“…We believe that the government deserves quite a lot of the blame for getting our financial system and our nation into trouble in the first place.” FCIC Minority Report
Below is an email that I wrote my defense attorneys in December 2010 that comments on the Minority Report of the Financial Crisis Inquiry Commission (attached below), which I believe is less political and more accurate than the Majority Report. Both the current Federal Reserve Chairman Ben Bernanke’s FCIC testimony and former Federal Reserve Chairman Alan Greenspan’s paper “The Crisis” are more in alignment with this report than the majority report.
For example, both Bernanke and Greenspan saw the crisis being caused primarily by global macroeconomic issues and both admitted that they and the Federal Reserve System (our government’s top banking, monetary and macroeconomic experts) did not foresee the financial crisis coming and that they didn’t think, even with the benefit of hindsight, that there was any “foolproof” way to avoid a crisis in the future. And yet the January 2011 Financial Crisis Inquiry Commission Majority Report stated:
“We conclude this financial crisis was avoidable”
I believe this majority report was a political “whitewash” on the part of the Administration and government bureaucrats. Well-intentioned politicians and government couldn’t be the key cause of the financial crisis when easy scapegoats existed in “bankers”, “Wall Street”, “recklessness”, “greed”, and “inadequate disclosure”. And their brethren in the government’s enforcement bureaucracy (FDIC, SEC, etc.) and the private plaintiff’s bar could effectively squelch most of these individuals and firms from speaking the truth. Thank goodness that minority members of the FCIC did not agree, refused to sign the majority report, and produced a less political and more accurate account of the financial crisis.
My December 2010 email to My Defense Attorney’s Re. The Financial Crisis Commission Minority Report:
This document, in my view, explains accurately and succinctly what happened and dovetails with my comments to you.
It also shows that what we did at Indymac…was a prudent part of the financial system at the time.
It never mentions fraudulent or non-transparent securities disclosures or negligent business decisions as a cause of the crisis or Indymac’s failure (we are briefly noted).
It would be defense exhibit A in both the securities litigation cases, as well as other cases (it even touches on the solvency issue…and makes our case for the fact that Indymac was solvent right up to it bank run…see quote below). Mike
Here some key excerpts:
“You get in much more trouble in investments with a sound premise than a bad premise because the bad premise you recognize immediately does not make sense…a home is a sound investment.” Warren Buffett in his testimony to the commission
“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 risk they were taking. The real risk of a mortgage investment became delinked from the premium demanded by investors to make a loan. Why? For one, investors shared the same mindset as borrowers, entice by the belief that home prices would never fall on a national scale. Further, the returns on investments thought to be comparably safe yielding far less than mortgage-related investments.”
“The government has always supported homeownership. But trying to get something for nothing…to subsidize homeownership without increasing the budget deficit…was a recipe for a crisis. The government, in effect, encouraged the GSEs to run two enormous monocline hedge funds that invested exclusively in mortgages and were implicitly backed by the U.S. taxpayer.”
“The GSEs were not the only means by which the government supported the financing of high-risk mortgages. Through the GSEs, FHA loans, VA loans, the FHLBs, and CRA, among other programs, the government subsidized and, in some cases, mandated the extension of credit to high-risk borrowers, propagating risks for financial firms, the mortgage market, taxpayers, and ultimately the financial system.”
“If the financial firm does not have enough cash on hand, then it will have to sell assets into a depressed market. Liquidity risks can quickly evolve into solvency concerns once a run begins. A striking conclusion we drew from the FCIC’s work is the extent to which these liquidity risks proved to be systemically underappreciated.”
“So, that is what you prepare for (a storm). But this was not a normal storm. It was, to quote Goldman Sachs CEO “a hurricane”.
“Put simply, the risk of a housing collapse was simply not appreciated. Not by homeowners, not by investors, not by banks, not by rating agencies, and not by regulators.”
“Because of the perceived safety of highly rated MBS and CDOs, firms held minuscule capital against the probability of loss.”
“Leverage and maturity mismatch are not bad things…the financial system and the economy as a whole need them to operate…leverage and maturity transformation are, to a large extent what banks do, but both of these factors create fragility.”
“But once investors get spooked, and a run begins, there is nothing that a financial firm can do except try to regain the market’s confidence.”
“Following the successive collapses of Bear Stearns, Fannie Mae, Freddie Mac, Lehman Brothers, and American International Group (AIG), what had begun in the second half of 2007 as a run on those firms that the market identified as having large mortgage exposures and acute liquidity risks exploded into a generalized market panic. Depository institution had failed. Investment banks had failed…”
“The panic had spread to the widest corners of the financial system. Thrifts IndyMac and Washington Mutual failed…”
“The panic ended when confidence returned…by acting as a lender of last resort…that is, a counterparty willing to make secured loans when no one else will…the government played a key role in preventing runs on otherwise strong firms…the passage of the Troubles Asset Relief Porgram helped restore confidence as well. The government’s commitment to stand behind financial firms, combined with capital injections, and a guarantee of bank debt, helped moderate the panic and stabilize financial markets.”
“These were the best of a series of bad options, and policymakers had extremely limited information to work with. While we believe that the government deserves quite a lot of the blame for getting our financial system and our nation into trouble in the first place, we applaud the quick and decisive actions taken by our nation’s leaders during the panic.”
“The historical record is rich with examples of the prolonged and devastating economic impact of financial crises.”
“In fact, the big drivers of debt increases are the inevitable collapse in tax revenues that governments suffer in the wake of deep and prolonged output contractions, as well as often ambitious countercyclical fiscal policies in advanced economies aimed at mitigating the downturn (and not the costs of bailing out or recapitalizing the banking system).”
“Reinhart and Rogoff also find that financial crises often precede sovereign debt crises, give the rapid increase in public debt.”
“In their panoramic study of financial crises and the debt crises that follow, Reinhart and Rogoff identify perhaps the four most dangerous words expressed by investors, regulators, and policymakers before the crash: “This time is different”. We could not agree more. We caution our nation’s leaders to learn the appropriate lessons from history and take seriously the need to reduce our federal deficit.”
REPUBLICAN COMMISSIONERS ON THE FINANCIAL CRISIS INQUIRY COMMISSION
FINANCIAL CRISIS PRIMER QUESTIONS AND ANSWERS ON THE CAUSES OF THE FINANCIAL CRISIS
Delivered as required by P.L. 111-21: The Fraud Enforcement and Recovery Act of 2009
December 15, 2010