by Dan Krell © 2010
If you’re still wondering about the cause of the financial crisis, don’t worry- the Financial Crisis Inquiry Commission (FCIC) is [still] looking into it. The Fraud Enforcement and Recovery Act of 2009 established the FCIC to examine the causes of the financial and economic crisis within the United States and submit its findings to the President on December 15th, 2010. The Commission is comprised of ten congressionally appointed members who are “prominent private citizens with significant experience in banking, market regulation, taxation, finance, economics, housing, and consumer protection.”
The Commission is charged with twenty-two areas of inquiry. Some of those areas that are related to the housing market include: monetary policy and credit; the concept that certain institutions are “too-big-to-fail”; fraud and abuse in the financial sector, including fraud and abuse towards consumers in the mortgage sector; legal and regulatory structure governing investor and mortgagor protection; financial institution reliance on numerical models (including risk models and credit ratings); the legal and regulatory structure of the United States housing market; lending practices, and securitization (including transferring risk). To do its job, the Commission is given the authority to hold hearings, issue subpoenas, and refer anyone who violated the law (with regard to the financial crisis) to the U.S. or State Attorney General.
Although Last week’s testimony of former Federal Reserve Chairman Alan Greenspan made headlines, not only because of the sometimes seemingly antagonistic questioning and defensive responses, the back and forth garnered the highly publicized “Greenspan sound bites” such as: “congress has amnesia” and “I was right 70% of the time.” As his testimony came to a close, a power outage dimmed the lights and disabled the microphones; which the Chairman of the FCIC attributed to Greenspan’s “lights out performance.”
Throughout his testimony and questioning, Mr. Greenspan cited a string of temporal events that may have led to the crisis, which included: higher affordable housing goals set in 2000; huge accumulations of subprime loans by Fannie Mae and Freddie Mac (to meet the new goals); and the increased European demand for subprime financed Collateralized Debt Obligations (CDO).
According to Mr. Greenspan’s testimony, subprime loans were not a major problem before 2002 because they were a small sector of the market. However, after new affordable housing guidelines were set, the subprime market grew rapidly (which may have also been the cause of rapid appreciation of home prices). He stated that if Fannie Mae and Freddie Mac had not accumulated the huge amounts of subprime loans (the accumulation was a contrast to their intended function); they probably would not have failed. Additionally, those subprime loans were graded “AAA” (rather than subprime) which probably increased the European appetite for the CDO’s (because of the unusual high yields for the grade). Mr. Greenspan differentiated the recent financial crisis from the Great Depression by saying that the recent financial crisis was “the greatest financial crisis” due to short term availability of funds; but the Great Depression was “the greatest economic crisis.”
So far, the FCIC has held two hearings and a forum of academic experts who presented working papers of their research on the causes that led up to the crisis.
Originally published at https://dankrell.com/blog/2010/04/13/inquiring-about-the-financial-crisis-the-financial-crisis-inquiry-commission-is-on-the-job/
This article is not intended to provide nor should it be relied upon for legal and financial advice. Using this article without permission is a violation of copyright laws. Copyright © 2010 Dan Krell