The four Republican members of the Financial Crisis Inquiry Commission split off and issued their own report on the 2008 financial crisis today, a full month before the Commission is scheduled to release its report. The GOPers’ surprising conclusion: “We caution our nation’s leaders to learn the appropriate lessons from history and take seriously the need to reduce our federal deficit.” What?
Former Rep. Bill Thomas (R-CA), who once chaired the House Ways and Means Committee, joined with former CBO director and economic adviser to Sen. John McCain’s presidential campaign Douglas Holtz-Eakin, AEI scholar and Reagan-era Treasury official Peter Wallison, and Hoover Institute fellow and former George W. Bush economic adviser Keith Hennessey to issue their report, which largely focuses on the what they see as the role of Fannie Mae and Freddie Mac in the crisis — and the implications of moral hazard stemming from the government’s implicit guarantees of the two institutions.
Their report discusses the housing bubble, the exposure of financial firms to risk because of mortgage-backed securities and segues, awkwardly, into a discussion of consumer panic before winding up at the bottom line: the government should reduce the deficit.
The 10-member bipartisan commission was created by the Fraud Enforcement and Recovery Act of 2009. The Commission’s whole purpose was to look at 22 separate areas of inquiry — including moral hazard, credit default swaps, regulation, fraud, credit rating systems, executive compensation and Fannie Mae and Freddie Mac — to develop a comprehensive portrait of the failures that led to the financial crisis that bankrupted companies, destroyed Americans’ savings, led to devastation in the housing market and cost millions of Americans their livelihoods.
Instead, the GOP commissioners use their report to make the case that the housing bubble and the “unprecedented number of subprime and other weak mortgages in this bubble” were the ultimate cause of the financial crisis — and seem to have little interest in looking further. They say, in fact, that it was all the fault of government:
There were three important ways that the government pushed investors toward investing in mortgage debt. First, the regulatory capital requirements associated with mortgage debt were lower than for other investments. Second, the government encouraged the private market to extend credit to previously underserved borrowers through a combination of legislation, regulation, and moral suasion. Third, and most important, during the bubble’s expansion, the largest investors in the mortgage market, the government-sponsored enterprises (GSEs)—Fannie Mae and Freddie Mac—were instruments of U.S. government housing policy
They site the “decline in lending standards” — as spearheaded by the government — as the biggest reason the economy went into decline, blaming Fannie Mae and Freddie Mac in particular for pushing banks to lend to unqualified borrowers and encouraging investors to buy into those debts. And then, they say, no one believed that housing prices wouldn’t always go up, or that mortgage-backed securities might not be inherently stable.
After praising the government for stepping in with the bank bailouts and TARP — after they accuse it of “effectively” seizing AIG — they then go on to make their sole recommendation for preventing a repeat of the crisis or the housing bubble: reduce the budget deficit.
A partial lists of items from the mandate of the commission that the Republicans’ report ignores includes:
- fraud and abuse in the financial sector, including fraud and abuse towards consumers in the mortgage sector
- Federal and State financial regulators, including the extent to which they enforced, or failed to enforce statutory, regulatory, or supervisory requirements
- the global imbalance of savings, international capital flows, and fiscal imbalances of various governments
- accounting practices, including, mark-to-market and fair value rules, and treatment of off-balance sheet vehicles
- tax treatment of financial products and investments
- capital requirements and regulations on leverage and liquidity, including the capital structures of regulated and non-regulated financial entities
- credit rating agencies in the financial system, including, reliance on credit ratings by financial institutions and Federal financial regulators, the use of credit ratings in financial regulation, and the use of credit ratings in the securitization markets
- affiliations between insured depository institutions and securities, insurance, and other types of nonbanking companies
- corporate governance, including the impact of company conversions from partnerships to corporations
- compensation structures
- changes in compensation for employees of financial companies, as compared to compensation for others with similar skill sets in the labor market
- derivatives and unregulated financial products and practices, including credit default swaps
- financial institution reliance on numerical models, including risk models and credit ratings
- the legal and regulatory structure governing financial institutions, including the extent to which the structure creates the opportunity for financial institutions to engage in regulatory arbitrage
- the quality of due diligence undertaken by financial institutions
- and, the causes of major financial institutions which failed, or were likely to have failed, had they not received exceptional government assistance.