The Financial Crisis Inquiry Commission (FCIC) was established in 2010 in the United States to investigate the causes of the 2008 financial crisis. The commission, led by Phil Angelides, held public hearings, gathered testimony from hundreds, and released its report in January 2011.
The report concluded that "the collapse of the housing bubble—fueled by low interest rates, easy and available credit, scant regulation, and toxic mortgages—that was the spark that ignited" events leading to the financial crisis.
The commission was explicit in its concerns about insurance giant American International Group, financial giants Bear Stearns and Lehman Brothers, and mortgage giants Fannie Mae and Freddie Mac, each of which the government brought under consideration for financial rescue.
Creation and statutory mandate The commission has been nicknamed the Angelides Commission after its chairman Phil Angelides. The commission has been compared to the Pecora Commission, which investigated the causes of the Great Depression in the 1930s, and has been nicknamed the New Pecora Commission. Analogies have also been made to the 9/11 Commission, which examined the September 11 attacks. The commission had the ability to subpoena documents and witnesses for testimony, a power that the Pecora Commission had but the 9/11 Commission did not. The first public hearing of the commission was held on January 13, 2010, with the presentation of testimony from various banking officials. Hearings continued during 2010 with "hundreds" of other persons in business, academia, and government testifying.
The commission was created by section 5 of the Fraud Enforcement and Recovery Act of 2009 (Public Law 111–21), signed into law by President Barack Obama on May 20, 2009. That section of the Act: Set the purpose of the commission, i.e., "to examine the causes, domestic and global, of the current financial and economic crisis in the United States." Set its composition of 10 members, appointed on a bipartisan and bicameral basis in consultation with relevant Committees. Six members are to be chosen by the congressional majority, the Democrats (three of these by the Speaker of the House and three by the Senate Majority Leader) and four by the congressional minority, the Republicans (two from the House Minority Leader and two from the Senate Minority Leader). Expressed the "sense of the Congress that individuals appointed to the Commission should be prominent United States citizens with national recognition and significant depth of experience in such fields as banking, regulation of markets, taxation, finance, economics, consumer protection, and housing" and also provided that "no member of Congress or officer or employee of the federal government or any state or local government may serve as a member of the Commission." Provided that Commission's chair be selected jointly by the congressional majority leadership and that the vice chair be selected jointly by the congressional minority leadership, and that the chair and vice chair may not be from the same political party. Set the "functions of the Commission" as:
Authorized the commission to "hold hearings, sit and act at times and places, take testimony, receive evidence, and administer oaths" and "require, by subpoena or otherwise, the attendance and testimony of witnesses and the production of books, records, correspondence, memoranda, papers, and documents." This subpoena power was also held by the Pecora Commission, but not the 9/11 Commission. Provided that "a report containing the findings and conclusions of the Commission" shall be submitted to the President and to the Congress on December 15, 2010, and that at the discretion of the chairperson of the commission, the report may include reports or specific findings on any financial institution examined by the commission. Provides that the chairperson of the Commission shall, not later than 120 days after the date of submission of the final report, appear before the Senate Banking Committee and the House Financial Services Committee to testify regarding the commission's findings. Provides for the termination of the Commission 60 days after the submission of the final report.
Composition Speaker of the House Nancy Pelosi of California and Senate Majority Leader Harry Reid of Nevada (both Democrats) each made three appointments, while House Minority Leader John Boehner of Ohio and Senate Minority Leader Mitch McConnell of Kentucky (both Republicans) each made two appointments:
Phil Angelides (chairman) – jointly chosen as chair by Pelosi and Reid Bill Thomas (vice chairman) – jointly chosen as vice chair by Boehner and McConnell Brooksley Born (Pelosi) Byron Georgiou (Reid) Bob Graham (Reid) Keith Hennessey (McConnell) Douglas Holtz-Eakin (McConnell) Heather Murren (Reid) John W. Thompson (Pelosi) Peter J. Wallison (Boehner)
Commission's investigation and public response As part of its inquiry, the commission held a series of public hearings throughout 2010 including, but not limited to, the following topics: avoiding future catastrophe, complex financial derivatives, credit rating agencies, excess risk and financial speculation, government-sponsored enterprises, the shadow banking system, subprime lending practices and securitization, and too big to fail.
The first meeting of the Commission took place in Washington on September 17, 2009, and consisted of opening remarks by Commissioners.
On January 13, 2010, Lloyd Blankfein testified before the commission, that he considered Goldman Sachs' role as primarily that of a market maker, not a creator of the product (i.e.; subprime mortgage-related securities). Goldman Sachs was sued on April 16, 2010, by the SEC for the fraudulent selling of collateralized debt obligations tied to subprime mortgages, a product which Goldman Sachs had created.
February 26–27 the Commission heard from academic experts and economists on issues related to the crisis. The following experts have appeared before the Commission in public or in private: Martin Baily, Markus Brunnermeier, John Geanakoplos, Pierre-Olivier Gourinchas, Gary Gorton, Dwight Jaffee, Simon Johnson, Anil Kashyap, Randall Kroszner, Annamaria Lusardi, Chris Mayer, David Moss, Carmen M. Reinhart, Kenneth T. Rosen, Hal S. Scott, Joseph E. Stiglitz, John B. Taylor, Mark Zandi and Luigi Zingales.
April 7–9, 2010, Alan Greenspan, Chuck Prince and Robert Rubin testified before the commission on subprime lending and securitization.
May 5–6, former Bear Stearns CEO Jimmy Cayne, former SEC Chairman Christopher Cox, Tim Geithner and Hank Paulson were scheduled to appear before the commission.
Writer Joe Nocera of The New York Times praised the commission's approach and technical expertise in understanding complex financial issues during July 2010.
On July 27, The composition of the commission's staff changed several times since its formation. The executive director J. Thomas Greene was replaced by Wendy M. Edelberg, an economist from the Federal Reserve. Five of the initial fourteen senior staff members resigned, including Matt Cooper, a journalist who was writing the report. Darrell Issa, a top Republican on the House Oversight and Government Reform Committee, questioned the Federal Reserve's involvement as a possible conflict of interest, and there has been disagreement among some commission members on what information to make public and where to place blame. Mr. Angelides called the criticisms "silly, stupid Washington stuff," adding: "I don't know what Mr. Issa's agenda is, but I can tell you what ours is." In a joint interview the commission's chairman, Phil Angelides (D), and vice chairman, Bill Thomas (R), said that the turnover's effects had been exaggerated and that they were optimistic about a consensus.Staff Losses and Dissent May Hurt Crisis Panel; The New York Times; September 2, 2010
Report
The Commission reported its findings in January 2011. In briefly summarizing its main conclusions the Commission stated: "While the vulnerabilities that created the potential for crisis were years in the making, it was the collapse of the housing bubble—fueled by low interest rates, easy and available credit, scant regulation, and toxic mortgages—that was the spark that ignited a string of events, which led to a full-blown crisis in the fall of 2008. Trillions of dollars in risky mortgages had become embedded throughout the financial system, as mortgage-related securities were packaged, repackaged, and sold to investors around the world. When the bubble burst, hundreds of billions of dollars in losses in mortgages and mortgage-related securities shook markets as well as financial institutions that had significant exposures to those mortgages and had borrowed heavily against them. This happened not just in the United States but around the world. The losses were magnified by derivatives such as synthetic securities."Financial Crisis Inquiry Commission-Press Release-January 27, 2011
The commission's final report was initially due to Congress on December 15, 2010, but was not released until January 27, 2011.Harsh Words for Regulators in Crisis Commission Report; The New York Times; January 27, 2011 In voting on the adoption of the final report the commission was split evenly along partisan lines, with Angelides, Born, Georgiou, Graham, Murren, and Thompson (appointed by Democrats Pelosi and Reid) all voting in favor and Thomas, Hennessey, Holtz-Eakin, and Wallison (appointed by Republicans Boehner and McConnell) all dissenting. Among those dissenting Thomas, Hennessey, and Holtz-Eakin collaborated on a single report while Wallison, from the American Enterprise Institute drafted his alone and proposed that the crisis was caused by government affordable housing policies rather than market forces. However, this view has not been supported by subsequent detailed analyses of mortgage market data.Michael Simkovic, Competition and Crisis in Mortgage Securitization
The Commission reached nine main conclusions (directly quoted): We conclude this financial crisis was avoidable. "There was an explosion in risky subprime lending and securitization, an unsustainable rise in housing prices, widespread reports of egregious and predatory lending practices, dramatic increases in household mortgage debt, and exponential growth in financial firms' trading activities, unregulated derivatives, and short-term "repo" lending markets, among many other red flags. Yet there was pervasive permissiveness; little meaningful action was taken to quell the threats in a timely manner." The Commission especially singles out the Fed's "failure to stem the flow of toxic mortgages."
We conclude widespread failures in financial regulation and supervision proved devastating to the stability of the nation's financial markets. "More than 30 years of deregulation and reliance on self-regulation by financial institutions, championed by former Federal Reserve chairman Alan Greenspan and others, supported by successive administrations and Congresses, and actively pushed by the powerful financial industry at every turn, had stripped away key safeguards, which could have helped avoid catastrophe. This approach had opened up gaps in oversight of critical areas with trillions of dollars at risk, such as the shadow banking system and over-the-counter derivatives markets. In addition, the government permitted financial firms to pick their preferred regulators in what became a race to the weakest supervisor."
We conclude dramatic failures of corporate governance and risk management at many systemically important financial institutions were a key cause of this crisis.