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Who Caused the Crash? Who Caused the Crash?

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Who Caused the Crash?

Dissenting views on the financial crisis commission vie to shape history—and the future.


The Republican and Democratic leaders of the Financial Crisis Inquiry Commission, Bill Thomas (left) and Phil Angelides (right), supported dueling views of what caused the meltdown.(Mark Wilson/Getty Images)

Updated at 4:27 p.m. on January 26.

Two years after the worst financial crisis since the Great Depression, Democrats and Republicans are still fighting over its true causes—and nowhere more fiercely than on the Financial Crisis Inquiry Commission. Their final reports, due out Thursday, could determine not only how history views the crisis but how the future regulatory landscape looks, as well.


In their majority report, the six Democrats on the 10-person congressionally appointed commission blamed Wall Street, Washington regulators, and particularly a handful of top policymakers: former Federal Reserve Chairman Alan Greenspan; his successor, Ben Bernanke; former New York Fed Chairman (and current Treasury secretary) Timothy Geithner; former Treasury Secretary Henry Paulson; and a host of Clintonites from the 1990s, according to a Democratic member of the commission who described the report’s conclusions to National Journal today.

Above all, the Democratic members say, the message of their report is that human beings were responsible and that the subprime mortgage catastrophe was “avoidable.”

The three main Republican dissenters on the commission, including the vice chairman, former Rep. Bill Thomas, “echo” much of the analysis of the Democratic majority report, but with one key difference, says the Democratic member, who would reveal the contents of the two reports only on condition of anonymity.


“Their conclusion is that no human being really caused this,” the member said. “It’s a rather bloodless view. The difference between their analysis and ours is that to a large extent they’re talking about economic forces above and beyond the power of mankind.... And they didn’t think the failure of regulation was a contributing factor.”

Another commission official who also declined to speak on the record confirmed that interpretation of the main GOP dissent. Neither Thomas nor the other two GOP members who signed the report—economist Douglas Holtz-Eakin, an adviser to John McCain’s presidential campaign, and Keith Hennessey, a former adviser to President George W. Bush—responded immediately to a request for comment.

The FCIC is scheduled to deliver its final, 576-page report at a news conference on Thursday in Washington. Previews of some of the conclusions have already appeared in The New York Times, Wall Street Journal, and Financial Times.  However, commission spokesman Tucker Warren said that the chairman, Phil Angelides, would have no comment until Thursday.

The conclusions of the majority report track closely with a number of journalistic accounts of the crisis previously published, all of which have heavily influenced the new regulatory landscape set up by the Dodd-Frank law passed last summer. “We think there were a lot of failures on the part of policymakers and regulators, financial firms and individuals,” said the Democratic member. “They were all things controlled by people.” The commission member said that Greenspan, who is accused of avoiding or quashing regulation over much of his 18-year tenure, is perhaps the main individual singled out for blame. But Paulson and Bernanke, both of whom mistakenly called the crisis containable in its early days, and Geithner, who as New York Fed chairman failed to notice early signs of trouble, are also named.


The Clinton administration also comes in for some blame in the report, particularly the decision in late 2000 to support the Commodity Futures Modernization Act, which effectively forbade any regulation of the derivatives “swaps” market, including credit default swaps. Among those who supported the new law was then-Treasury Secretary Lawrence Summers, later to become President Obama’s chief economic adviser, who at the time praised the act as “important legislation that will allow the United States to maintain its competitive position in this rapidly growing sector.”

That 2000 law marked a decisive point in the forthcoming subprime mortgage crisis, the commission member said. “From then until mid-2008, for seven and a half years, the [over-the-counter derivatives] market grew more than sevenfold, without transparency, without any state or federal regulator knowing really what was going on in the market, without any controls on growing counterparty credit risk. It effectively interconnected all the financial institutions in this country and around the world. It also opened the door to credit default swaps, the rampant development of which we think fueled securitization and amplified and multiplied the problems.”

The interconnection of all these hidden risks was further facilitated by the watering-down and final repeal of the Glass-Steagall Act, which had separated commercial and investment banking, the majority report concludes. The Securities and Exchange Commission and Comptroller of the Currency also failed to monitor the industry, the report says.

Depending on which view of the crisis ultimately takes hold, oversight of the financial system could be affected for decades to come. Already Rep. Spencer Bachus, R-Ala., the new chairman of the House Financial Services Committee, is seeking to water down some provisions of derivatives regulation and to shift more blame to Fannie Mae and Freddie Mac, the giant government-sponsored mortgage issuers.

A second dissenting report on the crisis, written by a fourth Republican member, Peter Wallison, a former Reagan administration official, pointed almost all the blame at Fannie, Freddie, and government housing policies. Wallison also accused the Democratic commission members, in effect, of bad faith. “Like Congress and the Obama administration, the Commission's majority erred in assuming that it knew the causes of the financial crisis,” Wallison wrote. “Instead of pursuing a thorough study, the Commission's majority used its extensive statutory investigative authority to seek only the facts that supported its initial assumptions—that the crisis was caused by 'deregulation' or lax regulation, greed and recklessness on Wall Street, predatory lending in the mortgage market, unregulated derivatives, and a financial system addicted to excessive risk taking. The Commission did not seriously investigate any other cause.”

CORRECTION: The original version of this report misstated Bill Thomas's position on the Financial Crisis Inquiry Commission.

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