Financial Crisis Primer

Today, as required by statute, four of the ten members of the Financial Crisis Inquiry Commission sent a document to the President and the Congress. To provide transparency, here is that document, “Financial Crisis Primer: Questions and Answers on the Causes of the Financial Crisis.” The four commissioners are Commission Vice-Chairman Bill Thomas, Doug Holtz-Eakin, Peter Wallison, and me. We are the four commissioners appointed by Republican Congressional Leaders Boehner and McConnell.

At least some of the four of us will have more to say about the causes of the crisis (in writing) in January. For now, we believe this document complies with the statutory requirement that the commission report today.

There’s a fair amount of press coverage today of what’s going on behind the scenes at the FCIC. Some of that reporting is inaccurate or misleading. I hope today’s focus can be on the substance of this document rather than the process squabbling, but I feel obliged to clarify a few process points in the initial coverage.

  • This is not a “report” or a “response” by the Republicans. It’s a primer on the issues we think will be important to cover in the final report of the commission. As we have not yet seen a proposed final draft of the report, nor even a first draft of proposed findings and conclusions, it’s impossible for us to respond to that report today.
  • Despite the statutory deadline, the Commission recently voted 6-4 to instead report in January. The four of us are nevertheless sending this document today to as best we can comply with the deadline in the law.
  • Last week the Commission voted, again 6-4 along party-appointed lines, to limit the minority’s opportunity to express our views in the commercial book version of the upcoming report. In a 512 page book that will be for sale at commercial bookstores, those who dissent are now allotted nine pages each. We will be allowed to express our views without restriction in the official GPO version of the report (which will be transmitted to the President and the Congress) and on the commission’s website, but those views will be limited or truncated in the commercial version. I suggested increasing the length of the commercial book to allow room for our full additional views but was turned down because it might add $1 to the sale price of the book. This is, to say the least, frustrating.

It’s probably hopeless, but I want to encourage reporters to focus on our substance rather than our process.

(photo credit: Tory)

25 responses

  1. You have no substance, just failed ideology.

    The country is in dire straits because of this, but you don't care because you'll always have a cushy job in wingnut welfare think tanks.

    Hope you're proud of yourself.

    • Go back to your communist cave you idiot. If you can't engage in substance, keep your mouth-breathing, sub-100 IQ self away. kthx

      • "Go back to your communist cave you idiot. If you can't engage in substance, keep your mouth-breathing, sub-100 IQ self away"

        Perfect reply. I couldn't make you look any dumber no matter how hard I tried.

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  3. I'm not a reporter, so I don't feel constrained not to talk about process. Two remarks in this regard:

    1. I thought the law required the Commission to send its "report" (with findings and recommendations) to Congress by tdoay, not a "document". Thus, how could sending a "document", not constituting a report, constitute complying with the statute (I'm not arguing with the document, or the decision to send it, but the apparent disingenuous argument that it complies with the statute);

    2. As far as the minority response being limited to 9 pages, I agree that is a bit extreme. The Supreme Court doesn't limit the length of dissents, to my knowledge. That said, I trust this limit would not apply to electronic versions of the document, for which printing costs are not relevant. Most people would not rely on the print version, I think. I hope this point is made in the Commission.

    Looking forward to reading this stuff, including the dissents.

    • On your first point, you're right. The statute requires the Commission to "report" today, and only a majority of the Commission can issue a "report." Without two more votes, the best the four of us could do was issue a "document" on the statutory deadline.

      So my phrasing "… to comply with the law" was imprecise. I have fixed it.

      FYI, the statute is silent on whether the Commission should report recommendations.

      The length limitation applies only to the commercially printed "book" version of the report, not to the official GPO version (printed or electronic), or to material posted on the website.

      • Mr. Hennessey,

        Actually, my comment was prompted not by the one you've corrected, but the very first sentence:

        "Today, as required by statute, four of the ten members of the Financial Crisis Inquiry Commission sent a document to the President and the Congress."

        I don't want to be Pound to your Eliot, but I think the situation might be captured better by something like this:

        "Today was the deadline set by statute for the Financial Inquiry Commission to send its report to the President and the Congress. Since the Commission has failed to send its report to meet that statutory deadline, four of the ten members of the Commission have sent a preliminary document to the President and Congress in an attempt to at least partially satisfy the spirit of that law".

        The last phrase is obviously my interpretation, but I do think that it is more in line with the language of the actual transmittal document.

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    • That's not the only blog spinning that story that way.

      Correct me if I'm wrong, but even if the accounts are 100% accurate, it appears that the point was not to shamelessly protect "Wall Street," or similar accusations, but rather to not use certain labels where more specificity should be used. It's intellectually lazy to blame "deregulation" or "shadow banking" without pointing to specifics and/or defining those terms clearly. My guess is the point was to prevent the use of politically-charged terms rather than to keep aspects of the crisis out of the report.

  6. Interesting reading. I see little action in Washington to address what is in essence a systemic failure on multiple levels. Each side (and there's probably more than 2 in this case) has devolved into a war of talking points and hobby horses. This short document is a good summary of the important facts and likely causes. I hope in the future the commissioners will be able to come up with some simple recommendations.

    It's distressing to see how just seven years after the last bubble, politicians, regulators and banking/finance leaders failed to see that this would end in tears. Instead of the Federal Reserve taking away the punch bowl (an alleged purpose of the Fed) everyone was drinking the Kool-Aid.

    My grand parents thinking about "the economy" was influenced by their experience in the depression. My generation was influenced by the great inflation of the 1970s. Most contemporary Americans are not going to forget this event (The Great Collapse?). It's going to have a substantial impact on politics and the economy for the next 50 years. I don't mean to turn this into a political polemic but It's hard not to mention that our current national leadership appears to be completely out of touch with the concerns of the public. I believe the November elections are the first, not the last expression of dissatisfaction with the people entrusted with leadership of the nation and the economy.

    And all the signs are bad. Large financial institutions that were "saved" by the Fed or the government are now profitable and bonuses are huge. The Federal Reserve appears to be intent on pursuing a monetary policy unmoored from reality. And the politicians are engaged in some sort of bizarre alternate world where arguments about the inheritance tax take precedent over 9.8% unemployment.

    Unlike most popular economists, I don't have the school solution. But I do know that if I were in the White House I would be focusing on reviving the economy. And yes, it takes time to implement good policies and for all the debris to be removed by market forces. We don't live in a dictatorship where the President can just say "do this". But it still takes collective leadership from all the key players. Leadership is what is lacking. Maybe that's because nobody knows what a good solution looks like. If that's the case then they need to be reminded what George Patton said, "A good plan executed violently now, is always better than a perfect plan executed later."

    In closing, I want to note that we appear to live in a world where bad choices by some people have no bad consequences. To much who are given, much is expected and yet not today. Franklin Raines, crook, book cooker? Not in prison. Alan Greenspan, still quoted in the Wall Street Journal and earning speaking fees rather than hiding in some undisclosed location. Barney "Let's roll the dice" Frank, re-elected. Dozens of CEOs from failed financial institutions out the door with golden parachutes. The list could go on. But if you can't pay your mortgage you will lose your house.

    Maybe in 25 years this will be know as the Era of No Accountability.

  7. I had looked forward to the commissions findings, but it would seem an extension is needed?
    You had plenty of time.
    The thought that you could actually summarize "what went wrong" is entirely crazy. Regardless I held hope for something interesting.

    What a waste of money for this whole exercise.
    Maybe the commission members will do the right thing and all chip in for a refund to taxpayers!?

  8. The post is interesting, and certainly there is much unnecessary infighting, but most of the criticism I have seen is directed at your attempt to expurgate the final report. To be honest I was disappointed.

    Now, some of the words I can understand (“Wall Street” is just sloganeering and not specific), but why “interconnected”?

    Can you respond to those acquisitions?


    • Holtz-Eakin responds to this at 2:57:

      He said all the terms are "sweeping terms with no clarity." As for "interconnected," it may not be as obviously politically-charged and over-broad at "Wall Street," but I can see how after days/weeks/months of discussions, the term could begin to be overused as a rhetorical shortcut. Besides, that term doesn't on its face seem to endanger either party's story of the events.

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  10. The preliminary document looks like the report will be way too kind to the ratings agencies. Not only were they wrong, but because of their government sponsorship competitive forces don't push them hard enough to be accurate. Also, those ratings are not reliable enough to be automatic tickets into, e.g., pension fund portfolios.

  11. I’ve now digested the preliminary report. Brevity does have advantages. I agree generally with what was written, but I would disagree with some of the emphasis. Here's one specific instance that I believe is significant. In the first section of the report, the four members discuss the fact that interest rates on home mortgages remained unusually (inappropriately) low despite the mounting risks to lenders. They then comment:

    “In retrospect, however, it is clear that lenders—including the government, which held the credit risk on most of the subprime and other weak mortgages outstanding—were not requiring big enough returns to compensate for the risks they were taking. The real risk of a mortgage investment became delinked from the premium demanded by investors to make a loan. Why?”

    The report later discusses the role of financial intermediation and securitization, but fails to link that process sufficiently to the above question. I believe the question “why” is largely answered by the fact that those front-line lenders were not bearing much of that “increasing risk”. GSE’s and the holders of those mortgage backed securities, and to a lesser extent, the financial intermediaries, were. This is especially true with respect to the more “exotic” type of mortgages.

    While financial intermediation and securitization have distinct benefits, they also pose real risks. The persons in the best position to evaluate those risks are the loan officers who approve and set the terms of these loans based on complete and accurate information provided them by prospective borrowers. But if the institutions they work for and who pay them don’t bear that risk, why should they care?. The further one gets from this initial sale, the more difficult it is to evaluate such risks, as experience with our credit rating agencies has shown. Further downstream that initial documentation is not reviewed, even if it could be found.

    It seems to me your report needs to focus a bit more on this problem and the possible solutions to it.

  12. Give me a break Darkbloom. Mortgage securitization was the worst market failure in the history of capitalism, to date. And "Wall Street" and "shadow bankers" and Buffett's baby "Moody's", ad infinitum. Interesting that Hennessey quoted Buffett but not Wallison. The AEI can't scrub the road fast enough.

    Hennessey is full of ideological asphalt. Anyone who says look at substance and then ends their high school essay with let's pay down the deficit is deserving of road kill.

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  14. Congratulations on joining the John Roberts Club of Intellectual Depravity. You and your cohorts had the opportunity to do something very worthwhile for our country. Instead you play cheap partisan parlor games. We only get one life to live. You shouldn't treat it so shabbily. You've chosen the dark side.

  15. As a conservative small business owner I am intensely concerned with Wallstreet (defined as: Citi, GS, BoA, MS, JPMC and about 3 dozen hedge funds) and their ability to pump up the next bubble and take down our economy. I don't care about TARP, big bonuses or the fact that Bob Rubin walked from this disaster with their collective wealth intact. All I want to know is that the banking system will recover and that my customers will be able to get short term loans (without having to post a kidney) and in addition, that there will be an assumption of stability with the markets for at least 8-12 years (long enough for me to finish my battle compound in Utah.)

    In the fall of 2008, as my customer base began to cut projects and in many cases fail outright I began study the genesis of this disaster. My conservative sensibilities took me immediately to CRA and the GSEs. Confounded liberals! But, this did not explain 1) the shear enormity of this disaster or 2) more obviously, why did a bunch of Wallstreet banks need to be bailed out. As true "intermediaries" effectively "transferring risk" it made no sense. Doing a "follow-the-money" analysis explains it all. But where the real dark corners of this disaster can be found is in the flawed statistical models used as a basis for these CDOs; which were poor and could only accurately model the safest of all asset classes. Wallstreet knew this as JPMC pulled back, GS shorted and the others doubled down. To say that Wallstreet "couldn't have known" is disingenuous to say the least. I mean, with the exception of Madoff no-one has gone to jail or suffered any financial loss … not even Dick Fuld.

    Americans have paid a terrible price; conservatives, liberals, cats and dogs. To gloss over Wallstreets involvement by way of omitting deregulation (which effectively stapled a nuke to Wallstreets grenade) is a frightening sign that the influence of Wallstreet may be extending into a rational attempt to provide America with a narrative that can give them at least the hope that the diagnosis has been made. America's prognosis will be a story for another day.


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