The Financial Crisis Inquiry Commission was formed in 2009 to study the crisis that hit financial markets over two and a half years ago. The Commission interviewed 700 witnesses that included bank executives, governmental officials and representatives from the rating agencies. They have released their findings that are critical of many and concluded that the crisis was avoidable.
CNNMoney has reported on the following findings by the Commission. Each finding is followed by comments, questions and/or conclusions referred to as “Issue”.
“Federal authorities, who failed to curb reckless behavior on Wall Street, bear much of blame for the turmoil that erupted in 2008 and 2009.”
Issue – This conclusion should surprise to no one. Bureaucrats have proven many times that they are incapable of oversight over an extended period. What starts as a good idea degenerates into a governmental boondoggle that puts more governmental workers on the dole.
“The crisis was also the product of “dramatic failures of corporate governance and risk management at many systemically important financial institutions,” according to one of the report’s nine conclusions.”
Issue – As long the large financial institutions run by executives with no long-term skin in the game they will make reckless decisions that benefit themselves via short-term bonus compensation plans.
“The commission faults policies under both Presidents Bush and Obama, as well as actions taken by the Federal Reserve under Alan Greenspan and the current chairman, Ben Bernanke. Tim Geithner, the current Treasury Secretary who was president of the New York Fed during the crisis, and his predecessor, Henry Paulson, were also named in the report.”
Issues – Politicians like Bush and Obama, as well as those in the Congress, are incapable of foreseeing even the potential systemic problems within the financial system. They are but politicians focused on elections.
Assuming that the professionals like Greenspan, Bernanke, Geithner and Paulson did not have more nefarious motivations, the fact that these financial elites did not see the train wreck coming should give pause to any expectation that their kind will see the next crisis coming.
The Commission faulted the shadow banking system including Lehman Brothers and Bear Stearns, and Goldman Sachs, Merrill Lynch and Citibank, as well as AIG. “The commission also faults the lending practices of commercial banks such as Countrywide, now owned by Bank of America, Wachovia and JP Morgan Chase.”
Issue – While Lehman Brothers and Bear Stearns were destroyed by the crisis, governmental bailouts undoubtedly saved the remaining institutions and many of those that live off of them. In other words the taxpayers bailed out the scoundrels that created the crisis.
“The report also criticizes the three main credit rating agencies – Moody’s, S&P and Fitch — as “essential cogs in the wheel of financial destruction””.
Issue – These for profit agencies are still in business. Why?
“The Commission said: “As our report shows, key policy makers – the Treasury Department, the Federal Reserve Board, and the Federal Reserve Bank of New York – who were best positioned to watch over our markets were ill prepared for the events of 2007 and 2008”“.
Issue – Given that the Treasury Department, Federal Reserve Board, and Federal Reserve Bank of New York with all of their resources and brain-power were “ill prepared”, it is unreasonable to expect the government and their bureaucrats to protect the people from future crises.
Fannie Mae and Freddie Mac, two government-sponsored enterprises, were “the kings of leverage,” the report says. By the end of 2007, the companies had a combined leverage ratio of 75 to 1.”
Issue – These enterprises became the “the kings of leverage,” because of their backing by the government and their executives being compensated based on short-term results.
In addition, the Congress forced these lending agencies to promote the government’s activist social programs that included giving mortgages to those that could not afford to pay them back.
You would think that with such a damming report that those in government would suggest a change in direction. However, instead of admitting that government oversight only helps to keep honest people honest, the government is adding even more bureaucrats and regulations in the promise that the next time it will work. How many times must this solution fail?
There are action that the government could take that would lessen the likelihood of similar systemic problems occurring again. They include:
1. “Too big to fail” must not protect companies from failure. Companies that fail must be left to go out of business, period; no exceptions. Their owners, shareholders, employees and customers must share the pain of being involved with a failed business. The fear of this draconian endgame is the best protector that society has towards bad business practices.
2. Anti-trust laws currently on the books must be enforced. Companies that approach the level of being “too big to fail” must be broken into smaller pieces.
3. Make it easier to prosecute corporate managers, individually, for illegal behavior made at the corporate level. While there are those that will claim this may limit corporations’ ability to attract managers, so be it. The damage done to our economy as a result of immoral and illegal, behavior by professional mangers demands this action.
4. Term limits. The professional politician class must be eliminated. Our Country must be run by the People, as our Founders envisioned.
5. Conflicts of interests must be eliminated between government employees and the private sector by restricting those that can work at both sides of related positions. Allowing Henry Paulson, a former head of Goldman Sachs to manage Treasury enabled him to decide which banks failed and which ones receive the benefits of the government’s bailout. How ludicrous!
Those that continue proffering the thesis that only the goventment can protect the People from scoundrels are either ignoring history or are attempting to protect some parochial interest. Even assuming that the lawmakers and bureaucrats had the best of intentions and the intellectual skills, which they do not always have, the dynamics of a complex economy and the resourcefulness of the greedy will always be one step ahead of the regulators.
Only the free market can govern and control reckless behavior. The government’s role should be to insure that the market remains truly free and that must start with no bailouts for those that fail.