THE FINANCIAL CRISIS INQUIRY REPORT - Final Report of the National Commission on the Causes of the

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THE

FINANCIAL

CRISIS

INQUIRY REPORT

THE

FINANCIAL CRISIS

INQUIRY REPORT

• OFFICIAL GOVERNMENT EDITION •

OFFICIAL

GOVERNMENT

EDITION

Final Report of the National Commission

on the Causes of the Financial and

ISBN 978-0-16-087727-8 Economic Crisis in the United States

9 7 80160 877278

90000

FC_cover.indd 1 1/20/11 2:07 PM

THE

FINANCIAL

CRISIS

INQUIRY REPORT

This printing includes all corrections contained in the errata sheet issued

by the Commission as found on the FCIC website as of February 25, 2011.

∞

THE

FINANCIAL

CRISIS

INQUIRY REPORT

FINAL REPORT OF THE NATIONAL COMMISSION

ON THE CAUSES OF THE FINANCIAL AND

ECONOMIC CRISIS IN THE UNITED STATES

OFFICIAL GOVERNMENT EDITION

THE FINANCIAL CRISIS INQUIRY COMMISSION

Submitted by

Pursuant to Public Law 111-21

January 2011

F ro as le t yb eh S epu ri tn e edn tn fo D co mu e tn S.U ,s G . evo r emn tn P ri itn O gn ffice

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ISBN 978-0-16-087983-8

CONTENTS

Commissioners ...................................................................................................vii

Commissioner Votes...........................................................................................viii

Commission Staff List ..........................................................................................ix

Preface ................................................................................................................xi

CONCLUSIONS OF THE

FINANCIAL CRISIS INQUIRY COMMISSION.....................xv

PART I: CRISIS ON THE HORIZON

Chapter  Before Our Very Eyes .........................................................................

PART II: SETTING THE STAGE

Chapter  Shadow Banking ...............................................................................

Chapter  Securitization and Derivatives.......................................................

Chapter  Deregulation Redux .........................................................................

Chapter  Subprime Lending ............................................................................

PART III: THE BOOM AND BUST

Chapter  Credit Expansion ..............................................................................

Chapter  The Mortgage Machine.................................................................

Chapter  The CDO Machine ........................................................................

Chapter  All In ..................................................................................................

Chapter  The Madness ...................................................................................

Chapter  The Bust............................................................................................

v

PART IV: THE UNRAVELING

Chapter  Early : Spreading Subprime Worries.................................

Chapter  Summer : Disruptions in Funding ....................................

Chapter  Late  to Early : Billions in Subprime Losses ...........

Chapter  March : The Fall of Bear Stearns........................................

Chapter  March to August : Systemic Risk Concerns....................

Chapter  September :

The Takeover of Fannie Mae and Freddie Mac..................

Chapter  September : The Bankruptcy of Lehman ........................

Chapter  September : The Bailout of AIG ........................................

Chapter  Crisis and Panic ..............................................................................

PART V: THE AFTERSHOCKS

Chapter  The Economic Fallout...................................................................

Chapter  The Foreclosure Crisis ..................................................................

DISSENTING VIEWS

By Keith Hennessey, Douglas Holtz-Eakin, and Bill Thomas ........................

By Peter J. Wallison....................................................................................................

Appendix A: Glossary .......................................................................................

Appendix B: List of Hearings and Witnesses ......................................................

Notes ................................................................................................................

Index available online at www.publicaffairsbooks.com/fcicindex.pdf

vi CONTENTS

539

545

553

Phil Angelides

Chairman

Brooksley Born

Commissioner

Byron Georgiou

Commissioner

Senator Bob Graham

Commissioner

Keith Hennessey

Commissioner

Douglas Holtz-Eakin

Commissioner

Heather H. Murren, CFA

Commissioner

John W. Thompson

Commissioner

Peter J. Wallison

Commissioner

Hon. Bill Thomas

Vice Chairman

MEMBERS OF

THE FINANCIAL CRISIS INQUIRY COMMISSION

COMMISSIONERS VOTING TO ADOPT THE REPORT:

Phil Angelides, Brooksley Born, Byron Georgiou,

Bob Graham, Heather H. Murren, John W. Thompson

COMMISSIONERS DISSENTING FROM THE REPORT:

Keith Hennessey, Douglas Holtz-Eakin,

Bill Thomas, Peter J. Wallison

Shaista I. Ahmed

Hilary J. Allen

Jonathan E. Armstrong

Rob Bachmann

Barton Baker

Susan Baltake

Bradley J. Bondi

Sylvia Boone

Tom Borgers

Ron Borzekowski

Mike Bryan

Ryan Bubb

Troy A. Burrus

R. Richard Cheng

Jennifer Vaughn Collins

Matthew Cooper

Alberto Crego

Victor J. Cunicelli

Jobe G. Danganan

Sam Davidson

Elizabeth A. Del Real

Kirstin Downey

Karen Dubas

Desi Duncker

Bartly A. Dzivi

Michael E. Easterly

Alice Falk

Megan L. Fasules

Michael Flagg

Sean J. Flynn, Jr.

Scott C. Ganz

Thomas Greene

Maryann Haggerty

Robert C. Hinkley

Anthony C. Ingoglia

Ben Jacobs

Peter Adrian Kavounas

Michael Keegan

Thomas J. Keegan

Brook L. Kellerman

Sarah Knaus

Thomas L. Krebs

Jay N. Lerner

Jane E. Lewin

Susan Mandel

Julie A. Marcacci

Alexander Maasry

Courtney Mayo

Carl McCarden

Bruce G. McWilliams

Menjie L. Medina

Joel Miller

Steven L. Mintz

Clara Morain

Girija Natarajan

Gretchen Kinney Newsom

Dixie Noonan

Donna K. Norman

Adam M. Paul

Jane D. Poulin

Andrew C. Robinson

Steve Sanderford

Ryan Thomas Schulte

Lorretto J. Scott

Skipper Seabold

Kim Leslie Shafer  

Gordon Shemin

Stuart C. P. Shroff

Alexis Simendinger

Mina Simhai

Jeffrey Smith

Thomas H. Stanton

Landon W. Stroebel

Brian P. Sylvester

Shirley Tang

Fereshteh Z. Vahdati

Antonio A. Vargas Cornejo

Melana Zyla Vickers   

George Wahl

Tucker Warren

Cassidy D. Waskowicz

Arthur E. Wilmarth, Jr.

Sarah Zuckerman

ix

COMMISSION STAFF

Wendy Edelberg, Executive Director

Gary J. Cohen, General Counsel

Chris Seefer, Director of Investigations

Greg Feldberg, Director of Research

PREFACE

The Financial Crisis Inquiry Commission was created to “examine the causes of the

current financial and economic crisis in the United States.” In this report, the Com￾mission presents to the President, the Congress, and the American people the results

of its examination and its conclusions as to the causes of the crisis.

More than two years after the worst of the financial crisis, our economy, as well as

communities and families across the country, continues to experience the after￾shocks. Millions of Americans have lost their jobs and their homes, and the economy

is still struggling to rebound. This report is intended to provide a historical account￾ing of what brought our financial system and economy to a precipice and to help pol￾icy makers and the public better understand how this calamity came to be.

The Commission was established as part of the Fraud Enforcement and Recovery

Act (Public Law -) passed by Congress and signed by the President in May

. This independent, -member panel was composed of private citizens with ex￾perience in areas such as housing, economics, finance, market regulation, banking,

and consumer protection. Six members of the Commission were appointed by the

Democratic leadership of Congress and four members by the Republican leadership.

The Commission’s statutory instructions set out  specific topics for inquiry and

called for the examination of the collapse of major financial institutions that failed or

would have failed if not for exceptional assistance from the government. This report

fulfills these mandates. In addition, the Commission was instructed to refer to the at￾torney general of the United States and any appropriate state attorney general any

person that the Commission found may have violated the laws of the United States in

relation to the crisis. Where the Commission found such potential violations, it re￾ferred those matters to the appropriate authorities. The Commission used the au￾thority it was given to issue subpoenas to compel testimony and the production of

documents, but in the vast majority of instances, companies and individuals volun￾tarily cooperated with this inquiry.

In the course of its research and investigation, the Commission reviewed millions

of pages of documents, interviewed more than  witnesses, and held  days of

public hearings in New York, Washington, D.C., and communities across the country

xi

that were hard hit by the crisis. The Commission also drew from a large body of ex￾isting work about the crisis developed by congressional committees, government

agencies, academics, journalists, legal investigators, and many others.

We have tried in this report to explain in clear, understandable terms how our

complex financial system worked, how the pieces fit together, and how the crisis oc￾curred. Doing so required research into broad and sometimes arcane subjects, such

as mortgage lending and securitization, derivatives, corporate governance, and risk

management. To bring these subjects out of the realm of the abstract, we conducted

case study investigations of specific financial firms—and in many cases specific facets

of these institutions—that played pivotal roles. Those institutions included American

International Group (AIG), Bear Stearns, Citigroup, Countrywide Financial, Fannie

Mae, Goldman Sachs, Lehman Brothers, Merrill Lynch, Moody’s, and Wachovia. We

looked more generally at the roles and actions of scores of other companies.

We also studied relevant policies put in place by successive Congresses and ad￾ministrations. And importantly, we examined the roles of policy makers and regula￾tors, including at the Federal Deposit Insurance Corporation, the Federal Reserve

Board, the Federal Reserve Bank of New York, the Department of Housing and Ur￾ban Development, the Office of the Comptroller of the Currency, the Office of Fed￾eral Housing Enterprise Oversight (and its successor, the Federal Housing Finance

Agency), the Office of Thrift Supervision, the Securities and Exchange Commission,

and the Treasury Department.

Of course, there is much work the Commission did not undertake. Congress did

not ask the Commission to offer policy recommendations, but required it to delve

into what caused the crisis. In that sense, the Commission has functioned somewhat

like the National Transportation Safety Board, which investigates aviation and other

transportation accidents so that knowledge of the probable causes can help avoid fu￾ture accidents. Nor were we tasked with evaluating the federal law (the Troubled As￾set Relief Program, known as TARP) that provided financial assistance to major

financial institutions. That duty was assigned to the Congressional Oversight Panel

and the Special Inspector General for TARP.

This report is not the sole repository of what the panel found. A website—

www.fcic.gov—will host a wealth of information beyond what could be presented here.

It will contain a stockpile of materials—including documents and emails, video of the

Commission’s public hearings, testimony, and supporting research—that can be stud￾ied for years to come. Much of what is footnoted in this report can be found on the

website. In addition, more materials that cannot be released yet for various reasons will

eventually be made public through the National Archives and Records Administration.

Our work reflects the extraordinary commitment and knowledge of the mem￾bers of the Commission who were accorded the honor of this public service. We also

benefited immensely from the perspectives shared with commissioners by thou￾sands of concerned Americans through their letters and emails. And we are grateful

to the hundreds of individuals and organizations that offered expertise, informa￾tion, and personal accounts in extensive interviews, testimony, and discussions with

the Commission.

xii PREFACE

We want to thank the Commission staff, and in particular, Wendy Edelberg, our

executive director, for the professionalism, passion, and long hours they brought to

this mission in service of their country. This report would not have been possible

without their extraordinary dedication.

With this report and our website, the Commission’s work comes to a close. We

present what we have found in the hope that readers can use this report to reach their

own conclusions, even as the comprehensive historical record of this crisis continues

to be written.

PREFACE xiii