BOOK REVIEW: 'The Financial Crisis Inquiry Report': plenty of villains, few good guys/gals in this tale of woe

Reviewed by David M. Kinchen
BOOK REVIEW: 'The Financial Crisis Inquiry Report': plenty of villains, few good guys/gals in this tale of woe
Take all of Stephen King's horror novels: "The Shining," "Dolores Claiborne", "Christine," etc. add  H.P. Lovecraft and Peter Straub and you still won't have the sheer horror contained within the paperback covers of "The Financial Crisis Inquiry Report", the final report of the National Commission on the Causes of the Financial and Economic Crisis  in the U.S. (PublicAffairs Books, $14.99). The  index is not included in the book I received, but can be accessed at: http://www.publicaffairsbooks.com/fcicindex.pdf.


What horrifies me more than almost anything after I plowed through this dismal record of malfeasance, misfeasance and general screwing up is that most the people who are responsible for the biggest financial crisis since the Great Depression -- some say it's even bigger and it certainly is in terms of wealth loss and maybe even lives ruined -- are walking around free and rich beyond the dreams of average Americans. I know of a few federal prisons, including one in Bastrop, Texas, that I'd like to see populated by the criminal class that created this crisis.

I'm talking about people -- among many others -- like former Federal Reserve Board chairman Alan Greenspan, former Fannie Mae CEO Daniel Mudd,  Angelo Mozilo (more about his penalty: last October the Securities and Exchange Commission  announced that former Countrywide Financial CEO Angelo Mozilo will pay a record $22.5 million penalty to settle SEC charges that he and two other former Countrywide executives misled investors as the subprime mortgage crisis emerged. The settlement also permanently bars Mozilo from ever again serving as an officer or director of a publicly traded company. Mozilo’s financial penalty is the largest ever paid by a public company's senior executive in an SEC settlement. Mozilo also agreed to $45 million in disgorgement of ill-gotten gains to settle the SEC’s disclosure violation and insider trading charges against him, for a total financial settlement of $67.5 million that will be returned to harmed investors.) and a host of financial "geniuses" that got us into the mess.  Daniel Mudd, the son of TV anchorman Roger Mudd, walked away with tens of millions of dollars in compensation for running what one regulator called "the worst run financial institution" he had seen in his 30 years as a bank examiner. Fannie Mae and its fellow partner in the secondary mortgage market Freddie Mac were taken over by the government in 2008.

The sad saga of Fannie and Freddie is chronicled in Chapter 17, one of 22 chapters in the majority accepted part of the report (as I noted, three of the minority party commissioners dissented, and one, Peter J. Wallison, went further and issued a lengthy statement of dissent that is included in the report.).  Essentially, the dissenters criticized the report as a simplistic chronological narrative of the events leading up to the crash and beyond. The dissenters also said that the majority commissioners put forth simplistic sole causes for the crisis, including the lack of a firewall that existed from 1933 until 1999 when the Clinton Administration obliterated the Glass-Steagall firewall separating investment and commercial banking. I tend to be on the side of those who would like to see an end to the Gramm-Leach-Bliley Act that replaced Glass-Steagall and a return to measures separating risky investment banks from more conservative commercial banks, but that's probably not in the cards. Absent that, I'd like to see one powerful regulator keeping an eagle eye on bankers, rather than the multitude of non-regulating regulators, asleep at the switch.

Dissenters also said that regulation or lack of it per se wasn't the cause of the meltdown. I didn't see the majority conclusions, contained in text boxes at the end of each of the chapters, say that regulation or lack of it was the SOLE cause; rather the multiplicity of regulators and the ability of financial institutions to pick and choose the least onerous regulator helped fuel the increase in toxic assets. (Probably the best-ever oxymoron: "Toxic Assets.").

The report was accepted by the six Democratic party members of the commission -- and rejected for the most part by the three GOP members, vice-chairman Bill Thomas, Keith Hennessey and Douglas Holtz-Eakin -- and by a fourth minority party member Peter J. Wallison, who contributed a dissenting statement. Remember, the commission was established in 2009, when the Democrats still controlled the House of Representatives, before last fall's election which saw the GOP take over the House.

The six majority party members of the commission are chairman Phil Angelides, a former California state treasurer and gubernatorial candidate; Brooksley Born; Sen. Bob Graham, D-FL; Heather F. Murren; John W. Thompson, and Byron Georgiou.

Brooksley Born, a native of San Francisco, comes across as one of the few good people in the financial mess. She was appointed in 1996 by Bill Clinton to head the Commodity Futures Trading Commission (CFTC) to regulate derivatives, one of the biggest single triggers of the meltdown. She served for three years, a prophet without honor in an administration that laughed at her warnings about proliferating derivatives (read pages 45-51 to learn more about derivatives and their role in the meltdown).

Born, a 1964 graduate of Stanford University Law School at a time when only a handful of women attended prestigious law schools,  tells  (on Page 47-48) how she wanted the CFTC to re-examine the way it regulated the over the counter derivatives market, "given the market's rapid evolution and the string of major losses since 1993."  Born says the CFTC requested comments and got them, including negative -- to say the least --- comments from Treasury Secretary Robert Rubin, Fed Chairman Alan Greenspan and Securities and Exchange Commission (SEC) chairman Arthur Levitt who issued a joint statement blasting Born's action: "We have grave concerns about this action and its possible consequences....We are very concerned about reports that the CFTC's action may increase the legal uncertainty concerning certain types of OTC derivatives."  The three men proposed a moratorium on the CFTC's ability to regulate OTC derivatives.  A decade later Born's fears were realized; it's no wonder that in 2009 she, along with Sheila Bair of the FDIC, was awarded the John F. Kennedy Profiles in courage Award in recognition of the "political courage she demonstrated in sounding early warnings about conditions that contributed to the current global financial crisis."

During the hearings that led to the report, on April 7, 2010, Born tugged the tail of the sainted Greenspan, declared that "The Maestro's" running of the Fed was an unmitigated failure...and she said it to his face, according to a news report I found on Google. Born, who pushed to strictly regulate derivatives under the Clinton Administration, but lost the battle to, among other people, Greenspan, told the former Federal Reserve chairman that his agency “failed to prevent housing bubble, failed to prevent the predatory lending scandal, failed to prevent the activities that would bring the financial system to the verge of collapse.”

“You failed to prevent many of our banks from consolidating and growing to a size that are now too big or too interconnected to fail,” Born added. She added that Greenspan’s views on deregulation, which he took as an article of faith, contributed to the Federal Reserve’s failure in delivering on its mandate. Looking as angry as he could at his advanced age, Greenspan replied, “The flaw in the system I acknowledged was an ability to fully understand the state of potential risks that were fully untested… That means we were under-capitalizing the banking system for 40 or 50 years.”

As a chronicle of the events leading to the meltdown, the book is very useful; even the dissenters agree with that. The report concisely covers the bailouts, the creation of TARP, the bankruptcy of Lehman Brothers and the rescue of AIG, Merrill Lynch and Bear Stearns. There is a succinct section on the horrendous foreclosure problem and the decline and fall of housing, with particular emphasis on the stress both the Clinton and George W. Bush administrations placed on homeownership. There's even a discussion of the collapse of commercial real estate. As  a reporter who has covered real estate for 40 years and who has read and reviewed many books on aspects of the financial meltdown, I recommend this "Report" to a reader seeking a one-volume discussion.
Publisher's web site: www.publicaffairsbooks.com
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