Issue of the week: Who caused the financial crisis?

last updated 8 January 2015

It’s like the denouement of Agatha Christie’s Murder on the Orient Express, said Tom Braithwaite in the Financial Times. “Everybody did it.” The 410-page majority report of the Financial Crisis Inquiry Commission appointed by Congress concludes that the “culprits” of “the traumatic events of 2008” include “regulators, politicians, Wall Street banks, and credit-rating agencies.” The report fingers the Federal Reserve’s loose monetary policy, Washington’s weak regulation of financial players, and a breakdown of accountability and ethics on Wall Street as contributors to the catastrophe, but it never identifies a “smoking gun.” Adding to the confusion, the four Republicans on the 10-member panel filed two dissents to the main report, with three Republicans faulting the report for “diminishing the importance of the global credit bubble” and the other one “laying the blame squarely at government housing policies.” The cacophony makes one wonder why the FCIC bothered with a report, said Daniel Indiviglio in TheAtlantic.com. Without consensus “on the causes, how can the public trust that either side gets it right?”

Still, there are some juicy tidbits buried in there, said Ben Rooney in CNNMoney.com. We learn that Goldman Sachs designed mortgage securities to fail, bought insurance against them, and collected $2.9 billion in federal bailout funds when they tanked. The payment came by way of AIG, the insurer rescued by the U.S. government, which had sold Goldman the insurance against the securities’ default. The Democratic majority’s report bashed Wall Street, said Paul Sperry in Foxâ€‹Newsâ€‹.com. But it let “well-connected” Democrats off the hook. It’s silent, for example, about New York Gov. Andrew Cuomo’s contribution to the crisis when he was secretary of Housing and Urban Development from 1997 to 2001. The “reckless” targets he set for “affordable housing”—which in practice amounted to encouraging loans to “low-income minorities with weak credit”—helped tip the housing market “into the subprime abyss.”

Partisan politics help explain why “the report is a confusing and contradictory mess,” said Frank Partnoy in The New York Times. But a bigger reason is that the panel lacked the investigative zeal of Ferdinand Pecora, the former New York City prosecutor who in 1933 led a congressional investigation of the 1929 stock-market crash. Armed with “shocking documents the public had never seen or imagined,” he conducted a “10-day inquisition” of leading bankers that exposed “widespread fraud and insider dealings.” The FCIC, which rehashed much that was already known, failed to follow Pecora’s example. But it’s worth recalling that Pecora was appointed to investigate the crash only after three previous investigators failed. The commission missed its chance. Congress should try again.