FCIC Report is very Illuminating

The Financial Crisis Inquiry Commission (FCIC) is a congressional sponsored study into the reasons for the Financial Crisis. They were authorized by the President in May 2009. They have issued their final report and are disbanding. Google FCIC and you will find their information is being maintained by Stanford University. The published report is available on the website and at booksellers (ISBN 978-1-61039-041-5). It is more than 500 pages long. I have personally purchased about 15 books on the Financial Crisis over the last two years. (I know I should get a life). Each book discusses a separate segment of the crisis. This report is the most comprehensive book to date and is very readable by a person interested in the subject.

The commission was chaired by Phil Angelidies and former congressman Bill Thomas. There are eight additional commissioners appointed by the Democratic and Republican party. They had a staff of 60 people. They held hearings in Washington and locations in states hardest hit by the Real Estate bubble.

The first chapter summarizes their findings and they are quite illuminating on the many facets of the Financial Crisis. They dispel many myths and examples are provided below. One can definitely say we had less government in the Finance world. The evolved system was unsustainable. The end result was the crash of September 2008.
Conclusions of FCIC
1-The Financial Crisis was avoidable

Despite the “once in a 100 years” admonitions of regulators and politicians, this crisis was avoidable. The document does a thorough job, point by point highlighting and disputing the many actions in the last 20 years.

2-Failures in Financial Regulation and Supervision proved devastating to Financial markets

Greenspan was authorized to stop the writing of toxic mortgages despite the rising evidence that they were massive and detrimental. In 2004, the Federal Reserve could have denied loosening of capital reserves from 12/1 to 30/1. In other words, they would need $1 dollars in the bank for every $30 dollars of assets. This is considered very high leverage.  In 2000 the government declined to regulate Credit Default Swaps (Derivatives). Repeal of Glass-Steagle allowed mixing banks and Insurance companies. Citi bank was acquired by Travelers Insurance immediately. Under the regulation of the Federal Reserve Bank of NY (Tim Geithner) Citi was one of the first banks to get into trouble and require a massive government bailout.

3-Dramatic failures of corporate governance and risk management at important financial institutions, key cause of the crisis.

Many banks (not all) acted recklessly took on too much risk with too little capital to address the crisis, being very dependent on short term funding which evaporated as the crisis evolved. They were not able to raise capital to address demand claim of customer. In short they were not able respond to a run on the bank. This is called a liquidity event. Recall that Investment banks were lightly regulated and did not have access to the FED window for emergency loans. They relied on unproven software to evaluate their risks. In short they loaded up on Real Estate securities which turned toxic and they could not absorb the losses. This was done despite the fact that they knew the underwriting of the real estate loans was poor. Goldman Sachs recognized this and curtailed purchasing of bad loans and they survived.  The financial community was not able to police itself, requiring a massive government bailout. Risk people identified the problem and were ignored.

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