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Congressional report calls financial crisis 'avoidable'

WASHINGTON — The 2008 financial crisis was an "avoidable" disaster caused by widespread failures in government regulation, corporate mismanagement and heedless risk-taking by Wall Street, according to the conclusions of a congressional inquiry.

The government commission that investigated the financial crisis casts a wide net of blame, faulting two administrations, the Federal Reserve and other regulators for permitting a calamitous concoction: shoddy mortgage lending, the excessive packaging and sale of loans to investors, and risky bets on securities backed by the loans.

"The greatest tragedy would be to accept the refrain that no one could have seen this coming and thus nothing could have been done," the panel wrote in the report's conclusions. The full report is expected to be released as a 576-page book Thursday.

While the panel, the Financial Crisis Inquiry Commission, accuses several financial institutions of greed, ineptitude, or both, some of its most grave conclusions concern government failings, with embarrassing implications for both political parties.

Of the 10 commission members, only the six appointed by Democrats endorsed the final report. Three Republican members have prepared a dissent; a fourth Republican, Peter J. Wallison, a former Treasury official and White House counsel to President Ronald Reagan, has written a dissent, calling government policies to promote homeownership the primary culprit for the crisis.

The report itself finds fault with two Fed chairmen: Alan Greenspan, a skeptic of regulation who led the central bank as the housing bubble expanded; and his successor, Ben Bernanke, who did not foresee the crisis but then played a crucial role in the response. It also criticizes the Bush administration's "inconsistent response" to the crisis — allowing Leh­man Brothers to go bankrupt in September 2008, for example, after earlier bailing out another bank, Bear Stearns, with help from the Fed — saying it "added to the uncertainty and panic in the financial markets."

Like Bernanke, Bush's Treasury secretary, Henry Paulson, predicted in 2007 — wrongly, it turned out — that the subprime meltdown would be contained, as the report notes.

Democrats also come under fire. The 2000 decision to shield over-the-counter derivatives from regulation, made during the last year of President Bill Clinton's term, is called "a key turning point in the march toward the financial crisis."

Timothy Geithner, who was president of the Federal Reserve Bank of New York during the crisis and is now President Obama's Treasury secretary, also comes under criticism; the report finds that the New York Fed "could have clamped down" on excesses by Citigroup in the leadup to the crisis.

Former and current officials named in the report, as well as financial institutions, declined Tuesday to comment on the report before it was released, or did not respond to requests for comment.

The report will probably reignite debate over the outsize influence of Wall Street; it says that regulators "lacked the political will" to scrutinize and hold accountable the institutions they were supposed to oversee. The financial sector spent $2.7 billion on lobbying from 1999 to 2008, while individuals and committees affiliated with the industry made more than $1 billion in campaign contributions.

The report concluded that the nation's five largest investment banks had only $1 in capital to cover losses for about every $40 in assets, meaning that a 3 percent drop in asset values could wipe out the firm. The banks hid their excessive leverage using derivatives, off-balance-sheet entities and other devices, the report found.

The speculative binge was abetted by a giant "shadow banking system" in which the banks relied heavily on short-term debt.

"When the housing and mortgage markets cratered, the lack of transparency, the extraordinary debt loads, the short-term loans and the risky assets all came home to roost," the report found. "What resulted was panic. We had reaped what we had sown."

Congressional report calls financial crisis 'avoidable' 01/25/11 [Last modified: Tuesday, January 25, 2011 9:46pm]
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