fnancial markets have become increasingly globalized. Technology has transormedthe eciency, speed, and complexity o fnancial instruments and transactions. Thereis broader access to and lower costs o fnancing than ever beore. And the fnancialsector itsel has become a much more dominant orce in our economy.From to , the amount o debt held by the fnancial sector soared rom trillion to trillion, more than doubling as a share o gross domestic product.The very nature o many Wall Street frms changed—rom relatively staid privatepartnerships to publicly traded corporations taking greater and more diverse kinds o risks. By , the largest U.S. commercial banks held o the industry’s assets,more than double the level held in . On the eve o the crisis in , fnancialsector profts constituted o all corporate profts in the United States, up rom in . Understanding this transormation has been critical to the Commis-sion’s analysis.Now to our major fndings and conclusions, which are based on the acts con-tained in this report: they are oered with the hope that lessons may be learned tohelp avoid uture catastrophe.•
We conclude this fnancial crisis was avoidable.
The crisis was the result o humanaction and inaction, not o Mother Nature or computer models gone haywire. Thecaptains o fnance and the public stewards o our fnancial system ignored warningsand ailed to question, understand, and manage evolving risks within a system essen-tial to the well-being o the American public. Theirs was a big miss, not a stumble.While the business cycle cannot be repealed, a crisis o this magnitude need not haveoccurred. To paraphrase Shakespeare, the ault lies not in the stars, but in us.Despite the expressed view o many on Wall Street and in Washington that thecrisis could not have been oreseen or avoided, there were warning signs. The tragedy was that they were ignored or discounted. There was an explosion in risky subprimelending and securitization, an unsustainable rise in housing prices, widespread re-ports o egregious and predatory lending practices, dramatic increases in householdmortgage debt, and exponential growth in fnancial frms’ trading activities, unregu-lated derivatives, and short-term “repo” lending markets, among many other redags. Yet there was pervasive permissiveness; little meaningul action was taken toquell the threats in a timely manner.The prime example is the Federal Reserve’s pivotal ailure to stem the ow o toxicmortgages, which it could have done by setting prudent mortgage-lending standards.The Federal Reserve was the one entity empowered to do so and it did not. Therecord o our examination is replete with evidence o other ailures: fnancial institu-tions made, bought, and sold mortgage securities they never examined, did not careto examine, or knew to be deective; frms depended on tens o billions o dollars o borrowing that had to be renewed each and every night, secured by subprime mort-gage securities; and major frms and investors blindly relied on credit rating agenciesas their arbiters o risk. What else could one expect on a highway where there wereneither speed limits nor neatly painted lines?