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Saturday, January 29, 2011

It's Official: Banks Caused Recession

Hey Barry:

Phil Angelides and the Financial Crisis Inquiry Commission have investigated the banking crisis. I list their conclusions below and there is plenty of blame to go around.

You can read the report here: http://fcic.gov/report

Clearly the major factors were bankers who acted recklessly, and occasionally criminally, and a poor to non-existent regulation structure.

The crisis was both preventable and predictable. Sadly, it WILL happen again unless strong additional steps are taken to prevent it.

Here are the conclusions:

"...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...

We conclude widespread failures in financial regulation and supervision proved devastating to the stability of the nation’s financial markets. The sentries were not at their posts, in no small part due to the widely accepted faith in the selfcorrecting nature of the markets and the ability of financial institutions to effectively police themselves. More than 30 years of deregulation and reliance on self-regulation by financial institutions, championed by former Federal Reserve chairman Alan Greenspan and others, supported by successive administrations and Congresses, and actively pushed by the powerful financial industry at every turn, had stripped away key safeguards, which could have helped avoid catastrophe...

We conclude dramatic failures of corporate governance and risk management at many systemically important financial institutions were a key cause of this crisis. There was a view that instincts for self-preservation inside major financial firms would shield them from fatal risk-taking without the need for a steady regulatory hand, which, the firms argued, would stifle innovation. Too many of these institutions acted recklessly, taking on too much risk, with too little capital, and with too much dependence on short-term funding...

We conclude a combination of excessive borrowing, risky investments, and lack of transparency put the financial system on a collision course with crisis. Clearly, this vulnerability was related to failures of corporate governance and regulation, but it is significant enough by itself to warrant our attention here...

We conclude the government was ill prepared for the crisis, and its inconsistent response added to the uncertainty and panic in the financial markets. As part of our charge, it was appropriate to review government actions taken in response to the
developing crisis, not just those policies or actions that preceded it, to determine if any of those responses contributed to or exacerbated the crisis...

We conclude there was a systemic breakdown in accountability and ethics. The integrity of our financial markets and the public’s trust in those markets are essential to the economic well-being of our nation...

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. The enactment of legislation in 2000 to ban the regulation by both the federal and state governments of over-the-counter (OTC) derivatives was a key turning point in the march toward the financial crisis...

We conclude the failures of credit rating agencies were essential cogs in the wheel of financial destruction. The three credit rating agencies were key enablers of the financial meltdown..."

On a related note, from Susanne Craig of the New York Times: "Lloyd C. Blankfein, the chief executive of Goldman Sachs, had a rough 2010. But at least he got a raise: his bonus increased by $3.6 million, according to a regulatory filing.

The firm’s board granted restricted stock valued at $12.6 million to Mr. Blankfein and other senior executives, including Gary D. Cohn, the firm’s president. The board also approved a new annual base salary of $2 million for its chief executive, up from $600,000. Mr. Cohn and others will see their base salaries increase to $1.85 million, according to the filing on Friday."

Your pal,