The Financial Crisis Inquiry Report

Claims Supported by This Source

1. Conclusion: The crisis was avoidable. Widespread failures in financial regulation and supervision; failures of corporate governance and risk management at major financial institutions; a combination of excessive borrowing, risky investments, and a lack of transparency; an ill-prepared government; and a systemic breakdown in accountability and ethics.
2. Conclusion: Collapsed mortgage lending standards and the securitization pipeline ignited and spread the fire. Each stage depended on demand from the next, and no one had sufficient skin in the game. They could not be sold without the seal of approval from rating agencies, and CDS added fuel to the pipeline.
3. Conclusion: Fannie Mae and Freddie Mac securities largely maintained their value throughout the crisis, and while both institutions contributed to it, they were not a primary cause.
4. An opaque shadow banking system laden with short-term debt grew to a size rivaling the traditional banking system, while trillions of dollars in the repo market, off-balance-sheet vehicles, and over-the-counter derivatives remained outside of safeguards.
5. The five largest investment banks operated with extremely thin capital. Much of their borrowing was overnight, renewed daily, and collateralized by subprime mortgage-backed securities. Leverage was hidden by derivatives, off-balance-sheet vehicles, and window dressing in financial reports.
6. Credit markets froze with the collapse of Lehman and the AIG crisis in September 2008. The report also includes a dissenting opinion (citing global capital flows as the main cause).
7. Introduction (p.xv): At the time the report was printed, over 26 million people were unemployed, underemployed, or had given up looking for work; about 4 million families had lost their homes to foreclosure, and another 4.5 million were in foreclosure proceedings or were seriously delinquent; and nearly $11 trillion in household wealth had been lost.
8. Conclusion (p.xvii): Financial sector debt grew from $3 trillion in 1978 to $36 trillion in 2007. In 2005, the top 10 financial institutions held 55% of the industry's assets (more than double the 1990 figure). In 2006, financial sector profits accounted for 27% of all corporate profits (up from 15% in 1980).
9. Conclusion (p.xix–xx): As of 2007, the five largest investment banks had a leverage ratio of 40-to-1 by one measure. A decline in assets of just under 3% could wipe out a firm. At the end of 2007, Bear Stearns had $11.8 billion in capital and $383.6 billion in debt, and was borrowing up to $70 billion overnight. The combined leverage of Fannie Mae and Freddie Mac was 75-to-1 at the end of 2007. From 2001 to 2007, mortgage debt per household increased by over 63%, from $91,500 to $149,500. Lehman's holdings of commercial and residential real estate were $111 billion at the end of 2007 (more than four times its capital).
10. Conclusion (p.xxv–xxvi): The government committed over $180 billion to AIG. From 2000 to 2007, Moody's rated nearly 45,000 mortgage-related securities as AAA (30 per business day in 2006); 83% of the AAAs from that year were later downgraded. The GSEs' involvement in the mortgage market amounted to $5 trillion, and Treasury support for the GSEs had reached $151 billion by the third quarter of 2010. The commission concluded that excess liquidity was a precondition for the credit bubble but not the cause of the crisis.
11. Chapter 15 (pp.289–290): On March 14, 2008, the New York Fed lent $12.9 billion to Bear Stearns via JPMorgan. On March 16, under Section 13(3), Maiden Lane LLC purchased $29.97 billion of Bear's assets (financed by a $28.82 billion loan from the NY Fed and a $1.15 billion subordinated loan from JPMorgan to cover the first loss). JPMorgan announced its acquisition at $2 per share, which was raised to $10 on March 24.
12. Chapter 20 (pp.356–357): As of September 15, the Reserve Primary Fund held 1.2% ($785 million) of its $62.4 billion in total assets in Lehman commercial paper. That morning, it faced redemption requests of $10.8 billion; its custodian, State Street, halted advances at 10:10 AM. An additional $29 billion in requests followed on the 15th and 16th. At 4 PM on the 16th, the fund valued its Lehman debt at zero, breaking the buck. In the following two years, 62 money market funds (36 in the US, 26 in Europe) received sponsor support, and redemptions spread even to MMFs with no Lehman holdings.
13. Chapter 20 (pp.373–374): On October 13, 2008, the Treasury allocated $250 billion from TARP to the Capital Purchase Program (CPP), for senior preferred stock paying a 5% dividend, rising to 9% after five years. Half of this amount went to nine firms: Citigroup, JPMorgan, and Wells Fargo ($25 billion each); Bank of America ($15 billion); Merrill Lynch, Morgan Stanley, and Goldman Sachs ($10 billion each); BNY Mellon ($3 billion); and State Street ($2 billion). The assets of these nine firms exceeded $11 trillion, representing about 75% of US banking assets.
14. Chapter 21: The recession began in December 2007. 3.6 million jobs were lost in 2008, another 4.7 million by December 2009, and nearly 1 million had been regained by November 2010.
15. Dissenting opinion (Hennessey, Holtz-Eakin, Thomas): Single-cause theories (capital flows, monetary policy, housing policy, lack of regulation, derivatives, greed) are all insufficient. The majority opinion is too broad. They list 10 essential causes, stating the credit bubble was caused by international capital flows and the re-evaluation of risk, and that US monetary policy may have been an amplifying factor but not the essential cause. Citing the chain of events in September 2008 (9/7 GSEs, 9/15 Lehman, 9/16 RPF and AIG 85 billion, 9/18–19 TARP proposal 700 billion, 9/21 Goldman Sachs and Morgan Stanley become bank holding companies, 9/25 WaMu, 9/29 House rejection and Wachovia, 10/1–3 passage), they argue it is a mistake to attribute the panic solely to Lehman.
16. Dissenting View (Wallison): The position that the necessary condition for the crisis was U.S. government housing policy, which created 27 million subprime and other high-risk loans (half of all mortgages), which then defaulted en masse when the 1997–2007 housing bubble deflated.

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