The Financial Crisis Inquiry Commission found the 2008 market turmoil to be “avoidable” in its long-awaited report but that “captains of finance and the public stewards of our financial system” had failed to grasp the build-up of risk.
In more than 500 pages, the first official government report into the financial crisis cast blame widely – accusing the Federal Reserve of having “neglected its mission” by not piercing the housing bubble, while finding that Goldman Sachs had understated its benefit from the government bail-out of AIG.
Alan Greenspan, the former Fed chairman, attracted the most frequent criticism of any individual. The FCIC accused him of presiding over a culture of deregulation that believed wrongly that markets would always self-correct.
But none of the Republican appointees to the commission endorsed the report, saying it was too far to the “left”, ignored global imbalances that contributed to the crisis and understated the role of government housing policy in stoking a credit bubble.
The FCIC, chaired by Phil Angelides, a former California treasurer, found “widespread failures in financial regulation”, a “dramatic failure of corporate governance and risk management”, “excessive borrowing”, and that the government was “ill prepared” and gave an inconsistent response in deciding not to save Lehman Brothers after orchestrating the rescue of Bear Stearns and later saving AIG.
Keith Hennessy, a Republican commissioner, said the staff had been directed by Mr Angelides to find “the smoking gun” but had failed to find any “jaw-dropping criminal type conclusions”.
“If you want to juice up the language and blame people to sell books, you should choose a different line of business,” said Douglas Holtz-Eakin, another Republican commissioner.
Since the FCIC began its inquiry in 2009, Congress has passed the Dodd-Frank financial reforms intended to deal with weaknesses in regulation. But Mr Angelides said “the jury is still out on” those reforms and said he hoped that the report would be “a guidepost to policymakers and the public”.
The later publication of private interviews and documents will be pored over for fresh information but the report itself contained no dramatic revelations from the crisis, which has been studied heavily by other official and unofficial bodies since it began in 2007.
Among previously unpublished opinions from key figures, Ben Bernanke, Fed chairman, said that almost every investment bank was at risk of collapse as the credit crisis gripped Wall Street. “Even Goldman Sachs, we thought there was a real chance that they would go under,” he said.
Goldman, which weathered the period more successfully than many of its peers, was the focus of a good deal of the report in various areas. The FCIC said Goldman gave it documents showing that after the government bail-out of AIG, the bank received $2.9bn from the insurance company related to credit default swaps for its own proprietary trades. “Goldman Sachs ... got about $14bn that it passed through to other clients but what we found is that ... they [also] ended up retaining $2.9bn,” said Mr Angelides.
Goldman declined to comment, but people familiar with the bank’s views disputed the commission’s conclusions on the $2.9bn windfall, saying it was not distinct from client-related activity. Goldman has said that the bank lost $1.2bn on its various exposures to the residential-mortgage market in 2007-08.
In a separate report, Republican commissioners said that the main report “largely ignores” the global nature of the crisis. They also disputed the idea that the government had the legal power to save Lehman.
In a third report, Peter Wallison, a scholar at the American Enterprise Institute, argued that Fannie Mae and Freddie Mac, the government-sponsored mortgage entities, were the main cause of the crisis and that increasing regulation of Wall Street was unnecessary and “legislative over-reach”.
Interview excerpts from the report
Excerpts from previously private interviews between key players in the crisis and the Financial Crisis Inquiry Commission’s staff were published on Thursday in the final report, writes Tom Braithwaite in Washington. Full transcripts are due in the next two weeks.
● “We were looking at this firm [in the fall of 2008] and saying, ‘Citigroup is not a very strong firm, but it’s only one firm and the others are okay,’ but not recognising that that’s sort of like saying, ‘Well, four out of your five heart ventricles are fine, and the fifth one is lousy.’ They’re all interconnected, they all connect to each other; and, therefore, the failure of one brings the others down.”
● “[Like JPMorgan Chase,] Goldman Sachs I would say also protected themselves quite well on the whole. They had a lot of capital, a lot of liquidity. But being in the investment banking category rather than the commercial banking category, when that huge funding crisis hit all the investment banks, even Goldman Sachs, we thought there was a real chance that they would go under.”
● “As a scholar of the Great Depression, I honestly believe that September and October of 2008 was the worst financial crisis in global history, including the Great Depression. If you look at the firms that came under pressure in that period . . . only one ... was not at serious risk of failure. ... So out of maybe the 13, 13 of the most important financial institutions in the United States, 12 were at risk of failure within a period of a week or two.”
– Ben Bernanke, Federal Reserve chairman
● “By 2008 our regulatory framework with respect to derivatives was manifestly inadequate... the derivatives that proved to be by far the most serious, those associated with credit default swaps, increased 100 fold between 2000 and 2008.”
– Larry Summers, former top economics advisor to the White House
● Lobbyists and members of Congress would “harass” regulators to prevent new regulations in a “kind of a blood sport to make the particular agency look stupid or inept or venal.”
– Arthur Levitt, former Securities and Exchange Commission chairman
● “Everyone really did believe that things were going to be OK. [I] thought they were certifiable lunatics.”
– Steve Eisman, founder of a fund within FrontPoint Partners that was short selling the mortgage market
● “When I drove home and Gary called me and told me it wasn’t going to be two or three hundred million but it was going to be eight billion – I will never forget that call. I continued driving, and I got home, I walked in the door, I told my wife, I said here’s what I just heard and if this turns out to be true, I am resigning.”
– Chuck Prince, former Citigroup chief executive, about a call from Gary Crittenden, former chief financial officer.
● “We thought that after we stabilized Fannie and Freddie that we bought ourselves some time. Maybe a month, maybe three months. But they were such profound interventions, stabilizing such a huge part of the financial markets, that would buy us some time. We were surprised that Lehman then happened a week later, that Lehman had to be taken over or it would go into bankruptcy.”
– Neel Kashkari, former Treasury assistant secretary
● “We didn’t do it strongly enough. We said to them, ‘Look, this is going to be bad.’ But it wasn’t like, ‘No ... you have to help.”
– John Thain, former chief executive of Merrill Lynch, on his communications with regulators over the collapse of Lehman Brothers
● “I didn’t think it was so bad. I hate to say that ... But I [thought] it was almost the same if on Monday morning the government had saved Lehman ... You still would have terrible things happen.... AIG was going to have their problems that had nothing to do with Lehman. You were still going to have the runs on the other banks and you were going to have absolute fear and panic in the global markets. Whether Lehman itself got saved or not ... the crisis would have unfolded along a different path, but it probably would have unfolded.”
– Jamie Dimon, chief executive of JPMorgan Chase, on the Lehman collapse
● “We could have survived it in my opinion, but it would have been terrible. I would have stopped lending, marketing, investing ... and probably laid off 20,000 people. And I would have done it in three weeks. You get companies starting to take actions like that, that’s what a Great Depression is.”
– Mr Dimon contemplating the post-Lehman world in which he foresaw possible 20 per cent unemployment