Crisis panel report finds Wall Street appeared to violate federal law

Written by Biloxi

Financial Crisis Inquiry Commission, an independent commission created by Congress, just released on Thursday their 662-page "Financial Crisis Inquiry Report" after a year-long investigation in which it reviewed millions of pages of documents, interviewed more than 700 witnesses and held 19 days of public hearings. The 10 panel commission of 6 Democrats and 4 Republicans conducted an investigation into the cause of the U.S. financial crisis. The report that was released is from the Democratic commission findings. Republican commission released and produced two of their own reports which largely looked at global forces, like savings from Asia flooding the U.S. financial system, and the role played by government housing goals. However, the Democratic committee looked much deeper into the financial crisis in which according to the report said that the crisis was avoidable and warnings were ignored. FCIC said in the report, “The greatest tragedy would be to accept the refrain that no one could have seen this coming and thus nothing could have been done. If we accept this notion, it will happen again.”

The 662-page report, available online, offers 10 main conclusions:

* We conclude widespread failures in financial regulation and supervision proved devastating to the stability of the nation's financial markets.
* We conclude dramatic failures of corporate governance and risk management at many systemically important financial institutions were a key cause of this crisis.
* We conclude a combination of excessive borrowing, risky investments, and lack of transparency put the financial system on a collision course with crisis.
* We conclude the government was ill prepared for the crisis, and its inconsistent response added to the uncertainty and panic in the financial markets.
* We conclude there was a systemic breakdown in accountability and ethics.
* We conclude collapsing mortgage-lending standards and the mortgage securitization pipeline lit and spread the flame of contagion and crisis.
* We conclude over-the-counter derivatives contributed significantly to this crisis.
* We conclude the failures of credit rating agencies were essential cogs in the wheel of financial destruction.

As the report mentioned that the federal regulators, the past and present Fed chairmen, government, banks, credit rating agencies, and the banks; financial products were key causes of the financial crisis, the crisis panel did find that Wall Street violated the federal law. According the FCIC report, Keith Johnson, former president of Clayton Holdings, one of the nation's biggest mortgage research companies, testified to the commission last year in September that some 28 percent of the loans given to homeowners with poor credit examined by his firm on behalf of Wall Street banks failed to meet basic standards. Yet nearly half appear to have been sold to investors regardless.

In addition, Richard Bowen, a whistleblower and former chief underwriter for Citigroup's consumer-lending unit, testified last year in April  that in the middle of 2006, Mr. Bowen discovered more than 60 percent of the mortgages that Citigroup had purchased from other firms and then sold to investors were "defective." In other words, those mortgages did not satisfy the bank's own lending criteria. On November 3, 2007,  Mr. Bowen sent an e-mail to top Citigroup officials, including Robert Rubin, a former Treasury Secretary. Unfortunately, Mr. Bowen's warnings appear to have been ignored.

Finally, there is this interesting information in the report where the commission conducted a private interview with FED Chairman Ben Bernanke. In a private interview with the crisis panelon November 2009, Mr. Bernanke said that 12 of the 13 U.S. financial firms were at the brink of failure at the height of the credit crisis in 2008. Mr. Bernanke didn't say which one of the 13 financial firms was not on the brink of failure or what 12 financial firms were, but we do know that Goldman Sachs was one of the firms in serious trouble. Mr. Bernanke told the commission, "If you look at the firms that came under pressure in that period ... only one ... was not at serious risk of failure.. Even Goldman Sachs, we thought there was a real chance that they would go under."

Now whether that means someone or somebody get jail time, that remains to be seen. However, it doesn't rule out suggestions that civil charges may be as far as the "violations" will go. Yet, the final report found that investors weren't adequately told what they were actually buying. So, I certainly wouldn't rule out more lawsuits by the investors accusing banks of fraud.