The Financial Crisis Inquiry Commission

16 July Print this Print this

Yesterday Senate Minority Leader Mitch McConnell (R-KY) appointed me to be a member of a new Financial Crisis Inquiry Commission.  I thank the Leader for the appointment, and will do my best to contribute thoughtful, open-minded, rigorous and responsible analysis and inquiry.

The Commission was created by Public Law 111-21, the Fraud Enforcement and Recovery Act of 2009, signed into law by President Obama on May 20, 2009.  The purpose of the Commission is “to examine the causes, domestic and global, of the current financial and economic crisis in the United States.”

I am one of 10 members.  Here is the full roster, along with the Congressional leader who appointed each:

  1. (Chairman) Phil Angelides (Pelosi, chosen as Chair by Pelosi and Reid
  2. (Vice Chairman) Former Rep. Bill Thomas (Boehner, chosen as Vice-Chair by Boehner and McConnell)
  3. Brooksley Born (Pelosi)
  4. Byron Georgiou (Reid)
  5. Former Senator Bob Graham (D-FL) (Reid)
  6. me: Keith Hennessey (McConnell)
  7. Doug Holtz-Eakin (McConnell)
  8. Heather Murren (Reid)
  9. John Thompson (Pelosi)
  10. Peter Wallison (Boehner)

The statute creating the Commission requires us to “submit on December 15, 2010 to the President and to the Congress a report containing the findings and conclusions of the Commission on the causes of the current financial and economic crisis in the United States.”

Some in the press are comparing this commission to the 9-11 Commission and to the Pecora Commission during the Great Depression.  I think it’s too early to draw any definitive parallels.

I expect to write on KeithHennessey.com about my work on the Commission over the next seventeen months.  Those of you familiar with my blog should have a fairly good idea of what to expect.

For those who are new to this site, I also have a free mailing list tied to the blog.  If you would like to track my work on the Commission, you can subscribe to the mailing list or the RSS feed, and/or visit the blog.  I write about a wide range of economic policies, not just financial policies.  So don’t be surprised when you see substance from me on anything from taxes and trade, to health care and social security, to energy and climate change, or to the broader macroeconomic and policy picture.

To get things rolling:

  1. I have assembled some background on the Commission.  Most of this substance is in today’s papers, but I thought I’d lay out my structural description here for reference.
  2. I am seeking input.  Please help educate me so I can do a good job on the Commission. Please use the contact information I provide below.
  3. I am building a preliminary reading list for myself and anyone else who might care.  I will post a first draft when it’s solid.
  4. On the top horizontal menu bar you will see a list of subject categories.  The “financial” category contains past posts and some of my White House work that is relevant, and it will contain all future posts related to my work on the Commission.

I anticipate that my work on the Commission will become a significant portion of the future content of this blog, so stay tuned.  I enjoy solving problems, especially when they’re hard and important.  I also like to explain complex and important stuff in a way that non-experts can understand.  I hope you will let me try to do that as I gain new and different perspectives on the financial and economic crisis in the United States.

For today, though, let’s get some mechanics out of the way.

Background on the Financial Crisis Inquiry Commission


The Financial Crisis Inquiry Commission was created by Public Law 111-21 (formerly known as S. 386), signed into law by President Obama May 20, 2009.

(I will abbreviate the Commission as FCIC.  At a friend’s suggestion I will verbally shorthand it as “FIN-sik,” because “FIS-sik” sounds like a cola.  I reserve the right to change my mind several times on this.)

P.L. 111-21 is the Fraud Enforcement and Recovery Act of 2009, a bill strengthening enforcement of various types of financial fraud crimes.  The Commission was created by a bipartisan Senate amendment to that bill, offered by Senator Johnny Isakson (R-GA) and Senator Kent Conrad (D-ND).  The amendment was adopted 92-4, a good sign of initial bipartisan support.  The four Senators opposing were Bunning (R-KY), Grassley (R-IA), Kyl (R-AZ), and McCain (R-AZ).

Here is the text of Section 5 of the law creating the Commission.  I will walk through it.  This mechanical stuff may seem boring, but it’s important.  If you find errors in the following description, I welcome corrections.

Establishment

The Commission is technically in the Legislative Branch.  The purpose is “to examine the causes, domestic and global, of the current financial and economic crisis in the United States.”  We are required to issue a report to the President and to the Congress on December 15, 2010.

Membership

There are ten members, appointed by the “bicam[eral] / bipart[isan]” leaders.  Speaker Pelosi and Senate Majority Leader Reid each get 3 appointments (since they’re in the majority).  House Minority Leader Boehner and Senate Minority Leader McConnell each get 2 appointments.  Each leader is required to consult “with relevant Committees,” meaning primarily the House Financial Services Committee and the Senate Banking Committee.

The Commission Members cannot be Members of Congress, nor government employees of any sort.  They are supposed to be “prominent United States citizens with national recognition and significant depth of experience in such fields as banking, regulation of markets, taxation, finance, economics, consumer protection, and housing.”

Speaker Pelosi and Leader Reid jointly chose the Chairman, Phil Angelides.  Leaders Boehner and McConnell jointly chose the Vice Chairman, Bill Thomas.

Functions of the Commission

The Commission has five functions:

  1. “To examine the causes of the current financial and economic crisis in the United States.”  A list of 22 specific items for us to review follows.
  2. “To examine the causes of the collapse of each major financial institution that failed (including institutions that were acquired to prevent their failure) or was likely to have failed if not for the receipt of exceptional Government assistance from the Secretary of the Treasury during the period beginning in August 2007 through April 2009.”
  3. To submit a report to the President and the Congress on December 15, 2010.  That report should contain our findings and conclusions on the causes of the crisis.  The Chairman can also include reports or specific findings on any particular financial institution that failed.
  4. To refer to the Attorney General and State AG’s as appropriate “any person that the Commission finds may have violated the laws of the United States in relation to such crisis”
  5. “To build upon the work of other entities, and avoid unnecessary duplication, by reviewing the record of” a host of existing bodies, including the House Financial Services and Senate Banking Committees, the GAO, and just about anybody else in government.

Here is the long list of 22 specific causes the Commission must investigate under function (1) above:

  1. fraud and abuse in the financial sector, including fraud and abuse towards consumers in the mortgage sector;
  2. Federal and State financial regulators, including the extent to which they enforced, or failed to enforce statutory, regulatory, or supervisory requirements;
  3. the global imbalance of savings, international capital flows, and fiscal imbalances of various governments;
  4. monetary policy and the availability and terms of credit;
  5. accounting practices, including, mark-to-market and fair value rules, and treatment of off-balance sheet vehicles;
  6. tax treatment of financial products and investments;
  7. capital requirements and regulations on leverage and liquidity, including the capital structures of regulated and non-regulated financial entities;
  8. credit rating agencies in the financial system, including, reliance on credit ratings by financial institutions and Federal financial regulators, the use of credit ratings in financial regulation, and the use of credit ratings in the securitization markets;
  9. lending practices and securitization, including the originate-to-distribute model for extending credit and transferring risk;
  10. affiliations between insured depository institutions and securities, insurance, and other types of nonbanking companies;
  11. the concept that certain institutions are `too-big-to-fail’ and its impact on market expectations;
  12. corporate governance, including the impact of company conversions from partnerships to corporations;
  13. compensation structures;
  14. changes in compensation for employees of financial companies, as compared to compensation for others with similar skill sets in the labor market;
  15. the legal and regulatory structure of the United States housing market;
  16. derivatives and unregulated financial products and practices, including credit default swaps;
  17. short-selling;
  18. financial institution reliance on numerical models, including risk models and credit ratings;
  19. the legal and regulatory structure governing financial institutions, including the extent to which the structure creates the opportunity for financial institutions to engage in regulatory arbitrage;
  20. the legal and regulatory structure governing investor and mortgagor protection;
  21. financial institutions and government-sponsored enterprises; and
  22. the quality of due diligence undertaken by financial institutions.

Major Powers of the Commission

  • The Commission may hold hearings, take testimony, receive evidence, and administer oaths.
  • The Commission can require “the attendance and testimony of witnesses and the production of books, records, correspondence, memoranda, papers, and documents.”  If necessary, the Commission can issue subpoenas to achieve this goal.
  • Finally, the Commission can get “any information related to any inquiry of the Commission from any part of the government.”

I am seeking input


In an attempt to become a well-informed member of the Financial Crisis Inquiry Commission, I am seeking input.  Please help educate me.

I am building a reading list for myself.  I will post a first draft when it’s solid.

From whom I most need help

I will take help and input from anyone willing to provide it.  There are some channels that I know can help me a lot.

In particular, I would value highly:

  1. original writing by individuals with substantive expertise in any of the areas covered by the commission; and
  2. information and insight from those who were involved, from any perspective.

I need the most help from those with direct experience working in the financial sector, especially over the last several years.  I will take it from any level of the corporate org chart — those in the “C” suites, and the analysts, associates, and traders who work on the front lines.

I also could use help from the academic community.  Please send me your papers or links to them.

I could use help and input from members of the press who have been covering this crisis.

I would greatly appreciate input from those based outside the U.S.  We are supposed to “to examine the causes, domestic and global, of the current financial and economic crisis in the United States.”  Distance can give perspective, and a comparison with other nations can be enormously instructive.

How to provide input

If you have something you think I should see, please email it to me at:  kbh [dot] fcic [at] gmail [dot] com

As part of your email, please include your name, profession, contact information, and relevant professional background.  I will take anonymous input, but may weight it less heavily, depending on the apparent reason for the anonymity.

Shorter is better.  If you send me a short email, I’ll read it.  If it’s a 1-3 page memo, I’ll do my best to read it.  If you send me a 100-page treatise, I expect I’ll skim it.

If your email includes the phrase “secret global conspiracy” or is in all caps, or contains more than three curses, you should assume that I’ll skip it.

Please assume that your input is basically one-way.  In almost all cases, don’t expect a private email dialogue with me based on your input.  You should anticipate that most of my feedback will come publicly through this blog.  This is more efficient and transparent.

This is not a substitute for formal input to the commission

I assume there will be a formal process for submitting input to the Commission.  This is not that process.

In particular, the Commission is supposed to refer to the Attorney General of the United States, or to State AG’s as appropriate, “any person that the Commission finds may have violated the laws of the United States in relation to such crisis.”  Please provide any information you have with respect to this mission directly to the Commission, through official channels, and not directly to me through this channel.

This input channel is to help educate me to be a better member of the Commission, not to serve as a generic inbox for the commission, and especially not to serve as an inbox for accusations of criminal wrongdoing.

What we’re supposed to inquire about, learn, and figure out

I have a fairly strong knowledge base from my experience in the Bush White House from 2002 through 2009.  There is more for me to learn, and I am directing my studies to match the formal mandate of the Commission.  You can help me most by tailoring your input to fit some part of this mandate.

We are supposed to:

  • “examine the causes of the current financial and economic crisis in the United States;” and
  • “examine the causes of the collapse of each major financial institution that failed (including institutions that were acquired to prevent their failure) or was likely to have failed if not for the receipt of exceptional Government assistance from the Secretary of the Treasury during the period beginning in August 2007 through April 2009.”

In the future I may pose some specific questions where I need help and education.  For now, if you want to provide input, please put yourself in my shoes.  Help me achieve the above two goals, and in particular tell me into which of the 22 subject-matter buckets listed above your input falls.

A little bit about me


I imagine that with this post some readers are discovering this blog and mailing list for the first time.  You can find my bio here.  Here are a few facts salient to the FCIC:

Thanks for reading.  If you’re new to this blog and mailing list, I hope you will subscribe and return.

(photo credit: All that’s left! by pfala)

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42 Responses to “The Financial Crisis Inquiry Commission”

  1. joe 16 October at 2:15 am

    I think mr black from the savings and loan debacle and ralph nader could add some color to your research. also a re reading of glass stegil would be beneficial

    Reply – Quote
  2. jake chase 10 November at 6:29 pm

    Mr. Hennessy,

    Should you be interested in understanding why the system failed you need read only two books, each of which is remarkably honest, written from the inside, and quite amusing. The books are: Infectious Greed, by Frank Partnoy, and Traders Guns & Money, by Satyajit Das. You ought to finish in a day or two. When you finish reading you will understand more than all your colleagues on the Crisis Committee combined. You will also know it is time to scrap what today passes for regulation and start over. OTC derivative contracts are the problem. As things stand, no published financial statement of any bank or public corporation is anything but a trap for the gullible. Any investment decision is nothing but a bet, and we might as well all be monkeys throwing darts at the financial pages. Risk is a guerilla army bearing hand grenades moving in quantum jumps through the investment landscape. It can blow up anywhere at any time. You will find yourself under great pressure to bury this reality under a mountain of rubbish, but this will do nothing to prevent the inevitable explosions.

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  3. Darius 28 December at 12:19 am

    Is your Commission going to supervise metal trade in contracts, options at London Metal Exchange in 2007, 2008, 2009
    to see $ over-supply in Europe and millions of mortgage credits offered by Swiss to some countries in Europe ?

    Reply – Quote
  4. Darius 28 December at 12:24 am

    Dear Keith,

    please contact administrator of your web site
    http://www.gcic.gov
    to update web server's configuration
    to remove false entry redirecting to
    gcic.gov
    as
    http://fcic.gov/
    refers to web site of Zimbra Corporation

    I don't know what Zimbra Inc. has to do with US Gov
    but confusion is great.

    Reply – Quote
  5. Darius 28 December at 12:27 am

    follow-up
    sorry
    I meant
    fcic.gov is redirecting to
    http://fcic.gov/
    Zimbra Corporation

    As many ppl just insert abbreviate web domain names like
    bloomberg.com
    instead of
    http://www.bloomberg.com

    so inserting
    fcic.gov for http://www.fcic.gov
    may redirect thousands of interested parties to some marketing web site
    by Zimbra Inc.

    part or not part of US Gov

    Reply – Quote
  6. Dustin Hecker 8 January at 1:01 pm

    I read this morning (1/08/10) the following summary of the position of the two chairmen concerning the causes of the financial crisis: "Both agreed that the crisis was the result of failures by individuals specifically and by the banking system in general. But in featuring the bankers at its first public hearings, the commission is sending a clear message that the first part of the narrative starts with the chief executives." (AP.) If this is truly where the commission will begin and end, the entire exercise will be a huge waste of time and money. This crisis was NOT triggered by a handful of "greedy" Wall Street bankers. Focusing on the actions of specific indivduals as the cause of the economic issues will do nothing beyond offering up a few sacrificial scalps.

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  7. Dustin Hecker 8 January at 1:02 pm

    part 2 of comment. The commission needs to start with what public policy can most easily control — public policy. It should start by asking the question what public policies created the incentives that led ordinary, "profit-maximizing" businesses and ordinary, "utility-maximizing" consumers to direct so many resources into, and to assume so much debt relating to, real estate. You cannot understand the cause of this kind of wide-spread economic event without looking at the way in which markets, consumers and suppliers react to incentives; in this case, provided by public policy in many ways large and small. The individuals involved do matter, but mostly as proxies for how most rational people would act given a certain set of incentives and conditions.

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  8. Richard Davet 11 January at 5:58 pm

    The Banks are all major "players" in the "GSE Business Model" which is the genesis of the financial meltdown.
    The following is my exchange with Jamie Dimon of JPM. For the record, please ask him the same questions and see if he is willing to put his responses on the record (he had them redacted from the annual shareholder meeting podcast):

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  9. Richard Davet 11 January at 6:01 pm

    continued

    42009 JPM Shareholder’s meeting
    Exchange with James Dimon CEO and Chairman

    As you know, for years, the Bank has been and continues to be major players in its mortgage business in what has come to be known as the “Government Sponsored Enterprise (GSE) Business Model”.
    In September of 2008, Treasury Secretary Paulson declared that, and I quote, “these enterprises pose a systemic risk”. Your mortgage business goes 90%+ to Fannie Mae on a daily basis.
    Much has been written about the GSE flawed business model, including a Wall Street op-ed by George Soros which calls the models “hopelessly conflicted” and “it simply doesn’t work”.

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  10. Richard Davet 11 January at 6:02 pm

    continued…

    ? 1, When do you and the Board intend to disclose to shareholders the consequences of the Bank’s vigorous involvement with this fatally flawed business model?

    ? 2 Isn’t this business a little like your running a house of ill repute while knowing that all your ladies have aids and what are you doing to your client base?

    ? 3, What would you say to the skeptics that are out there that think that all players involved with the GSE Business Model are engaged in a simple criminal scheme, albeit of a dimension that we have never seen before, that a prosecutor would call “theft by deception” with the American taxpayer as the victim?

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  11. Stephanie 12 January at 10:07 am

    Here's a question: Companies that make drugs, food, autos, airplanes, toys, home appliances, etc. must submit their new products to rigorous government testing to assure their safety before they can be sold to the public. In light of their well-demonstrated risk to the public-at-large, why should new financial products — esoteric derivatives, credit default swaps, etc. — not be subject to similar scrutiny? Is it not time to bring the entire over-the-counter market under government regulation?
    Stephanie Mcnealy
    http://www.famous-philanthropists.org/

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  12. Rita Perdue 13 January at 2:53 am

    I sure hope the "banks" get questioned on WHY they are the king-pin in this log jam of our economy – by freezing up credit so that new and current businesses can't create new jobs. They have got to let the purse strings loosen up so we can get the ball rolling again. This mess is their fault to begin with and they hold the keys to keeping the rest of us in sufferage! Somebody make them do the right thing.

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  13. Stephen 13 January at 3:28 pm

    Angelides is asking the right questions of the Wall St. execs.

    The situation is quite simple, because we’ve been through this before but it was contained within the U.S.. (S&L crisis).

    Bad products (mortgages) were created and sold throughout the world. Those mortgages were fraudulently created by an industry (mortgage industry) which has no boundaries, legal or ethical. The banks actively soliicited mortgage loans in any shape or form (I was there, I saw it) and the FBI warned Bush in 2002 that mortgage fraud was epidemic.

    Fraud is illegal and requires no regulation. It’s common law and real estate “Professionals” are going to prison in droves for inflating property values, falsifying incomes and employment and worse.

    Wall St. amplified the problem exponentially by buying these mortgages in bundles and selling them to investors as AAA rated products.

    The only question remains is: Was Wall St. an innocent victim, or active participant? And that question is answered by the practice Wall St. employed of betting AGAINST the very products it was purveying. They knew the mortgages were bogus.

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  14. Steve M 13 January at 6:16 pm

    I am delighted to see Mr. Hennessey's appointment to the Commission, and I think it is critical that we identify and deal with the causes of the financial crisis. While it is true that the lack of derivatives regulation was a cause, the fundamental and underlying cause was the government (Democrat Party inspired and controlled) mandated and promoted mortgage and real estate bubble. In the 1990's even the New York Times identified the problem and said that government mandated and promoted sub prime mortgages would cause a financial crisis. There is absolutely no question that the government, particularly in the form of Democrat politicians and their cronies at places like Fannie Mae and Freddie Mac, were the root cause of this near Depression. It sickens me to see them now blaming Wall Street for the problem and taking no responsibility for it themselves. Maybe they did not intend to destroy our economy, but they did it, and they need to be publicly indicted for it,, and take responsibility for it, so they won't do it again.

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  15. D Smith 13 January at 9:23 pm

    Put the Glass-Steagall Act back on the books and break up the remaing, evne larger "to big to fail" institutions

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  16. Rick Lewis 15 January at 7:14 pm

    I would invite all concerned to read the following:

    http://www.wired.com/techbiz/it/magazine/17-03/wp...

    Reply – Quote
  17. Minchoff Gomorkovsky 21 January at 3:29 pm

    I hope that what I'm saying here is not new information to you, but it seems obvious to me that the explanation for this crisis lies in the existence of the complex financial instruments that were constructed around the sub-prime / Alt-A mortgages. The simple truth is that, without these derivative instruments (CDO's, CDS's, Synthetic CDO's), the entire sub-prime / Alt-A mortgage default would have been a $300 Billion problem – less than the $500 Billion S&L problem that was resolved thru the RTC during the 1980's. The existence of these derivative instruments has turned he current problem into a multi-Trillion dollar problem and extended that problem globally. If you haven't read Les Leopold's book "The Looting of America", I'd suggest you read it as it very explains in an understandable and logical way the roots of the crisis. Granted – he leans left with some labor related issues – but the core arguments seem solid to me. From my perspective we need to fully review all of our derivative financial instruments for their value to society against their risk and potential abuse. Thanks for offering this venue to provide input ! minchoff

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