Fcic

Government, banks to the blame for crisis: FCIC panel

“The captains of finance and the public stewards of our financial system ignored warnings and failed to question, understand, and the manage evolving risks within a system essential to the well-being of the American public,” according to the conclusions of a much-anticipated book released after a one-year examination by the Financial Crisis Inquiry Commission.

Throughout the book, criticism focused on government, the banking industry and over-leveraged borrowers — each receiving much of the blame for hardships and difficulties that continue to ripple through the economy.

The book is being delivered to President Barack Obama and Congress and is scheduled to become available on the commission’s internet site and as a paperback and an e-book.

Much of the blame was heaped on the Federal Reserve, with a focus on both current Chairman Ben Bernanke and predecessor Alan Greenspan.

The report argues that the United States. central bank failed to stem the flow of toxic mortgages, which it could have done by setting prudent mortgage-lending standards. It also points out that the Securities and Exchange Commission failed in its responsibility at the time to require that big banks hold enough capital.

The SEC also allowed large financial institutions to become over-leveraged. Christopher Cox, a chairman of the SEC under President George W. Bush, said he was comfortable with the capital cushions at Bear Stearns in March 2008 — days before the troubled investment bank’s collapse and its acquisition by J.P. Morgan Chase & Co.

“More than 30 years of deregulation and reliance on self-regulation by financial institutions, championed by former Fed chairman Alan Greenspan and others, supported by successive administrations and Congresses, and actively pushed by the powerful financial industry at every turn, had stripped away key safeguards, which could have helped avoid catastrophe,” the report said.

The Financial Crisis Inquiry Commission also focused in its report on financial institutions, insisting they made, bought and sold mortgage securities they “never examined, didn't care to examine, or knew to be defective.” It added that large financial institutions relied on “tens of billions of dollars of borrowing” that had to be renewed every night, “secured by subprime mortgage securities.”

Too big to manage

It repeatedly raised concerns that large financial institutions were too big to manage, pointing out examples of interviews with executives at Citigroup Inc.

In multiple examples, the book sought to demonstrate how there was a major failure of risk management at major institutions, noting that one part of a large financial institution did not know what the other part was doing.

In one such case, Susan Mills, a managing director in Citigroup’s securitization unit, noted rising mortgage defaults between 2005 and 2007 and in response the unit slowed down its purchase of loans for securitization, demanding higher-quality mortgages.

Meanwhile, Murray Barnes, a Citigroup risk officer, approved the bank’s collateralized debt obligation desk’s request to temporarily increase its limits on purchasing CDOs — a type of security composed of the riskier portions of mortgage-backed securities. The risk-management division also hiked the CDO desk’s limits for retaining senior tranches from $30 billion to $35 billion in the first half of 2007.

“What is most remarkable about the conflicting strategies employed by the securitization and CDO desks is that their respective risk officers attended the same weekly meetings,” the report said.

The panel blamed a wide variety of individuals, firms and companies, including both the George W. Bush administration and the Barack Obama administration for allowing lax lending standards to borrowers, troubling packaging and selling of subprime-backed mortgage securities, and risky investments on securities backed by the loans.