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FCIC Final Report Conclusions

FCIC Final Report Conclusions

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"The financial crisis was avoidable.The crisis was the result of human action and inaction, not of Mother Nature or computer models gone haywire. The captains of finance and the public stewards of our financial system ignored warnings and failed to question, understand, and manage evolving risks within a system essential to the well-being of the American public. Theirs was a big miss, not a stumble."
"The financial crisis was avoidable.The crisis was the result of human action and inaction, not of Mother Nature or computer models gone haywire. The captains of finance and the public stewards of our financial system ignored warnings and failed to question, understand, and manage evolving risks within a system essential to the well-being of the American public. Theirs was a big miss, not a stumble."

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Published by: Investor Protection on Jun 27, 2011
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06/27/2011

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CONCLUSIONS OF THEFINANCIAL CRISIS INQUIRY COMMISSION
The Financial Crisis Inquiry Commission has been called upon to examine the fnan-cial and economic crisis that has gripped our country and explain its causes to theAmerican people. We are keenly aware o the signifcance o our charge, given theeconomic damage that America has suered in the wake o the greatest fnancial cri-sis since the Great Depression.Our task was frst to determine what happened and how it happened so that wecould understand why it happened. Here we present our conclusions. We encouragethe American people to join us in making their own assessments based on the evi-dence gathered in our inquiry. I we do not learn rom history, we are unlikely to ully recover rom it. Some on Wall Street and in Washington with a stake in the status quomay be tempted to wipe rom memory the events o this crisis, or to suggest that noone could have oreseen or prevented them. This report endeavors to expose theacts, identiy responsibility, unravel myths, and help us understand how the crisiscould have been avoided. It is an attempt to record history, not to rewrite it, nor allowit to be rewritten.To help our ellow citizens better understand this crisis and its causes, we also pres-ent specifc conclusions at the end o chapters in Parts III, IV, and V o this report.The subject o this report is o no small consequence to this nation. The prooundevents o  and  were neither bumps in the road nor an accentuated dip inthe fnancial and business cycles we have come to expect in a ree market economicsystem. This was a undamental disruption—a fnancial upheaval, i you will—thatwreaked havoc in communities and neighborhoods across this country.As this report goes to print, there are more than  million Americans who areout o work, cannot fnd ull-time work, or have given up looking or work. Aboutour million amilies have lost their homes to oreclosure and another our and a hal million have slipped into the oreclosure process or are seriously behind on theirmortgage payments. Nearly  trillion in household wealth has vanished, with re-tirement accounts and lie savings swept away. Businesses, large and small, have elt
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the sting o a deep recession. There is much anger about what has transpired, and jus-tifably so. Many people who abided by all the rules now fnd themselves out o workand uncertain about their uture prospects. The collateral damage o this crisis hasbeen real people and real communities. The impacts o this crisis are likely to be eltor a generation. And the nation aces no easy path to renewed economic strength.Like so many Americans, we began our exploration with our own views and somepreliminary knowledge about how the world’s strongest fnancial system came to thebrink o collapse. Even at the time o our appointment to this independent panel,much had already been written and said about the crisis. Yet all o us have beendeeply aected by what we have learned in the course o our inquiry. We have been at various times ascinated, surprised, and even shocked by what we saw, heard, andread. Ours has been a journey o revelation.Much attention over the past two years has been ocused on the decisions by theederal government to provide massive fnancial assistance to stabilize the fnancialsystem and rescue large fnancial institutions that were deemed too systemically im-portant to ail. Those decisions—and the deep emotions surrounding them—will bedebated long into the uture. But our mission was to ask and answer this central ques-tion:
how did it come to pass that in  our nation wasforced to choose between twostark and painful alternatives
—either risk the total collapse o our fnancial systemand economy or inject trillions o taxpayer dollars into the fnancial system and anarray o companies, as millions o Americans still lost their jobs, their savings, andtheir homes?In this report, we detail the events o the crisis. But a simple summary, as we seeit, is useul at the outset. While the vulnerabilities that created the potential or cri-sis were years in the making, it was the collapse o the housing bubble—ueled by low interest rates, easy and available credit, scant regulation, and toxic mortgages—that was the spark that ignited a string o events, which led to a ull-blown crisis inthe all o . Trillions o dollars in risky mortgages had become embeddedthroughout the inancial system, as mortgage-related securities were packaged,repackaged, and sold to investors around the world. When the bubble burst, hun-dreds o billions o dollars in losses in mortgages and mortgage-related securitiesshook markets as well as inancial institutions that had signiicant exposures tothose mortgages and had borrowed heavily against them. This happened not just inthe United States but around the world. The losses were magniied by derivativessuch as synthetic securities.The crisis reached seismic proportions in September  with the ailure o Lehman Brothers and the impending collapse o the insurance giant American Interna-tional Group (AIG). Panic anned by a lack o transparency o the balance sheets o ma- jor fnancial institutions, coupled with a tangle o interconnections among institutionsperceived to be “too big to ail,” caused the credit markets to seize up. Trading groundto a halt. The stock market plummeted. The economy plunged into a deep recession.The fnancial system we examined bears little resemblance to that o our parents’generation. The changes in the past three decades alone have been remarkable. The
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F
INANCIAL
C
RISIS
I
NQUIRY
C
OMMISSION
EPORT
 
fnancial markets have become increasingly globalized. Technology has transormedthe eciency, speed, and complexity o fnancial instruments and transactions. Thereis broader access to and lower costs o fnancing than ever beore. 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 transormation 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 oered 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 redags. Yet there was pervasive permissiveness; little meaningul 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 deective; 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?
C
ONCLUSIONSOFTHE
F
INANCIAL
C
RISIS
I
NQUIRY
C
OMMISSION
 
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