WASHINGTON — A divided inquiry panel unveiled its final report on the U.S. financial crisis Thursday, providing the most authoritative account to date of the madness that gripped Wall Street giants packaging risky mortgage securities, the blunders of federal regulators and the contagion that nearly led to a depression.
Even after home prices began their long descent in early 2006 _ a hard-to-ignore stop sign _ the U.S. financial industry created $1.7 trillion in home mortgage-backed securities and other exotic products tied to the loans' performance, Phil Angelides, the Democratic chairman of the Financial Crisis Inquiry Commission, told a news conference.
The 10-member panel released an exhaustive, 633-page report based on more than 700 interviews and millions of pages of documentary evidence — the first comprehensive analysis of the factors that led to the worst economic crash in 80 years.
Written in narrative, it lays out the sins and lessons of a disaster that stalled the economy for three years, led to the demise of storied investment banks and could lead to foreclosures on as many as 13 million homes.
The report parcels out blame to Federal Reserve Chairman Ben Bernanke and even more so to his predecessor, Alan Greenspan, for their "pivotal failure" to rein in subprime lenders who wrote so-called "liar's loans" for marginal borrowers, but also to Wall Street behemoths that repackaged the mortgages as securities and to credit ratings agencies that stamped them with exaggerated top-notch grades.
Key policymakers lacked a full understanding of the financial system they oversaw and, at the height of the crisis pressed the huge, government-sponsored secondary mortgage lenders Fannie Mae and Freddie Mac to take on more risk, heightening taxpayer losses when they collapsed, it said.
However, the four Republicans on the panel boycotted the news conference, submitting lengthy dissents saying the assessment was too simplistic.
Angelides, a former California state treasurer, said the panel hopes that Americans will read the report, available in bookstores nationwide and over the Internet, and learn that the meltdown was an avoidable "result of human action, inaction and misjudgment."
"The captains of finance and the public stewards of our financial system ignored warnings," he said. " If we do not learn from history, we will not fully recover from it."
Commission investigators found that banks and investment banks dove into the subprime housing market with such abandon that three firms — Merrill Lynch, now a part of Bank of America, Citigroup and the Swiss investment bank UBS — bought tens of billions of dollars in mortgage securities in 2007 when most investors were shunning them.
The firms found ways to peddle the same securities multiple times in complex offshore deals and to structure bets based on mortgage bonds' performance without actually buying them, creating a "self-fueling" offshore market, the panel concluded. Merrill traders even arranged for the sale of mortgage securities from one of its various deals to another, it reported.
The panel charged that Citi and Merrill didn't understand the risks they were taking and failed to disclose in a timely fashion tens of billions of dollars in mortgage risks to their investors.
Asked about the findings, Bank of America spokesman Scott Silvestri said that, "While most of these matters have been closely scrutinized and addressed, the work of the commission is important and we'll review their reports carefully."
Several of the biggest banks took on so much risk that a negative 3 percent market move "could have consumed their capital reserves," said Commissioner Byron Georgiou, a Nevada securities attorney.
Indeed, Bernanke told the panel that, of the nation's 13 most important financial institutions, "12 were at risk of failure within a week or two" in September 2008.
Georgiou cautioned that despite congressional reforms adopted last year to prevent a recurrence, in many ways "our financial system is still unchanged."
The report, which was delivered to President Barack Obama and Congress Thursday, found that:
- Major ratings agencies, especially market leader Moody's Investors Service, didn't review the quality of the mortgages backing the securities they rated, which played a central role in creating the crisis. Angelides noted that 45,000 pools of mortgage bonds received the top AAA rating, a grade achieved today by only six U.S. companies.
- Ten large banks and investment banks paid Clayton Holdings Inc. to scrutinize more than 900,000 sample mortgages before they bought pools that contained millions of loans. However, the samples sometimes amounted to as little as 2 percent of a bundle, and while Clayton rejected 28 percent of the sample loans, 39 percent of its rejections later were reversed.
- In September 2008, as panic spread, investors demanded their money, and hedge funds made such a run on Wall Street firms that investment bank Morgan Stanley's liquidity pool plunged from $130 billion to $55 billion in a week, and investment bank Goldman Sachs' pool fell from $120 billion to $57 billion. The Federal Reserve propped up both firms with tens of billions of dollars.
- As McClatchy reported in June, Goldman Sachs was acting as more than an intermediary on behalf of its clients on $6 billion of the $20 billion in insurance it bought on risky mortgage securities from the giant insurer American International Group.
The panel said that AIG paid Goldman $2.9 billion to settle coverage that Goldman bought with its own money on exotic, offshore securities, most of it after a massive taxpayer bailout rescued the insurer. Goldman declined to comment, but a person familiar with the trades, who declined to be named because he isn't authorized to speak, said that Goldman would disagree with this characterization because it had purchased separate insurance in the event AIG didn't cover the bets.
While the report looks backward on many wrongs, it helps move the debate forward on one important matter_ the future of Fannie Mae and Freddie Mac, which either guaranteed or bundled trillions of dollars in U.S. home loans.
Both have been in government conservatorship since then-Treasury Secretary Henry Paulson ordered them seized in August 2008. The Obama administration is expected to unveil in coming weeks its proposal about how to get them out of government hands.
Some conservatives have aggressively faulted the role of Fannie and Freddie in the crisis. However, mortgage data and the FCIC majority's analysis of about 25 million mortgages to marginal borrowers show that Fannie's and Freddie's mortgages performed far better than those securitized by Wall Street.
In 2008, the year the U.S. financial system buckled and almost collapsed, more than 28 percent of mortgages bundled by Wall Street were delinquent, compared with about 6 percent of Fannie or Freddie bundled mortgages, the report said.
In their collective dissent, three of the four Republicans on the panel — former California Rep. Bill Thomas, and economists Douglas Holtz-Eakin and Keith Hennessey — didn't dispute this aspect of the FCIC's report.
"Fannie Mae and Freddie Mac did not by themselves cause the crisis, but they contributed significantly in a number of ways," the three panelist wrote.
Their view was shared by the majority of panelists. Georgiou said that the two firms had just a dollar in reserve for every $75 of mortgage risks.
The report also noted that last year, Fannie and Freddie demanded that the companies that sold them 167,000 soured mortgages return a staggering $34.8 billion for misrepresenting them. To date, Fannie has received $11.8 billion and Freddie $9.1 billion from sellers, it said.
(Christina Rexrode of The Charlotte Observer contributed to this article.)
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