Commission: three reasons why the financial crisis happened
The Financial Crisis Inquiry Commission hearings have produced one moment of drama and a few theories from regulators and bankers about why the meltdown happened.
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Establishing an official record of what happened to cause the 2008 meltdown is all well and good, says Paul Light, a professor of public service at New York University and an expert on government practices.Skip to next paragraph
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But Light wonders what will happen to the panel’s report when it is written. Will it have a shelf life? Will it become the basis for some new legislative reforms?
“I don’t see it happening,” he says.
Bankers and regulators admit failures
Still, the financial commission’s two days of public hearings have produced a number of interesting admissions from bankers and regulators, and theories as to why what happened, happened.
1. Everybody thought gravity had been suspended. Both bankers and regulators touched on the fact that the financial system as a whole did not consider that it was possible housing prices could decline. Banks did not think about this when weighing the risk of housing-related investments, for instance.
2. The deal was the thing. Regulators Sheila Bair, head of the Federal Deposit Insurance Corporation, and Mary Schapiro, chief of the Securities and Exchange Commission, both testified on Thursday that financial firms had become too used to self-regulation, and that they increasingly saw the generation of financial transactions as their economic role in life.
“The excesses of the last decade represented a costly diversion of resources from other sectors of the economy,” said Bair.
3. Nobody knew anything. The SEC and other regulators have long seen as one of their primary missions the protection of average individual investors from avaricious professionals. But as Wednesday’s exchange between chairman Angelides and Goldman’s Blankfein showed, sometimes even the savvy big guys were clueless about the risks they were taking.
Blankfein defended Goldman’s sale of bundles of sour mortgages by saying that the buyers knew what they were getting into.
“These are professional investors who want this exposure,” said Blankfein.
Given the subsequent collapse in housing prices, and the cratering of the value of those bundled mortgages, perhaps those professional investors should think about other lines of work.
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