Origins of Financial Crisis Explained in FCIC Report Released Today

By Kyle Chezum Updated on 1/27/2011

1/27/11

The Financial Crisis Inquiry Commission (FCIC) today released a comprehensive report on the origins of the financial crisis, blaming both Wall Street and Washington for the meltdown.  The Federal Reserve, including Chairman Ben Bernanke and former chairman Alan Greenspan, was a major target of criticism.  “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,” the report states.  The report will be made available on the FCIC’s website soon.

The FCIC blames much of the current crisis on deregulation and self-regulation in the financial sector.  The report names “30 years of deregulation” as a primary culprit of the financial collapse, and says that this lack of oversight was “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.”

Ineffective risk management on the part of major financial institutions is listed as another leading cause of the crisis.  The FCIC claims that major banks originated loans that should never have been originated and sold them to investors who failed to conduct proper diligence on the securities.  In many cases, the mortgages and securities were known to be defective.

Both the private financial sector and past government administrations are blamed for the crash, and support of the conclusions, even within the panel itself, split along party lines.  The report delivered to Congress and Obama was endorsed only by the six Democrats on the team.  The four Republicans released their own dissenting report last month.  The Republican report primarily blamed government regulation and policies for the financial crisis.

Peter Wallison, one of the Republicans on the FCIC panel and an economist fellow at the American Enterprise Institute, released a third report that places the blame for the crisis, placed major blame on Fannie Mae and Freddie Mac.  Wallison claimed that Department of Housing and Urban Development loaded Fannie and Freddie with high-risk subprime debt in order to create affordable housing for lower income buyers and that these institutions were presented to investors as risk free investments due to their government backing.

All reports also place a portion of the blame on borrowers who took on debt they couldn’t afford.