Why the Financial Crisis Probe is Set to End With a Whimper
The Financial Crisis Inquiry Commission is a political fiasco, but at least it may not be an intellectual one. Excerpts from the congressional panel's final report, which the group is officially releasing on Thursday, suggest its members are pinning the blame mostly where it belongs -- on Wall Street, along with the bipartisan political class that enabled it:
The 2008 financial crisis was an "avoidable" disaster caused by widespread failures in government regulation, corporate mismanagement and heedless risk-taking by Wall Street, according to the conclusions of a federal inquiry.
The commission that investigated the crisis casts a wide net of blame, faulting two administrations, the Federal Reserve and other regulators for permitting a calamitous concoction: shoddy mortgage lending, the excessive packaging and sale of loans to investors and risky bets on securities backed by the loans.Among those specifically called out for their part in the catastrophe include former Fed chief Alan Greenspan, current Fed Chairman Ben Bernanke, former U.S. Treasury head Henry Paulson, current Treasury boss Tim Geithner, and various (if for now undisclosed) financial industry sachems.
Encouragingly, the FCIC also will throw water over spurious theories about the root causes of crisis. Fannie Mae (FNMA) and Freddie Mac (FMCC) did it? Only in Republican commissioner Peter Walllison's dreams. Also heartening is that the panel appears to be referring cases of potential misconduct it uncovered in its 18-month probe to the Justice Department (although regrettably that's not expected to yield any criminal prosecutions).
Money well spent
At the same time, some of the leaked passages raise questions about just how how hard-hitting the FCIC report will be. Take this:
The captains of finance and the public stewards of our financial system ignored warnings and failed to question, understand and manage evolving risks within a system essential to the well-being of the American public.No. Wall Street didn't "ignore" warnings. Over years big banks helped engineer a financial system in which raising the alarm about speculation run amok was impossible (see Born, Brooksley). From 1999 to 2008, the financial industry spent $2.7 billion on lobbying to grease the wheels in Washington, where lawmakers of both parties colluded in a disastrous campaign of deregulation. And while it's true that the lords of finance didn't "question, understand and manage" risk, surely the larger point is that in the end they didn't give a damn.
Far cry from Pecora
Let's also not forget that when the FCIC began its work in 2009, some hoped it would be another Pecora Commission. Those 1933 hearings would eventually blow the lid off a financial industry that, as in 2008, had gravely damaged the economy. Ferdinand Pecora, the former New York prosecutor (and Sicilian immigrant) who would ultimately lead the investigation, subpoenaed everyone in sight in holding the nation's most important bankers to account. With backing from FDR, Pecora -- pictured above -- helped fundamentally change the relationship between Washington and Wall Street.
Whatever the FCIC's achievements, they're certain to fall far short of Pecora's. The group was likely doomed, at least as an agent of change, from the outset -- not by its partisan composition, but by the ideological orthodoxy of some of its members. Even the panel's enabling legislation hamstrung its work. For members to issue subpoenas, for instance, they needed the assent of both Commission Chairman Phil Angelides, a Democrat, and co-Chairman Bill Thomas, a Republican. That ensured conflict over who would be compelled to testify.
"In my opinion, the FCIC has been a pale imitation of the Pecora hearings," Michael Perino, a law professor at St. John's University in New York and author of a compelling new account of the earlier proceedings, told me in an interview. "You have commissioners with preconceived notions about what happened and who have their own political agendas that they're unwilling to get past."
The result? Discord, with reports of bitter clashes among commissioners. Republican members even recently bolted to produce their own abridged and bizarrely censored analysis of the financial crisis. As a result, the final report is actually expected to consist of three separate documents, with the six Democrats on the ten-member panel endorsing one version, three Republicans another and Wallison choosing to grind his axe against the GSEs.
That divide, like the one that now separates Congress, greatly decreases the chance that the group's findings will have any real impact on the debate over financial reform.
Image from National Archives via Senate.gov
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