Financial Crisis Inquiry Commission Quotes
Federal and state rules required or encouraged financial firms and some institutional investors to make investments based on the ratings of credit rating agencies, leading to undue reliance on those ratings. However, the rating agencies were not adequately regulated by the Securities and Exchange Commission or any other regulator to ensure the quality and accuracy of their ratings. Moody’s, the Commission’s case study in this area, relied on flawed and outdated models to issue erroneous ratings on mortgage-related securities, failed to perform meaningful due diligence on the assets underlying the securities, and continued to rely on those models even after it became obvious that the models were wrong.
All three of the credit rating agencies gave securities of bundled very risky mortgages the highest and most secure ratings. They never examined the underlying securities, and continued to give these AAA ratings even after many had defaulted and they were in “junk bond” status. The rules then were that the financial companies who wanted a rating would “discuss” the rating that they would get BEFORE they paid the rating companies to do the rating. In no case did they ever pay a rating agency for a rating unless there would be a AAA rating despite the fact that these securities were among the highest risk public securities in American financial history. Under the law at the time, the rating agencies could not be held liable for there irrational ratings.
Financial Crisis Inquiry Commission, Final Report Of The National Commission On The Causes Of The Financial And Economic Crisis In The United States, January 2011
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Moody’s and Standard & Poors, the 2 largest credit rating agencies, gave A ratings to securities that had packaged terrible F-rated, toxic, subprime mortgages, and gotten the credit ratings agencies to rate them as A on the theory that the risk was diversified. Each new security like this that a bank put out was submitted informally to one of the credit rating agencies to “discuss”. If the agency “concluded” that they could give it an A rating, they received a very large fee. If not, the bank would not officially submit the security and not pay anything. That almost never happened with these packages of subprime mortgages.
Modern finance is so complex and convoluted, that any laws or regulations that government makes are quickly evaded by even more complex and convoluted schemes which the legislators and regulators have to try and control. By the time they learn and understand and finally develop measures to regulate those, the cycle starts again. Hence the “fool’s errand”
Criticizing federal regulators in the 1989 Savings and Loan scandal:
More than 20 years later, after unregulated finance enabled the Great Depression, Franklin Delano Roosevelt, finally got the Securities and Exchange Commission passed by Congress. By the beginning ot the 21st century
The result was regulation of the banks and the creation of the SEC to regulate the stock market, However, over the years, the regulations were not able to keep up with the sophisticated development of new forms of investments and financial instruments and the financial industry were able to speculate with other people’s money in ways that FDR and his reformers never imagined. Finally, even the regulation that did exist was weakened by the policies of the George W. Bush administration and the combination brought about the Great Recession of 2008 where the profits from excess speculation were privatized and the losses, socialized with the taxpayer and the American worker bearing the brunt while most of the speculators were bailed out and made more money than ever. The Obama administration tried to reform the situation, but was unable to put an end to the legal speculation with other people’s money or of having institutions that were “too big to fail.”
This bill set up the Securities and Exchange Commission (SEC). Prior there was no regulation or limit as to what a corporation could say to raise money from the public. Lies and fraud were common. There were no accounting standards as to when a company was profitable. Things improved much but each year that are companies caught lying or exaggerating to get people to buy their stock.
He was referring to Fannie Mae, the government-created. private mortage guarantee company. It was heavily regulated, and in general it met the regulatory requirements. However, the requirements were insufficient, and in the 2008 Meltdown and the Great Recession that followed, Fannie Mae itself was in such bad financial condition, that the Federal Government had bail them out or have the entire home mortgage industry fall apart.
Greenspan and some others assumed that the shareholders and the executives who ran the financial institutions had the same vested interests. But the executives had disconnected themselves from the fate of the shareholders, by having Golden Parachutes to protect the executives even if the business failed and they were fired. And they got their bonuses immediately so by the time the authorities and the shareholders discovered that the profits the bonuses were paid for were illusory, the bonus money was safely stored in a secret offshore bank. But if things went wrong, there was always the play of getting a government bailout which would keep the executives getting their huge bonuses and keep the shareholders from losing their money as the taxpayers covered most of the losses.
Banks often lie. The system encourages them to do so. In a crisis, if a bank honestly says that it is not sure that it has enough cash and other liquid assets, others will not lend it any more money and depositors will rush to withdraw their money, thereby almost insuring a failure. The bank that lies, might weather the storm and survive.
The Financial Crisis Inquiry Commission (FCIC) was a ten-member commission appointed by the leaders of the United States Congress with the goal of investigating the causes of the financial crisis of 2007–2010. The Commission has been nicknamed the Angelides Commission after the chairman, Phil Angelides. The commission has been compared to the Pecora Commission, which investigated the causes of the Great Depression in the 1930s, and has been nicknamed the New Pecora Commission. Analogies have also been made to the 9/11 Commission, which examined the September 11 terrorist attacks. The commission had the ability to subpoena documents and witnesses for testimony, a power that the Pecora Commission had but the 9/11 Commission did not. The first public hearing of the commission was held on January 13, 2010, with the presentation of testimony from various banking officials. Hearings continued during 2010 with "hundreds" of other persons in business, academia, and government testifying.
