FCIC Insiders Say Report Gives Wall Street a Free Pass, Simply Sought to Validate Conventional Wisdom About Crisis

From the very outset, the Financial Crisis Inquiry Commission was set up to fail. Its leadership, particularly its chairman, Phil Angelides, was seen as insufficiently experienced in sophisticated finance. The timetable was unrealistic for a thorough investigation of a crisis this complex, let alone one international in scope. Its budget and staffing were too small. The investigations were further hampered by the requirement that subpoenas have bi-partisan approval along with Its decision to hold hearings with high profile individuals, including top Wall Street executives, before much in the way of lower-level investigation had been completed. The usual way to get meaningful disclosure from a top executive is to confront him with hard-to-defend material or actions; interrogations under bright lights, while a fun bit of theater, generally yield little in the absence of adequate prep.

So with expectations for the FCIC low, recent reports that the panel urged various prosecutors to launch criminal probes were a hopeful sign that the commission might nevertheless come out with some important findings. But correspondence from insiders in the last few days suggests otherwise. One, for instance, wrote, “I’m still in the process of getting the stink out of my clothes.”

These ideologically-neutral sources close to the investigation depict the commissioners as having pre-conceived narratives and of fitting various tidbits unearthed during the investigation into these frameworks, with the majority focusing more on the problems caused by deregulation and the failure of the authorities to use even the powers they had, while the minority assigns blame to government meddling, particularly housing-friendly policies.

These insiders see both sides as wrong, and want to encourage investigative reporters to challenge both the majority and dissenting accounts. They contend that both versions help perpetuate the myth that Wall Street was as much a victim of the crisis as anyone else.

One of these sources sent this document in an effort to question the notion that any of the reports coming out of the FCIC were the result of a fact-based investigative process, meaning operating in an objective manner, scouring information to see which theories or storylines seemed most consistent with what had been unearthed. As you will see, he makes clear that he regards all of the FCIC narratives as falling well short in explaining the crisis.

Now if we could only get Kurosawa to enter stage left and tell us what really happened…..

From a source close to the investigation:

Recently, I got started talking with a neighbor about ideologues in and around government. He had just read a book called Emerald City. He said it was about how we screwed up in Iraq by letting the ideologues run the post war show. The problem was that they had no “on the street” Iraqi experience. For them it was all theory and little practical experience. They were sure they were right and nothing could be said to change them. When things didn’t go according to plan, they just pretended it did or asserted events would turn their way shortly.

It occurred to me that we should be on the alert for this phenomenon when it comes to the three reports (one report and two dissents) to be released the Financial Crisis Inquiry Commission later this week. True to form, the reports start out with how many documents were reviewed and how many people interviewed. This sets us up to believe that the Commissioners relied on facts garnered from the documents and interviews in coming to their conclusions.

It would do Americans a lot of good to put this to the test. Did the Commissioners really use the facts to arrive at their conclusions or did they arrive at the conclusions first and are simply citing a selection of the facts to support their previously arrived at positions?

In fact, the majority will provide a history of financial crisis anecdotes and then try to fit the facts into its theory that the crisis was avoidable if only the financial sector took fewer risks and government was more competent. The dissents will do the same to support their theory that it was all government’s fault.

The problem is that the financial crisis was a real event. It didn’t happen in a theoretical model. It happened in real life and ruined the retirement savings of millions of Americans. Not only should we be skeptical of both the majority and the dissents, we should put them to the test to explain exactly how their theory explains the losses of hundreds of billions of dollars in the securities markets and trillions more in residential real estate. The question we should always keep in mind is for them to explain how abrupt catastrophic financial systemic failure happened. (Remember Secretary Paulson going to Congress kneeling before Nancy Pelosi and begging for three quarters of a billion [sic] dollars over the weekend.)

In a systemic failure there are always things that people do which in hindsight look imprudent: take on too much leverage, speculate instead of hedge, chase short term goals at the expense of long term security, panic, etc. If these things are offered up by the majority who says the crisis was avoidable, put them to the test. Which of the multitude of anecdotes were critical? If they can’t identify one or two critical factors, ask them specifically (anecdote by anecdote) whether the crisis would have occurred even if the anecdote in question didn’t occur. If they can’t tell you either, then really what they are saying is the crisis was a “perfect storm” of just the right mix of private sector greed and public sector incompetence coming together at the same time. In other words, what happened could not have been predicted and the crisis was not avoidable.

The ideologues in dissent have already started to sell a different theory. Some will try to say that the crisis was all due to affordable housing goals at the GSEs and the Community Reinvestment Act. This theory doesn’t hold true anywhere but in some right wing economist’s model. We should be able to assume that the GSEs did their best to pursue profits for their shareholders. That is, they didn’t intend to underwrite loans they knew would not be paid back. Nothing in the AHGs or CRA required them to underwrite bad mortgages. Indeed, those goals specifically were hedged so that they could be ignored if loans to satisfy them could not be made under terms which were economic.

The ideologues may say that underwriting bad mortgages by the GSEs resulted in an unsustainable increase in housing prices that all of a sudden collapsed (causing the financial crisis). But this would not (could not) have happened so widely and so quickly without other factors intervening. For example, how did the AHGs and CRA cause the rapid collapse of AIG, various monoline insurers, various investment banks, numerous money market funds or billions of dollars of losses in a huge number of mutual funds and pension funds none of which were subject either to the goals or CRA?

Catastrophic financial system collapse is not the result of largely unrelated anecdotes. There are too many firewalls in the system to allow it to happen. It has to be the result of one or more firewalls failing or something really big in the system going bad. What was there about the system that was big enough to cause systemic failure so quickly? What connects the two: the failure of the housing and securities markets?

Based on further discussions with individuals familiar with how the report was developed, the following shortcomings are evident:

The Commission was able to do comparatively little in the way of forensic work; the bulk of its effort was devoted to the hearings, which delivered relatively little in the way of new insight

As indicated above, the FCIC report is guilty of “drunk under the streetlight” behavior, of trying to fit its story to already known or easily found information. Even though the report makes extensive use of salacious extracts from e-mails, the insiders content that none of these information in these e-mails illuminates information critical to the crisis trajectory.

As a result, the report underplays or completely misses the real drivers of the crisis. Specifically, it gives short shrift to the obvious epicenters:

– How a previously benign securitization process allowed for the creation and sale of bad mortgages on a widespread basis

– How inadequate disclosure as alleged in a number of recently filed big lawsuits allowed mortgage backed bonds that contained many loans that fell below the underwriters’ promised standards to be sold to investors

– How a shadow banking system ballooned with products increasingly based on dubious financial instruments

– How CDOs that were devised by subprime shorts, most importantly the hedge fund Magnetar, drove the demand for the worst sort of subprime loans, extended the toxic phase of the subprime bubble well past its sell-by date

– How the dealer banks knowingly created toxic products, and via flawed risk management processes, allowed traders to retain significant portions of them via strategies that amounted to gaming of the banks’ bonus systems

Merely reading news releases of the last few weeks will show the shortcomings of the FCIC report. For instance, it skips over the role of the failure of the securitization industry to adhere to its own agreements, even though the FCIC was presented with this information last summer. It also is silent on the sort of abuses coming to light, such as the fact that Bear Stearns was allegedly double-dipping on its own deals, demanding that originators make extra cash payments on bad mortgages they had sold into pools that Bear was selling to investors, while failing to pass those payments on to investors (knowing that they instead would seek to have the bond insurers be the ones who would make investors whole).

Similarly, on the eve of the release of the FCIC report, the SEC, which astonishingly had declared disclosure on mortgage-backed securities to be “robust”, has done a quiet about face and has issued a new rule requiring issuers of asset backed securities to conduct a quality review and disclose to investors what that review consisted of. Note that this closing of a gaping loophole in disclosure has gone largely unnoticed.

The sad thing isn’t that the FCIC did not do its job. As we indicated earlier, that failure was by design. No one in the officialdom wants the mechanisms of the crisis to be exposed in full. It would compromise too many influential people and restoke well warranted public ire about the bailout of a miscreant financial services industry and its ongoing extractive behavior. Ironically, this core element of the dissent’s criticism is spot on, even if their own narrative suffers from precisely the same flaws. As FCIC commissioner Peter Walliston observes:

Like Congress and the Obama administration, the Commission’s majority erred in assuming that it knew the causes of the financial crisis…The Commission did not seriously investigate any other cause and did not effectively connect the factors it investigated to the financial crisis. The majority’s report covers in detail many elements of the economy before the financial crisis that the authors did not like, but generally fails to show how practices that had gone on for many years suddenly caused a worldwide financial crisis. In the end, the majority’s report turned out to be a just-so story about the financial crisis, rather than a report on what caused the financial crisis…..

From the beginning, the Commission’s investigation was limited to validating the standard narrative about the financial crisis—that it was caused by deregulation or lack of regulation, weak risk management, predatory lending, unregulated derivatives, and greed on Wall Street. Other hypotheses were either never considered or were treated only superficially. In criticizing the Commission, this statement is not intended to criticize the staff, who worked diligently and effectively under difficult circumstances and did extraordinarily fine work in the limited areas they were directed to cover. The Commission’s failures were failures of management.

By having the FCIC validate widely accepted, superficial, and ultimately inadequate explanations of the crisis, the Obama administration continues in its policy of looking forward rather than back, when looking back is the foundation of any serious scientific, investigative, or prosecutorial process. The odds are high that the media and the public at large will mistake the extensive use of anecdote in the FCIC report for accuracy and completeness. As with so many accounts of the crisis, the artful use of detail will yet again have the effect of diverting attention from the true drivers of the crisis and thus leave Wall Street free to devise new ways to wreck the economy for fun and profit.

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  1. Matt Stoller

    Normally, you diagnose the disease, and proceed to treatment. It’s not hard to see that the administration designed the FCIC so it would come out with its diagnosis after Congress had already proceeded to the treatment in the form of Dodd-Frank.

    1. Fed Up

      “Normally, you diagnose the disease, and proceed to treatment.”

      Diagnosis: Too much total debt (private and gov’t)

      Not the treatment: Even more total debt

      Difficult for most economists to understand because they believe all new medium of exchange should be demand deposits created from debt, whether private or gov’t and poor assumptions about real aggregate demand.

  2. jake chase

    Are you really surprised the FCIC was a whitewash? If so, would you be interested in a nice bridge over the East River?

    Alternatively, could you identify one governmental commission of the past one hundred years which was created and conducted to find out the truth? (Please don’t suggest the Pecora Commission, which was deliberately trotted out to smear Morgan interests and strengthen those of the Rockefellers)

    1. TC

      Might such an effect of the Pecora Commission as you cite (and the role this investigation played leading to passage of the Banking Act of 1933) have been the unavoidable consequence of policies intending to develop the wealth of the nation? Indeed, might Warren Buffett’s “faith in America” such as had him sinking his fortune into a railroad last year be predicated in belief that, reimposition of Glass-Steagall — a necessary arrangement if the United States is ever again to become the wealthiest, producing nation on earth (rather than the most thoroughly bankrupt consumer nation) — is at this point a foregone conclusion?

  3. Paul Tioxon

    This is not a scientific, investigative, or prosecutorial process. It is a COMMISSION. Like the The Warren Commission. Commissions are like Blue Ribbon Panels, chock full of leading citizens, Daughters of the American Revolution, and other assorted gray headed public notables. The DoJ does the other stuff. If you want scientific forensics, I suggest CSI Los Angeles, lots of bikini episodes in the drenching SoCal sunlight.

  4. K. Williams

    Did you really just write a whole post attacking the report as a whitewash even though you haven’t actually read it? Remarkable. And absolutely laughable that you’re accusing other people of reaching their conclusions in advance. And why don’t you give the “ideologically-neutral” excuse a rest — this repeated faux insistence that only you and your trusted sources are somehow objective and immune from personal bias has no basis in reality. You have an ideology — you’re a left-wing Democrat who thinks the government should own banks. To pretend that this doesn’t somehow shape your view of the crisis makes no sense.

    1. Yves Smith Post author

      You clearly attacked the post without reading it.

      First, the post is a report on what insiders who had a front row seat saw about the process.

      Second, it attacks the majority position, which is Democratic, as well as the dissent.

      Third, I am not a Democrat, I regularly attack the party. And I am told one of the reasons I have trouble getting on TV is my views do not fit into neat ideological pigeonsholes.

      Fourth, I did very significant forensic work on the crisis, into areas that were crucial that the FCIC missed. For a single person without subpoena powers to be able to say that is damning on its face.

      Fifth, I have never said government should own the banks. That’s your straw man.

      So who has an agenda here?

      1. Fed Up

        “Third, I am not a Democrat, I regularly attack the party. And I am told one of the reasons I have trouble getting on TV is my views do not fit into neat ideological pigeonsholes.”

        Try Christine Romans at CNN. If you can take personal finance and budgeting and “scale it up” to macroeconomics while defeating all the macroeconomists who say budgeting doesn’t matter, you should be able to get somewhere.

    2. Hugh

      Left-wing Democrat is an oxymoron. Details of the report have been leaking all day. Maybe you missed all that.

      I think the faux part is the idea that we have to stick our nose up the skunk’s ass before we can say it’s a skunk. Most of us can, and prefer to, make that determination from a greater distance.

      A commission may be a real fact finding project for you but out here in the real world, we know that commissions are mostly used to fulfill some pre-determined goal. This is done by stacking them with the right people and/or limiting their budget, time to work, ability to work, and authority. People forget that the 9/11 Commission was set up exactly this way. Kissinger was supposed to be one of the original co-chairs. It was riven with partisan infighting. The Bush Administration tried to pull the plug on it before it had completed its work and in general cooperated with it to the minimum extent possible. Some might say but wait a second, that commission came up with all these recommendations. Yes, but the Bush Administration dragged its heels on those recommendations for a couple of years. Even then it enforced only those it wanted to. Most important though from the Bush Administration’s point of view is that the commission was expressly forbidden to assign blame to anyone.

      Commissions, like the Cat Food commission, can be used to come up with pre-ordained conclusions that policymakers can then point to as objective and non-partisan, when the real goal is to duck blame for making those same recommendations on their own.

      The Angelides commission was set up and operated for kabuki purposes only. We knew this going in. As I said, you look at the people chosen, how they were chosen, what the commission’s powers and staff were, how the commission operated, time and budget constraints. Add in today’s leaks and you really don’t need a weatherman to tell you which way the wind is blowing.

      You seem to be saying that we should forget how commissions work, how Washington works, and give them the benefit of the doubt. Why?

      1. Minh

        Were they all 911 inspired ?
        1. “Inside Job” by Nouriel Roubini
        2. “Freefall” by Joseph Stiglitz

        1. Hugh

          I’m not sure what point you are making. This is the composition of the FCIC from wiki:

          Phil Angelides (chairman) – Pelosi (jointly chosen as chair by Pelosi and Reid)
          Bill Thomas (vice chairman) – Boehner (jointly chosen as vice chair by Boehner and McConnell)
          Brooksley Born (Pelosi)
          Byron Georgiou (Reid)
          Bob Graham (Reid)
          Keith Hennessey (McConnell)
          Douglas Holtz-Eakin (McConnell)
          Heather Murren (Reid)
          John W. Thompson (Pelosi)
          Peter J. Wallison (Boehner)

          Brooksley Born is the only name with expertise and credibility and her part in all this took place back in the Clinton years.

          I am not a Roubini fan, ultimately too neoliberal for me. I often agree with Stiglitz but also find him often too detached. Neither was a member of the FCIC.

          The 9/11 Commission didn’t inspire anything. The reason I mentioned it is because I found its backstory quite fascinating and very different from how it was portrayed in the press, and it was a great example of how commissions are managed and contained by those who create them.

          1. 4jkb4ia

            I saw Hugh making this point practically on the commission’s first day, and as someone who paid careful attention to them, Born was not the greatest questioner to walk on the planet. Every question was about derivatives, and many of them were hopelessly leading or general. I think my favorite questioner was Holtz-Eakin, which makes me more disappointed in the kind of hackery he has been doing lately.

            I am not surprised by what Yves wrote. Everything that the NYT story says they have found you could glean from the hearings very easily, but the hearings didn’t easily add up.

          2. 4jkb4ia

            Curse you, no edit function. I wanted to write that simply paying attention to Yves over the last year was almost certainly better than these folks but I have no proof.

          3. streetman

            Born was there strictly as the in-house derivatives expert. The testimony we will never hear is how she was consistently frustrated in her efforts to regulate OTC derivatives during her CFTC years by Greenspan, and especially Rubin and Summers (wrong party, I guess)…

      2. Paul Repstock

        “You Americans are so naive.” (Steve Martin)

        Commisions do not need to investigate. They only ‘need’ to admire the clothes of the King who pays them.

        Why is everyone so afraid to admit that the mortgage meltdown was orchestrated? I don’t see protesters at forclosures carrying placards saying, “Bear Sterns was an inside job.”

    3. YankeeFrank

      K Williams – I have to ask — in response to your little diatribe that North Dakota is the only state in the nation with its own state-owned bank, and the only state in the nation that currently has a very low unemployment rate. State-owned banks, unlike private banks, are ostensibly run for the benefit of the people. North Dakota has done this very well and they are thriving amidst the current national catastrophe. The large private banks have sunk our entire economy and continue to drain purchasing power and investment from worthwhile projects into speculation and fraudulent activities like front running hft. What exactly do you love about private banks and hate about state owned banks?

      1. Lyle

        But what pray tell is the difference between a state bank and a credit union? A credit union is there to serve its members and is a mutual organization. It seems that many forget that the mutual form of organization eliminates the stock holding class, the users are the owners and get the proceeds of the operation of the organization. In many ways a credit union is to be preferred to a state owned bank, in the first place they already exist.

        1. attempter

          It’s true, credit unions are better, further along the line of economic and political progress, than state banks. But it doesn’t have to be an either-or.

          Under these financialized kleptocratic conditions, having state banks is better than not having them, if they assiduously work to keep wealth produced in-state, in the state. And there’s enough interest in them these days that it seems to be an achievable project in at least some states. So it may be worth the activist time and energy to fight for them.

          Plus, state banks as an issue may have broader political potential as touchstones of federalism. As the federal government becomes more tyrannical, the state is an obvious line on which to fight. Even anarchists shouldn’t throw away perfectly good pre-existing weapons and fortifications. A movement has to progess in stages.

    4. F. Beard

      You have an ideology — you’re a left-wing Democrat who thinks the government should own banks. K. Williams

      I would love to see the private banks try to pull off their counterfeiting without all the government privilege they get including legal tender laws, the IRS, a lender of last resort, the Fed, capital gains tax on money alternatives, etc.

      The banks are ROLLING in filthy government privilege. How dare you imply they are private now ? In fact they are fascist.

      1. Mansoor Khan

        Don’t forget the FDIC deposit insurance? Remove government deposit insurance and banks are toast!

        1. F. Beard

          Remove government deposit insurance and banks are toast! Mansoor Khan

          I wonder how banks can ever be illiquid with the lender of last resort, the counterfeiter-in-chief, the Fed, to borrow from?

          But yeah, the FDIC is definitely government privilege for the banks.

    5. decora

      “you’re a left-wing Democrat who thinks the government should own banks.”

      i think if you read the blog and read EConned you might feel differently.

      nobody who “thinks government should own the banks’ would spend so much time dissecting and trashing the exact depth and breadth of the conflicts and mistakes that occured when the government did, in fact, ‘own the banks’, which happened under a republican president with a republican treasury secretary.

      it would be more accurate to say that she “thinks government should p0wn the banks”, or at least the bad actors within them.

  5. Hugh

    Obama is an out and out corporatist. So are the Democrats. Ditto the Republicans. They put this commission together precisely not to investigate the housing bubble and meltdown. Mission accomplished.

    In class warfare the primary weapon of kleptocratic elites is distraction. Democrats point at Republicans. Republicans point at Democrats. Each criticizes the others’ narrative. Meanwhile we are invited at every opportunity to focus on the kabuki political theater, on the two narratives they present us and forget that the real one is the one they aren’t talking about at all.

  6. Hugh

    One correction to the insider’s account. Paulson met with Congressional leaders and demanded $700 billion or else, invoking the specter of martial law. It wasn’t exactly on extended knee.

  7. sgt_doom

    “The ideologues in dissent have already started to sell a different theory. Some will try to say that the crisis was all due to affordable housing goals at the GSEs and the Community Reinvestment Act.”

    Sad but true, we’ve been hearing this outrageous balderdash for the past year, including that group of Chinese businessmen in Hong Kong who actually paid America’s Airhead, Sarah Palin, to peddle such claptrap to them.

    A quick brie. The subprime, actually just a drop in the bucket in the entire securitization/credit derivatives mark-to-myth scam, breaks down as follows:

    One-third of the subprimers turns out to be simply speculators, both wealthy individuals and corporate.

    Of the remaining two-thirds, two-thirds of that log (the majority, in other words) turns out to be house flippers; both individuals and corporate.

    So only a minority were even actually residential in nature!

    And the banksters were the guilty parties anyway one observes — selling the same loans essentially hundreds to thousands of times over, by the manner they generated securities based upon those loans, which in turn were listed as assets further down the chain by other banks and financial institutions, which issued securities on the liability side, etc., etc., etc., leading to ultra-leveraging, which in turn was used for speculative purposes by the major banksters.

    I held a fantasy-like hope for the FCIC, because Angelides is an honest man, but realized without any army of the top forensic economists and forensic accountants and certified fraud examiners working for them, there was infinitesimal hope for a positive outcome.

    But anyway, we all knew nothing would become of that commission as the Obama-Bush-Clinton-Bush-Reagan Administration is in charge.

  8. Jon Claerbout

    Eve said 3/4 billion where I think she meant 3/4 trillion.

    (Remember Secretary Paulson going to Congress kneeling before Nancy Pelosi and begging for three quarters of a billion dollars over the weekend.)

    1. Yves Smith Post author

      That’s a quote, that’s not my text. But I have added a [sic] to make it clearer.

  9. craazyman

    I would add:

    How the big-swinging-dees (and their female equivalents) who manage fixed-income portfolios around the world managed to sleep at night knowing they were willingly and knowingly participating in the gigantic loot to pad their wallets. And how they can now manage to claim they’re victims of misrepresentation.

    You could create a breakfast cereal with all the letters that follow their names on their business cards. But somehow conscious thought evaded them.

    Well, it’s the human condition. Few among us are saints and the ones that are, usually they’re poor and wouldn’t have known a CDO from an OCD — although they are admittedly related. wink wink

    Saturn eating his children, just like fish eating their own eggs. The ancient lake. Dive down.

    I was fly fishing once on the Potomac just down from Great Falls and caught on a streamer what seemed to be a Walleye. As I pulled him up there were two fish trailing him as he flashed and dove. It seemed to me for a moment they were there for him, to help in his moment of agony. And then I told that story to a fly fishing store owner and he laughed and said “They were there for the food, in case it fell out of his mouth.” I knew that was true. But the mind makes weird scenes from the facts of existence. By the way, I just let it go anyway, back to the deep. It’s not a religion. I had a turkey dinner tonight. But I don’t think I’d feel good eating little kids like the banksters did. Some things do separate us from the lower animals, even though other things make it clear the separation isn’t by much.

  10. MichaelC

    And I’d add to your excellent list of items missed or underplayed:

    – The collateral damage (still to be realized) to the ecomomy (and law) from the flood of potentially NON MBS used to facilitate the fraud.

  11. Francois T

    Roubini said it perfectly in “Inside Job”: There will be no investigation because it would mean the crooks would be caught.

    Many of these rooks are in DC right now. It is impossible to otherwise explain the requirements that subpoenas have bi-partisan approval.

  12. Noash

    lt Looks like the news is all bad on the blog today. Iowa AG won’t be holding banks accountable. Virginia decides to help out the banks instead of homeowners, Americans lose faith in big corps and banks, etc. The only thing I wasn’t disappointed in was the FCIC – I never expected them to do anything but talk big and do nothing. Guess I was right.

  13. TC

    Why should the FCIC report be anything other than an exercise in the same manner of fantasy and denial as more or less has characterized the state of affairs within the United States since the Warren Commission report was issued?

    All that really matters now is recognition that, the two-tier credit system that once was Glass-Steagall has been destroyed (along with its stabilizing arrangement fostering and strengthening both public and private debts). This uniquely American principle regulating finance must be immediately restored if the globe is to avoid a chaotic economic and financial breakdown presently being fed by purely hyperinflationary central bank and treasury insanity.

    Once we’re serious about restoring the Glass-Steagall principle as the proven financial platform on which witting sovereigns can promote mutually beneficial commerce with an eye toward an improved state of affairs decades forward, then we can correct the errors of the FCIC report … and work our way back to that Warren Commission piece of cowardly trash, too.

  14. mannfm11

    It appears to me the accepted function of Wall Street since the dotbomb bubble has been to originate and promote as much trash as possible and pass it on to the public before it blows up in their own hands. They didn’t let go of the bomb fast enough this time is all.

  15. Expat

    It still makes me ill when I read comments that hinge on left/right, Democrat/Republican views and epithets. The cognitive dissonance displayed by Republicans who claim every Democrat is a communist intent on having the dreadful government own all the banks while they ignore or even cheer when the government simply hands trillions over to these same banks.

    Democrats are not left wing. Both parties are center right. Perhaps Democrats support social programs out of some last shred of humanity while Republicans support them out of Machiavellian self-interest (re-election), but the final result is the same.

    It is ironic that after one hundred and fifty years of negro freedom, our first black president is a slave to Wall Street.

  16. Independent Accountant

    Who should be surprised by this? It’s the “stress tests” all over again. By the way, where were the Big 87654 firms during this disaster? Yes, the same firms which let the S&L crisis of 1979-86 take place? They and the SEC are virtually useless.

  17. Just a thought...

    Just watched the press conference and I want to point out the blame was clearly laid at the feet of regulators with some ethical/risk management/compliance problems on wall street contributing to the problem that regulators should have caught. What I found very interesting however, is when Angelides was questioned about the section of the originally proposed Frank-Dodd bull that limited leverage to 15 to 1 in federally insured depository institutions, the political shill (that would be Angelides) responded that “Regulators have the power to control leverage”. In other words, “not the fault of the people who put me on this committee.”

    Whether you agree with the dissenters or not, failure to identify the contributions of policy makers, and ultimately the lack of political independence in the regulatory structure, is at the heart of the problem. May not be the root cause, which I contend is the disproportionate political influence of corporations and the wealthy, but only when regulators are ALLOWED to be at odds with the power structure then they can do their jobs.

    Now back to b!tching about wall street greed.

    1. jal

      When is mainstream going to wake up.
      Since when is it acceptable to blame the “cops” for what the bad people are doing?

      You know …
      its not the fault of the rapist. Its her fault.
      Its the fault of the cops that you are a dope addict
      Its the fault of the cops that you are a thief.
      Its the fault of the cops for not stopping you from stealing.

      NOW you are accepting …

      Its the fault of the REGULATORS that there was fraud and stealing of the savings by the banksters. Those savings were just begging to be taken.

      1. Just a thought...

        Confused and incoherent. Nice job.

        The regulators have their share of the blame without a doubt. The blame however starts at the top of the structure not the bottom (where the examiner and bank meet and the relationship that is incorrectly blamed for what went wrong). The guidance for examinations, surely a surprise for the lot of you with no familiarity the actual regulatory process, is set by people who more often than not have no experience examining financial institutions or reviewing bank/financial policies.

        It is these administrative officials, who largely play politics within the regulatory organizations themselves, that set the processes and procedures used to guide front line regulatory staff. This organizational set-up exists across ALL REGULATORY ORGANIZATIONS.

        So now we’re back to the one aspect that the angry ‘lynch the regulators’ group doesn’t quite grasp. Regulatory policies are set to reflect the will of elected officials. For example, Greenspan has taken a sizeable amount of the blame for deregulation but do you really think the idea started with him (hint: the FCIC’s ‘research’ is wrong)? It started with Wall Street execs who contacted their paid friends in the House and Senate who then made it known to Greenspan that Wall Street had a great idea. The money-election relationship is the corruption and the root cause of everything we are currently facing. Another example, home ownership underwriting standards at non-financial institutions and non-bank subs were not reviewed because they were outside the accepted purview of regulators because they served the political interests of powerful elected officials. Shoot the messengers, blame the regulators and continue to ignore a corrupted political process and absolutely nothing will change except who you blame next time. Then again, you might just blame the regulators again.

        And before I get lumped with the Wallison dissent. I whole-heartedly agree that CRA is a joke, as is HOEPA, but these are symptoms not the cause. And their shortcomings have nothing to do with the economically disadvantaged getting homes they can’t afford, it has to do with failed intentions. A different story all together. The diversion tactic used by Wallison ignores the fact that the AEI represents the same companies and individuals who indirectly influenced the relaxed underwriting standards that he sees as the cause, because AEI supporters made absurd sums of money off of the policies prior to the meltdown.

        1. Yves Smith Post author

          I cannot disagree with you more.

          Greenspan was the driver of the “don’t touch derivatives” posture at the Fed. I recall gaping out loud in 1996 or 1997 when I read Greenspan announcing his “let a thousand flowers bloom” policy re derivatives.

          Broad policies, particularly in new instruments, come from the top, not the staff.

          1. Just a thought...

            Couldn’t disagree with me more?

            Yves: “Broad policies, particularly in new instruments, come from the top, not the staff.”

            Just a thought…: “The blame however starts at the top of the structure not the bottom”

            It can be misguided to simply assume the messenger, or even champion if you prefer to describe Greenspan as such, is the driver. Greenspan spent the vast majority of his tenure as a political shill hiding Wall Street/Washington DC friendly propaganda behind his credentials as an economist. There is no way he could have lasted as long as he did without selling out to the interests of those with the ability to bankroll both sides of the aisle.

  18. Larry Elasmo

    K. Williams: “You have an ideology — you’re a left-wing Democrat who thinks the government should own banks.”

    Just found this comment, so I’m late to the party, but it cracked me up. Not sure which part is funnier: calling someone a “left-wing Democrat”, as if such a mythical creature really existed, like calling someone Sasquatch or Bigfoot. Or the thought that someone believes there really such a creature as Sasquatch or Bigfoot, er, I mean a left-wing Democrat.

    Maybe Sasquatch is the left-wing Democrat you’ve been looking for. And Obama is a socialist. That might explain it.

    After all, believing this should be no harder than believing that banks that have received trillions in government assistance are thriving free market private enterprise success stories!

    Or while tracking Bigfoot in the forests of the Pacific northwest, maybe you spotted one o’ them “liberals” (defined as a coastal elite who owns a Mac, listens to NPR, and sips lattes) and mistakenly identified it as a left-winger.

    And of course the FCIC told the truth. It was set up by politicians, politicians have never been known to lie or deceive the public, therefore it follows that the FCIC report must be true.

    K. Wright, I’d sure like to get my hands on some of whatever it is that you’ve been smokin’.

    1. Larry Elasmo

      Oops, that last line should be:

      “K. Williams, I’d sure like to get my hands on some of whatever it is that you’ve been smokin’.”

  19. Walter Westcot

    I’m weary of these discussions online and in coffee shops.

    Tunisia and now Egypt have erupted with solutions for corrupt governors.

    Quibbling between ourselves over ‘what to do? what to do?’ does not give our oppressors pause.

    this kind of power concedes only to violence.

    That’s where we are headed. And if that puts your panties in a knot, you’re not deserving of our heritage.

  20. Econ

    As a citizen north of “your” border, the FCIC report was immediately suspect from the media reports printed and otherwise. To us in the great white north peace, order and good government is our motto while having freedom and liberty in a progressive (most of the time ?) parliamentary democracy. Methinks that there is enough objective conditions in the Excited States of America to trash the FCIC report in Boston harbour and frame the new Constitution II with the appropriate revisions once the barricades have been mounted.

  21. streetman

    I know Yves to be very non-partisan, always making every effort to be an equal opportunity exposer of all the bad actors in the financial play, regardless of politics, and the attempt was made again here. But sometimes things really are exactly as they appear to be, and in this case both “sides” of the Commission truly aren’t equally at fault for the epic fail of the FCIC. In fact, the dissenting opinions, excerpts from which are subsequently quoted (AEI’s Peter Wallison) right here in the same post that attempts to dismiss them, are a very accurate and well supported description of why the FCIC is simply another example of political capture and best read as propaganda in favor of the ruling party’s (at the time) particular shopworn regulatory agenda.

    1. Yves Smith Post author

      With all due respect, this is a distortion of the post.

      Just because Walliston has offered an accurate and pointed criticism of the FCIC process does not mean his competing narrative is any better, particularly since his narrative does not map on to his critique. And as has been recounted elsewhere, Walliston has taken inconsistent, virtually contradictory, positions on Fannie, Freddie, and affordable housing over time.

      1. streetman

        OK, so you agree with his criticism of the methodology but not his dissenting opinion of the causes of the crisis. Fair enough. I don’t know much about his consistency over time, but I thought (both) rebuttals were fairly compelling compared to the official findings, and that the proximate causes the dissenters cited at least deserved a spot on the list of approved scapegoats. Enjoyed the post, though, thanks. BTW, pretty sure his last name is spelled without a “t”, fyi…

  22. decora

    Dear Smith & Friends,

    Dude, I know the entire news media / public is about 2+ years behind you all on all this stuff. The problem is you guys are too goddamned smart. Give us time, I think we will catch up eventually!

    My only question: when will you dig into the life settlements market, Mortality Swaps, Longevity swaps, etc.

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