: The main cause of the crisis was the Fed’s failure to regulate the toxic mortgages at the heart of the crisis. It was these lousy loans, made by the subprime firms and packaged into CDOs and sold by Wall Street and traded by hedge funds, that ultimately created tremendous systemic risk and cost millions of people their homes and their jobs. This was a case of human error.
“The captains of finance and the public stewards of our financial system ignored warnings and failed to question, understand, and manage evolving risks,” the commission concludes. “No one said ‘no.’ ”
While not a page-turner like Michael Lewis’s “The Big Short,” the FCIC report offers a different emotion: the lurid fascination of watching a train wreck. Thanks to its subpoena power, the commission had remarkable access to people, collected important numbers and got under the hood of companies ranging from AIG Financial Products to Goldman Sachs. The report is written in a very clear, jargon-free style and arrives at concise conclusions.
The minutiae of market breakdowns are surprisingly compelling, such as the shock of Kyle Bass of Hayman Capital Management, who was trying to assign a derivatives position from Goldman Sachs to Bear Stearns in March 2008, only to get this response: “GS does not consent to this trade.” On a late Sunday afternoon on the Lehman weekend, John Mack got a call from Ben Bernanke, Tim Geithner and Hank Paulson. “Basically they said they wanted me to sell the firm,” Mack said. One hour later, he got money from Mitsubishi and the trio backed off.
Perhaps most surprising is the multiple times supposedly wise men were the captives of spectacularly boneheaded ideas. There were Geithner, Larry Summers and Arthur Levitt arguing passionately that there was no need to regulate OTC derivatives. Bernanke was convinced we would have no more deep recessions because of the “Great Moderation.” Chuck Prince and Stan O’Neal were shocked to find SIVs and toxic mortgages on their balance sheets.
After they announced huge write-downs, resigned in disgrace and their firms were bailed out, they of course collected multimillion-dollar paychecks. Hedge funds escaped this withering criticism and are portrayed here either as prescient or as nimble catalysts that panic quickly and wreak havoc, such as when they caused a run on Morgan Stanley in the hours before it became a bank. In the end, the overall picture is one of deeply clueless regulators who are always the last to know what is going on in the markets, and of Wall Street sharks whose flawed products tanked the world economy. As the New York Times’ Floyd Norris put it in a recent column, “there is at least a suspicion that a significant part of modern finance has no real value for anyone except the participants.”
Hedge fund managers should be grateful the FCIC report doesn’t blame them for creating harmful instruments, but rather portrays them as understanding well their dangers.