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Conclusions of the Financial Crisis Inquiry Commission

Below is a summary of the conclusion from The Financial Crises Inquiry Report.  I read through the conclusion to the 662 page document and plan to skim the remaining portions.  I found what I read to be highly informative, surprising and discouraging showing that the lack of integrity, dishonesty and greed is alive and well.  Are you surprised?  The report can be viewed and downloaded at www.fcic.gov/report

excerpts taken from the report...
Nearly $11 trillion in household wealth has vanished, with retirement accounts and life savings swept away. Businesses, large and small, have felt the sting of a deep recession. There is much anger about what has transpired, and justifiably so. Many people who abided by all the rules now find themselves out of work
and uncertain about their future prospects. The collateral damage of this crisis has been real people and real communities. The impacts of this crisis are likely to be felt for a generation. And the nation faces no easy path to renewed economic strength.

But our mission was to ask and answer this central question:  how did it come to pass that in 2008 our nation was forced to choose between twostark and painful alternatives - either risk the total collapse of our financial systemand economy or inject trillions of taxpayer dollars into the financial system and anarray of companies, as millions of Americans still lost their jobs, their savings, andtheir homes?In this report, we detail the events of the crisis. But a simple summary, as we seeit, is useful at the outset. While the vulnerabilities that created the potential for crisis were years in the making, it was the collapse of the housing bubble - fueled bylow interest rates, easy and available credit, scant regulation, and toxic mortgages - that was the spark that ignited a string of events, which led to a full-blown crisis inthe fall of 2008.


  • We conclude this financial crisis was avoidable. The crisis was the result of humanaction and inaction, not of Mother Nature or computer models gone haywire.
  • We conclude widespread failures in financial regulation and supervisionproved devastating to the stability of the nation’s financial markets. The sentrieswere not at their posts, in no small part due to the widely accepted faith in the self-correcting nature of the markets and the ability of financial institutions to effectivelypolice themselves. 
  • We conclude dramatic failures of corporate governance and risk managementat many systemically important financial institutions were a key cause of this crisis. There was a view that instincts for self-preservation inside major financial firmswould shield them from fatal risk-taking without the need for a steady regulatoryhand, which, the firms argued, would stifle innovation. 
  • We conclude a combination of excessive borrowing, risky investments, and lackof transparency put the financial system on a collision course with crisis. In the years leading up to the crisis, too many financial institutions, as well as toomany households, borrowed to the hilt, leaving them vulnerable to financial distressor ruin if the value of their investments declined even modestly. For example, as of2007, the five major investment banks - Bear Stearns, Goldman Sachs, LehmanBrothers, Merrill Lynch, and Morgan Stanley - were operating with extraordinarilythin capital. By one measure, their leverage ratios were as high as 40 to 1, meaning forevery $40 in assets, there was only $1 in capital to cover losses. Less than a 3% drop inasset values could wipe out a firm. To make matters worse, much of their borrowingwas short-term, in the overnight market - meaning the borrowing had to be renewedeach and every day. For example, at the end of 2007, Bear Stearns had $11.8 billion inequity and $383.6 billion in liabilities and was borrowing as much as $70 billion inthe overnight market. It was the equivalent of a small business with $50,000 in equityborrowing $1.6 million, with $296,750 of that due each and every day. One can’treally ask “What were they thinking?” when it seems that too many of them werethinking alike.And the leverage was often hidden - in derivatives positions, in off-balance-sheetentities, and through “window dressing” of financial reports available to the investingpublic.The kings of leverage were Fannie Mae and Freddie Mac, the two behemoth government-sponsored enterprises (GSEs). For example, by the end of 2007, Fannie’sand Freddie’s combined leverage ratio, including loans they owned and guaranteed,stood at 75 to 1.We conclude the government was ill prepared for the crisis, and its inconsistentresponse added to the uncertainty and panic in the financial markets. As part ofour charge, it was appropriate to review government actions taken in response to thedeveloping crisis, not just those policies or actions that preceded it, to determine ifany of those responses contributed to or exacerbated the crisis.
  • We conclude there was a systemic breakdown in accountability and ethics. Theintegrity of our financial markets and the public’s trust in those markets are essentialto the economic well-being of our nation. The soundness and the sustained prosperity of the financial system and our economy rely on the notions of fair dealing, responsibility, and transparency. In our economy, we expect businesses and individualsto pursue profits, at the same time that they produce products and services of qualityand conduct themselves well.Unfortunately - as has been the case in past speculative booms and busts - wewitnessed an erosion of standards of responsibility and ethics that exacerbated the financial crisis. This was not universal, but these breaches stretched from the groundlevel to the corporate suites. They resulted not only in significant financial consequences but also in damage to the trust of investors, businesses, and the public in thefinancial system. 
THESE CONCLUSIONS must be viewed in the context of human nature and individualand societal responsibility. First, to pin this crisis on mortal flaws like greed andhubris would be simplistic. It was the failure to account for human weakness that isrelevant to this crisis.Second, we clearly believe the crisis was a result of human mistakes, misjudgments, and misdeeds that resulted in systemic failures for which our nation has paiddearly. As you read this report, you will see that specific firms and individuals actedirresponsibly. Yet a crisis of this magnitude cannot be the work of a few bad actors,and such was not the case here. At the same time, the breadth of this crisis does notmean that “everyone is at fault”; many firms and individuals did not participate in theexcesses that spawned disaster.We do place special responsibility with the public leaders charged with protectingour financial system, those entrusted to run our regulatory agencies, and the chief executives of companies whose failures drove us to crisis. These individuals sought andaccepted positions of significant responsibility and obligation. Tone at the top doesmatter and, in this instance, we were let down. No one said “no.”But as a nation, we must also accept responsibility for what we permitted to occur.Collectively, but certainly not unanimously, we acquiesced to or embraced a system,a set of policies and actions, that gave rise to our present predicament.

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