Republican Financial Crisis Commissioners Maul History in Absolving Wall Street

Last Updated Dec 16, 2010 2:46 PM EST

The Financial Crisis Inquiry Commission is in crisis. Four Republican members of the bipartisan panel, formed last year to investigate what blew up the U.S. economy in 2007, caught the government-chartered group by surprise yesterday by issuing a brief paper outlining their views on what caused the meltdown. More seriously, the document is a wholly expurgated version of events that omits key facts while twisting others to fit certain ideological preconceptions.

So much for bipartisanship. (The commission isn't expected to issue its final book-length report until January.) Worse, so much for providing a definitive analysis of the factors that triggered the crisis, which just might come in handy the next time the financial world tilts on its axis.

How useless is the new document? In writing it, the Republican members deliberately left out any mention of "Wall Street," "deregulation," "shadow banking" and other words that might offend the financial industry and conservative fellow-travelers. Democratic FCIC member Brooksley Born, who tried in vain to regulate derivatives during the mid-1990s when she led the Commodity Futures Trading Commission, expressed genteel disappointment at the Republican commissioners' sanitation efforts:

"I certainly felt, and I think the majority of the commission felt, that deleting those phrases would impair the commissioners' ability to give a full and fair and understandable report to the American people about the causes of the financial crisis," Born said.
"Certainly, it's hard to imagine Wall Street wasn't involved," she added.
Yes, it is hard, isn't it? Seems to me big banks like Goldman Sachs (GS) and Citigroup (C) were in there somewhere. Something about a bailout....

Republican commissioners Douglas Holtz-Eakin, Keith Hennessey, Bill Thomas and Peter Wallison do come up with a major suspect to explain the financial crisis: government. Familiar hobbyhorses are trotted out, including the GSEs and the Community Reinvestment Act, a 1977 law that encourages banks to lend to low- and moderate-income borrowers.

Also singled out for spreading risk throughout the financial system are the Veterans Administration, which makes loans to military vets, and the Federal Home Loan Banks, which serves communities across the country. We could spend hours debunking such notions, but fortunately others have spared us the trouble.

The Republicans also give cover to Wall Street by apportioning equal blame to everyone -- homeowners, investors, credit rating agencies, regulators -- as if borrowers who were illegally steered into an interest-only adjustable-rate mortgage were just as guilty as their lender or a bank that knowingly sold self-destructing CDOs. In another bizarre contortion, Wall Street firms are faulted not for scheming to pass bad paper to investors, but merely for keeping these loans on their books. Huh?

The problem with this view isn't simply that it's wrong. It's that this wrongness perpetuates the rampant fraud that occurred in the years leading up to the financial crisis by trying to cover up what really happened. Says economist Mark Thoma:

The goal here is to promote a false account of the crisis -- government support of poor people did it -- and allow Republican cronies in the banking industry to pick up where they left off before the crisis so rudely interrupted their ever so profitable activities.
Blue-ribbon commissions are notoriously ineffectual, of course. And while bipartisanship can make for good politics, it's terrible for understanding history, for getting at the truth of things. Such differences are hard to split. Yet going on two years of investigating the financial crisis, at least some members of this panel seem hellbent on doing just that.

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    Alain Sherter covers business and economic affairs for CBSNews.com.