Financial Crisis Inquiry Commission: 10 Experts + 3 Theories = Fail

The business world is abuzz with reaction to the Financial Crisis Inquiry Commission's final reports -- yes, as in all three of them. As I mentioned yesterday, the apparently tripartisan panel was unable to agree on a single official theory for what caused the collapse.

Only six of the group's 10 members bothered to show up for the news conference to release their findings. The Republican members produced two dissenting accounts of the crisis, with three of them also airing their grievances about the FCIC in the WSJ.

Complexity breeds perplexity, as they say in economics. Too bad, because there's some good stuff in the main report. One revelation: Goldman Sachs (GS) earned $2.9 billion -- this is money that went straight into the bank's account, as opposed to covering customer losses -- from the government's bailout of AIG. Here are the main factors the Democrats on the panel identified as direct causes of the crisis.

Widespread failures in financial regulation, including the Federal Reserve's failure to stem the tide of toxic mortgages.

Dramatic breakdowns in corporate governance including too many financial firms acting recklessly and taking on too much risk.

An explosive mix of excessive borrowing and risk by households and Wall Street that put the financial system on a collision course with crisis.

Key policy makers ill prepared for the crisis, lacking a full understanding of the financial system they oversaw.

And systemic breaches in accountability and ethics at all levels.

In some ways, though, who cares? When it comes to understanding the world, bipartisanship is greatly overestimated. Such events are for individual economists, historians and other scholars to dissect, not government commissions. And as usual, the markets will draw their own conclusions. Truth doesn't have to be official to be true.

Here's a round-up of what various wonks have to say about the findings:

Yves Smith, Naked Capitalism:

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 bipartisan 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 FCIC Republicans are right to place the government at the center of what went wrong. But this was not a case of over-regulating and over-reaching. On the contrary, 30 years of financial deregulation, made possible by capturing the hearts and minds of regulators, and of politicians on both sides of the aisle, gave a narrow private-sector elite â€" mostly on Wall Street â€" almost all the upside of the housing boom.

The downside was shoved onto the rest of society, particularly the relatively uneducated and underpaid, who now have lost their houses, their jobs, their hopes for their children, or all of the above.

We each agree that [Alan] Greenspan was the single biggest factor in allowing the crisis to develop. Nonfeasance is what I called his refusal to perform his duties as a bank regulator. The FCIC reached the same conclusion.

My view is the keys to the crisis are 1) the willful lack of regulators to do their jobs, combined with 2) the rapid "innovation" in the mortgage market, especially the agency problems associated with the originate-to-distribute model. I'm just starting to read the report, but just based on the conclusions, this report deserves praise.

"Experts already agree on the main factors that contributed to the crisis," Mr. Kashyap said. "The commissioners' failure to agree on most of the causes and narrow their differences to a handful of issues does the country a great disservice by perpetuating the idea that reasonable people cannot understand what happened."

Regulators are still too cozy with Wall Street, and greed is still alive and well. This probe did end with a whimper. Behavioral finance shows that we humans are not efficient learners, and this crisis proves it.

When you see the next big thing offering a great return without risk, you can bet it's time to fasten your seat belts for the bumpy ride of the next crisis. Don't ever bite on any promise of a great low risk return.

It was far-fetched to think that this supposedly bipartisan panel would provide the last word on the crisis. Still, a bit more consensus would have been nice. As one member puts it: "The story will be the differences between us, not what we discovered. That's a great shame."

My sense is that somebody told the Republicans on the commission that they'd better not assent to the final report, or else there would be some kind of consensus for action. And the Masters of the Universe can't have that. Still, the Republican dissent, far different than the simplistic hokum they put out in December (to which Peter Wallison still subscribes), is not that far from where the Democratic commissioners land in their report.

The commission's final report and its pledge to post raw materials â€"- apparently including information obtained from companies as well as other government agencies â€"- is an astounding abuse of process that would effectively create a government-sanctioned Wikileaks.

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