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Inside Scoop on the Financial Crisis Inquiry Commission
Nobel prize winning economists George Akerloff and Joseph Stiglitz,
former Fed chairman Alan Greenspan, leading economists such as Robert
Shiller, Anna Schwartz, James Galbraith, former lead S & L regulator
William K. Black, former Tarp overseer Elizabeth Warren and many other
leading financial experts say that criminal fraud was the primary cause of the financial crisis.
They also say
that failing to prosecute that fraud will prolong the crisis, interfere
with the ability to stabilize the economy, and cause future crises.
And see this.
They make it clear that the most fraud destructive fraud starts at the top: with the heads of the biggest banks, biggest accounting firms, and biggest corporations.
Experts in fraud as a cause of economic crises have developed a set of terms to describe this process, including "looting", "control fraud", "accounting fraud" and "regulatory capture". However, none of these terms appear in the Financial Crisis Inquiry Commission Report.
Why not?
As Josh Rosner of of Graham-Fisher told me:
If one looks closely at the document behind the
investigation, it appears the FCIC failed to highlight perhaps the
most central issue in the crisis - warehouse lending. Documents in the
FCIC archives demonstrate that at least one of the rating agencies
was aware, before they began to downgrade securities en masse, that
the Wall Street banks were aggressively cleaning out their inventory
of securities and selling them to investors. Other documents
demonstrate that at least one large firm was aggressively seeking to
offload risks they had intended to retain by moving them to sales
traders and arming sales-traders with information to use to move those
risks, even going so far as to choose specific firms to target.
Clearly, they believed in the greater fool theory, the question is did
they make honest representations to those they sought to fool. Culpability
seems clear, and I would think legal action should follow, but as is
the case with most "gold panel" commissions, those who control the
game make sure they can skate away.
And in a series of 3 investigative reports, Yves Smith shares insights gained from insiders on the Commission.
Yesterday, Smith noted:
From the very outset, the Financial Crisis Inquiry Commission was set up to fail.
***
The investigations were further hampered by the requirement that
subpoenas have bi-partisan approval along with Its decision to hold
hearings with high profile individuals, including top Wall Street
executives, before much in the way of lower-level investigation had been
completed. The usual way to get meaningful disclosure from a top
executive is to confront him with hard-to-defend material or actions;
interrogations under bright lights, while a fun bit of theater,
generally yield little in the absence of adequate prep.
***
Recent
reports that the panel urged various prosecutors to launch criminal
probes were a hopeful sign that the commission might nevertheless come
out with some important findings. But correspondence from insiders in
the last few days suggests otherwise. One, for instance, wrote, “I’m
still in the process of getting the stink out of my clothes.”
These ideologically-neutral sources close to the
investigation depict the commissioners as having pre-conceived
narratives and of fitting various tidbits unearthed during the
investigation into these frameworks, with the majority focusing more on
the problems caused by deregulation and the failure of the authorities
to use even the powers they had, while the minority assigns blame to
government meddling, particularly housing-friendly policies.
These insiders see both sides as wrong, and want to encourage
investigative reporters to challenge both the majority and dissenting
accounts. They contend that both versions help perpetuate the myth that
Wall Street was as much a victim of the crisis as anyone else.
***
From a source close to the investigation:
***
When
it comes to the three reports (one report and two dissents) to be
released the Financial Crisis Inquiry Commission later this week[,] the
reports start out with how many documents were reviewed and how many
people interviewed. This sets us up to believe that the Commissioners
relied on facts garnered from the documents and interviews in coming to
their conclusions.
It would do Americans a lot of good
to put this to the test. Did the Commissioners really use the facts to
arrive at their conclusions or did they arrive at the conclusions
first and are simply citing a selection of the facts to support their
previously arrived at positions?
In fact, the
majority will provide a history of financial crisis anecdotes and then
try to fit the facts into its theory that the crisis was avoidable if
only the financial sector took fewer risks and government was more
competent. The dissents will do the same to support their theory that
it was all government’s fault.
***
Which of the
multitude of anecdotes were critical? If they can’t identify one or
two critical factors, ask them specifically (anecdote by anecdote)
whether the crisis would have occurred even if the anecdote in question
didn’t occur. If they can’t tell you either, then really what they
are saying is the crisis was a “perfect storm” of just the right mix of
private sector greed and public sector incompetence coming together at
the same time. In other words, what happened could not have been
predicted and the crisis was not avoidable.
***
Catastrophic financial system collapse is not the result of
largely unrelated anecdotes. There are too many firewalls in the
system to allow it to happen. It has to be the result of one or more
firewalls failing or something really big in the system going bad.
What was there about the system that was big enough to cause systemic
failure so quickly? What connects the two: the failure of the housing
and securities markets?Based on
further discussions with individuals familiar with how the report was
developed, the following shortcomings are evident:The Commission was able to do comparatively little in the way of
forensic work; the bulk of its effort was devoted to the hearings,
which delivered relatively little in the way of new insight
As indicated above, the FCIC report is guilty of “drunk under
the streetlight” behavior, of trying to fit its story to already known
or easily found information. Even though the report makes extensive use
of salacious extracts from e-mails, the insiders content that none of
these information in these e-mails illuminates information critical to
the crisis trajectory.
***
The sad
thing isn’t that the FCIC did not do its job. As we indicated earlier,
that failure was by design. No one in the officialdom wants the
mechanisms of the crisis to be exposed in full. It would compromise too
many influential people and restoke well warranted public ire about
the bailout of a miscreant financial services industry and its ongoing
extractive behavior. Ironically, this core element of the dissent’s
criticism is spot on, even if their own narrative suffers from
precisely the same flaws. As FCIC commissioner Peter Walliston observes:Like Congress and the Obama administration, the Commission’s majority
erred in assuming that it knew the causes of the financial crisis…The
Commission did not seriously investigate any other cause and did not
effectively connect the factors it investigated to the financial
crisis. The majority’s report covers in detail many elements of the
economy before the financial crisis that the authors did not like, but
generally fails to show how practices that had gone on for many years
suddenly caused a worldwide financial crisis. In the end, the
majority’s report turned out to be a just-so story about the financial
crisis, rather than a report on what caused the financial crisis…..
From the beginning, the Commission’s investigation was
limited to validating the standard narrative about the financial
crisis—that it was caused by deregulation or lack of regulation, weak
risk management, predatory lending, unregulated derivatives, and greed
on Wall Street. Other hypotheses were either never considered or were
treated only superficially. In criticizing the Commission, this
statement is not intended to criticize the staff, who worked diligently
and effectively under difficult circumstances and did extraordinarily
fine work in the limited areas they were directed to cover. The
Commission’s failures were failures of management.By having the FCIC validate widely accepted, superficial,
and ultimately inadequate explanations of the crisis, the Obama
administration continues in its policy of looking forward rather than
back, when looking back is the foundation of any serious scientific,
investigative, or prosecutorial process. The odds are high that the
media and the public at large will mistake the extensive use of anecdote
in the FCIC report for accuracy and completeness. As with so many
accounts of the crisis, the artful use of detail will yet again have the
effect of diverting attention from the true drivers of the crisis and
thus leave Wall Street free to devise new ways to wreck the economy for
fun and profit.
Today, Smith writes:
What is troubling about the report is the manner in which it hews to conventional wisdom. Its ten major findings
are hardly controversial, yet they are still insufficient to explain
why the financial system seized up and appeared close to failure. And
telling a familiar-sounding story assures that the status quo will
remain unchallenged, and serves to validate the inadequate reforms now
underway. After all, they are premised on the very same superficial
beliefs.
I participated in a blogger conference call with FCIC
commissioners Phil Angelides and Brooksley Born. I’m clearly not cut
out for public life. It was disconcerting to hear them thumping their
talking points. For instance, Angelides began by saying that the
purpose of the report was to explain why we faced the choice in 2008 of
spending billions of dollars to bail out the financial system or let
it fail.
That’s a false dichotomy that serves to justify the
unprecedented rescues. It implies that the only way the crisis could
have been addressed was the course of action taken. We pointed out as
the crisis was unfolding that some of the early interventions made matters worse.
Even at the peak of the crisis, a range of other actions were possible
but were not taken. The bias throughout the crisis was to throw money
at the problem with virtually no strings attached, and even in the cold
light of day, to take far too little in the way of corrective and
punitive measures.
***
Another problem area was the
difficulty in getting subpoenas issued. The process was made difficult
by design; it took sign off by commissioners of both parties. As a
result, nearly all the document production was voluntary.
And in her hardest-hitting post on the issue, Smith reports:
The
Financial Crisis Inquiry Commission report increasingly looks like a
whitewash. Even though the commission has made referrals for criminal
prosecution, you’d never know that reading its end product. The
references to “fraud” and “crime” are sparing, and ex mention of the
SEC’s fraud investigation of Goldman, consist almost entirely of
mortgage fraud, which is the FBI’s notion of “fraud for profit” or
“fraud for housing”, meaning borrower fraud. The book also acknowledges
the fraudulent lending by firms that were prosecuted like Ameriquest.
In other words, the notion that the TBTF firms might have engaged in
less than savory activity is remarkably absent from the report.
The
FCIC has also been unduly close-lipped about their criminal referrals,
refusing to say how many they made or giving a high-level description
of the type of activities they encouraged prosecutors to investigate.
By contrast, the Valukas report on the Lehman bankruptcy discussed in
some detail whether it thought civil or criminal charges could be
brought against Lehman CEO Richard Fuld and chief financial officers
chiefs Chris O’Meara, Erin Callan and Ian I Lowitt, and accounting firm
Ernst & Young. If a report prepared in a private sector action can
discuss liability and name names, why is the public not entitled to at
least some general disclosure on possible criminal actions coming out
of a taxpayer funded effort? Or is it that the referrals were merely to
burnish the image of the report, and are expected to die a speedy
death?Matt Stoller [financial writer and former chief policy
aide for Congressman Alan Grayson] provides further support for the
cynical take. Via e-mail:I was on a conference call
today with Phil Angelides and Brooksley Born, two commisioners of the
Financial Crisis Inquiry Commission. During their unveiling of the
FCIC report, they used words like deregulation, leverage, imprudent
risk-taking, reckless behavior, failures at credit agencies, and failed
regulators. Left out were words like crime, fraud, looting, or a
specialized form of looting known as control fraud. At every point
reporters asked about their referrals of criminal cases, which someone
leaked before the report came out, they demurred. “We are not
prosecutors”, said Angelides.
I asked about the criminal nature
of the crisis. I said I didn’t want to know about any specific case,
but whether they thought that fraud or crime was a core cause of the
crisis. This is an important distinction, because the real question at
hand is whether you trust the system to correct itself, or whether you
believe that the people running the system are the problem and must be
removed before we can fix the system. It’s obvious, as you’ll see,
that Born and Angelides believe the former.
Neither Born nor
Angelides would answer whether accounting fraud or crime was a primal
cause of the crisis. The gist of the response was “it’s all in the
report,” along with an attempt to pretend like they had discovered the
systemic mortgage origination fraud that the FBI discussed in 2004.
Born also repeated that they wouldn’t disclose specific cases of
criminal referrals, even though I had specifically said that I was not
interested in such disclosures. It was a filibuster, and an obvious
one at that. I kept pressing, and asked them repeatedly to answer my
question, and after the third follow-up Angelides finally said they had
to go.
With that, the FCIC has completed the final act of
oversight for the last Democratic Congress, and it held true to what
Democrats in the last Congress believed. Everyone was at fault for the
crisis, but no one is to blame. This was Bush’s line in 2008, that
“Wall Street got drunk”, and Obama’s line throughout the Dodd-Frank
mark-up. The Republicans went after the GSEs and “regulation”, and the
Democrats sadly lamented the tragedy of the crisis. Again, everyone’s
at fault, and no one is to blame. I saw high-ranking Democrat Carolyn
Maloney brag yesterday about her vote for TARP in the hearing on
foreclosures, noting that the Dow busted through 12,000 as a sign of
prosperity. This is what they believe, in their bones. There was no
theft, only tragedy. The American economy lives on the crack of
financialization, not the production of valuable services and goods
that solve real problems.
You can even read Obama’s Cooper Union speech
from 2008, and with a few additions, it’s basically that narrative.
Deregulation bad, regulation good. New Deal “outmoded”, excessive pay a
problem. (I do find it amusing that Obama in 2008 brought up how
other banks spread rumors about Bear Stearns so it would collapse, and
then stressed how the SEC “should investigate and punish this kind of
market manipulation.” But that’s kind of an exception, an adorable one
that suggested there were rhetorical remnants of outrage among elites)
The
FCIC report is destined for the same dustbin of history as that
speech. It is a document of and by well-meaning insiders that just
can’t deal with the corruption they were supposed to investigate. It’s a
psychological crutch maybe, or perhaps a denial mechanism, but it
doesn’t really matter. This report is just a cover-up, the same kind of
cover-up that is allowing the thieves to escape with their loot.
Nothing
will come from the generation in power who created this mess. They
just don’t have it in them. The bad guys will steal again. I mean,
crime pays. Besides, who’s going to call it crime, anyway?
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