Who caused the greatest financial and economic crisis since the Great Depression?
From consumers who took on far too much debt, to bankers who took on far too much risk, and regulators who did far too little to stop dangerous trends years in the making, the blame is widely if not equally shared, a majority of the panel agreed.
And in a strong indictment of the failures of those in positions of responsibility to keep the financial and economic trains from derailing, the panel's majority said the crisis wasn't inevitable.
The panel, chaired by Democrat Phil Angelides, former California state treasurer, wrote:
We conclude this financial crisis was avoidable. The crisis was the result of human action and inaction, not of Mother Nature or computer models gone haywire.
The captains of finance and the public stewards of our financial system ignored warnings and failed to question, understand, and manage evolving risks within a system essential to the well-being of the American public. Theirs was a big miss, not a stumble.
While the business cycle cannot be repealed, a crisis of this magnitude need not have occurred. To paraphrase Shakespeare, the fault lies not in the stars, but in us.
Despite the expressed view of many on Wall Street and in Washington that the crisis could not have been foreseen or avoided, there were warning signs. The tragedy was that they were ignored or discounted.
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 prime example is the Federal Reserve's pivotal failure to stem the flow of toxic mortgages, which it could have done by setting prudent mortgage-lending standards. The Federal Reserve was the one entity empowered to do so and it did not.
The record of our examination is replete with evidence of other failures: financial institutions made, bought, and sold mortgage securities they never examined, did not care to examine, or knew to be defective; firms depended on tens of billions of dollars of borrowing that had to be renewed each and every night, secured by subprime mortgage securities; and major firms and investors blindly relied on credit rating agenciesas their arbiters of risk.
What else could one expect on a highway where there were neither speed limits nor neatly painted lines?
Here are the just the bullet-points of the panel's other findings:
• We conclude widespread failures in financial regulation and supervisionproved devastating to the stability of the nation's financial markets...
• We conclude dramatic failures of corporate governance and risk managementat many systemically important financial institutions were a key cause of this crisis...
• We conclude a combination of excessive borrowing, risky investments, and lackof transparency put the financial system on a collision course with crisis...
• We conclude the government was ill prepared for the crisis, and its inconsistentresponse 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 securitizationpipeline 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 thewheel of financial destruction...
The panel's majority directly contradicted those who blame the whole financial meltdown mainly on the Federal Reserve's low interest rate policy under Alan Greenspan, its former chair; mortgage giants Fannie Mae and Freddie Mac, or the housing policies of successive presidential administrations.
While all those contributed to greater or lesser degrees, the financial crisis was created by more factors than those, some having a much more significant role, the panels's majority found.
In a move that was expected, three Republican panelists led by Vice Chairman Bill Thomas, a former Republican Congressman from California, dissented from the majority's report because they thought that it blamed the crisis on too many factors.
But then, in what was arguably a contradiction, they listed ten causes they discerned behind the crisis. Some of those overlapped with the causes the majority gave.
Further, the dissenters discounted the majority's view that a failure of U.S. regulation was at fault because, they said, similar bubbles in real estate occurred in Europe.
The financial crisis report puts an end to what was our era's version of the Pecora Commission which during the Great Depression investigated the role Wall Street companies played in that calamity.
But while the panel finished its work, the debate promises to rage on over the causes of the crisis that began in 2007 and how to stop a repeat.
In sober words, the report warns that it would be a grave error to act as though nothing can be done to prevent financial meltdowns of the sort the nation experienced.
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.
This report should not be viewed as the end of the nation's examination of this crisis. There is still much to learn, much to investigate, and much to fix.
This is our collective responsibility. It falls to us to make different choices if we want different results.