Bankers, politicians and the people blamed for credit crisis

Wall Street's recklessness and specific frauds to be detailed today in report on US crash

The financial crisis was an "avoidable" disaster, and the blame for it stretches from the halls of government and the skyscrapers of Wall Street right down to ordinary homebuyers across the US, according to the commission set up to learn the lessons of recent history.

The sheer scale and complexity of the events that engulfed the financial world in 2007 and 2008 defy a single easy explanation, and the Financial Crisis Inquiry Commission (FCIC) will today publish not one but three opinions giving weight to different causes and fingering different culprits.

Commissioners will say that they have passed evidence to the Department of Justice and are recommending prosecutions for fraud in several specific instances, but the broader themes are ones of regulatory failure and Wall Street recklessness, at least according to the leaked extracts emerging this week.

The conclusions of the report are a damning answer to the parade of Wall Street executives who appeared before the commission saying that the financial crisis seemed to come out of a clear blue sky.

"Alarm bells were clanging inside financial institutions, regulatory offices, consumer service organisations, state law enforcement agencies, and corporations throughout America, as well as in neighbourhoods across the country," the authors say. "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."

The events of the unfolding crisis are not in dispute. In 2007, it emerged that the banking system had extended vast amounts of credit to subprime borrowers and that US house prices had become precariously high. Pieces of these subprime mortgages had been bought and sold across the world, so when Americans found themselves unable to pay, they spread a sickness across global finance. Banks, which had themselves borrowed too much money from each other, came close to collapse.

In September 2008, Lehman Brothers toppled, sparking a panic that only the promise of government bailouts in numerous countries stopped. In the US, taxpayers have got their money back from Wall Street now, but the anger remains. The crisis exacerbated a recession and pushed unemployment to almost 10 per cent, and it is resisting all attempts to bring it down. What is much harder is the job of sorting out what factors contributed at each stage, what could have been done differently, and who should have acted.

The FCIC, despite subpoenaing millions of documents from regulators and private firms, and holding weeks of hearings, failed in its task of forging a bipartisan view of the crisis. The divergent opinions, with Republicans on the commission publishing two dissenting reports, will dismay Barack Obama, who set up the commission shortly after becoming President in 2009 and who had hoped its conclusions would galvanise opinion in favour of reform. The makeup of the commission, chaired by Californian Democrat Phil Angelides with a Republican former Congressman, Bill Thomas, as his deputy, was modelled on the bipartisan 9/11 Commission, whose report on the 2001 terrorist attacks on the World Trade Centre went on to become a best-seller.

Extracts of the FCIC's report have appeared this week in The New York Times, The Wall Street Journal and The Washington Post.

Although the main commission report cites greed and management failures at Wall Street firms, it concentrates on wider policy issues. It cites the collapse of mortgage standards in the US as a key cause of the crisis, blaming home owners themselves, fraudulent mortgage brokers and Wall Street's voracious appetite for mortgages to be sliced and diced into derivatives for sale across the world, as well as the Federal Reserve, the US central bank and a powerful regulator. Alan Greenspan, the anti-regulation Fed chairman who was in charge until 2006, is accused in the report of "a pivotal failure" to stop subprime mortgage lending getting out of control.

Mr Greenspan's successor, Ben Bernanke, is criticised for failing to see that subprime mortgage losses would lead to much bigger problems; Wall Street's regulator, the Securities and Exchange Commission, is criticised for letting banks hold a mere $1 for every $40 of lending activity they did, so that even modest losses could wipe them out; the Bush administration is condemned for an inconsistent response to the unfolding crisis.

The schisms in the FCIC reflect wider philosophical debate about the causes of the crisis. The Republican minority said even the sweeping majority report is simplistic as it ignores a credit bubble that went beyond US housing, and indeed beyond US borders.

They also disagreed with the majority's conclusion that US government housing policy and the role of Fannie Mae and Freddie Mac were not major contributors. Fannie and Freddie were government-guaranteed companies that bought or insured mortgages to make them more affordable for low income Americans.

"US government housing policy... led to the creation of 27 million subprime and other risky loans – half of all mortgages in the United States – which were ready to default as soon as the massive 1997-2007 housing bubble began to deflate," the Republican commissioner Peter Wallison writes in another, personal dissenting opinion. "If the US government had not chosen this policy path, the great financial crisis of 2008 would never have occurred."

Start your day with The Independent, sign up for daily news emails
News
people

Harry Potter actor suffered 'severe flu-like symptoms' on a flight from London to Orlando

Arts and Entertainment
Legendary Star Wars filmmaker George Lucas
film
News
news
Arts and Entertainment
tv

First full-length look is finally here

PROMOTED VIDEO
ebooks
ebooksA special investigation by Andy McSmith
Arts and Entertainment
Frank Turner performing at 93 Feet East
musicReview: 93 Feet East, London
News
Toronto tops the charts across a range of indexes
news

World cities ranked in terms of safety, food security and 'liveability'

Extras
indybest
Voices
A mother and her child
voices
Voices
The veterans Mark Hayward, Hugh Thompson and Sean Staines (back) with Grayson Perry (front left) and Evgeny Lebedev
charity appealMaverick artist Grayson Perry backs our campaign
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Product Manager - (Product Marketing, Financial Services)

£30000 - £35000 per annum + Benefits: Ashdown Group: Marketing Manager - Marke...

Recruitment Genius: Compliance Assistant

£13000 per annum: Recruitment Genius: This Pension Specialist was established ...

Ashdown Group: Market Research Executive

£23000 - £26000 per annum + Benefits: Ashdown Group: Market Research Executive...

Recruitment Genius: Technical Report Writer

£25000 - £35000 per annum: Recruitment Genius: A Technical Report Writer is re...

Day In a Page

Isis hostage crisis: The prisoner swap has only one purpose for the militants - recognition its Islamic State exists and that foreign nations acknowledge its power

Isis hostage crisis

The prisoner swap has only one purpose for the militants - recognition its Islamic State exists and that foreign nations acknowledge its power, says Robert Fisk
Missing salvage expert who found $50m of sunken treasure before disappearing, tracked down at last

The runaway buccaneers and the ship full of gold

Salvage expert Tommy Thompson found sunken treasure worth millions. Then he vanished... until now
Homeless Veterans appeal: ‘If you’re hard on the world you are hard on yourself’

Homeless Veterans appeal: ‘If you’re hard on the world you are hard on yourself’

Maverick artist Grayson Perry backs our campaign
Assisted Dying Bill: I want to be able to decide about my own death - I want to have control of my life

Assisted Dying Bill: 'I want control of my life'

This week the Assisted Dying Bill is debated in the Lords. Virginia Ironside, who has already made plans for her own self-deliverance, argues that it's time we allowed people a humane, compassionate death
Move over, kale - cabbage is the new rising star

Cabbage is king again

Sophie Morris banishes thoughts of soggy school dinners and turns over a new leaf
11 best winter skin treats

Give your moisturiser a helping hand: 11 best winter skin treats

Get an extra boost of nourishment from one of these hard-working products
Paul Scholes column: The more Jose Mourinho attempts to influence match officials, the more they are likely to ignore him

Paul Scholes column

The more Jose Mourinho attempts to influence match officials, the more they are likely to ignore him
Frank Warren column: No cigar, but pots of money: here come the Cubans

Frank Warren's Ringside

No cigar, but pots of money: here come the Cubans
Isis hostage crisis: Militant group stands strong as its numerous enemies fail to find a common plan to defeat it

Isis stands strong as its numerous enemies fail to find a common plan to defeat it

The jihadis are being squeezed militarily and economically, but there is no sign of an implosion, says Patrick Cockburn
Virtual reality thrusts viewers into the frontline of global events - and puts film-goers at the heart of the action

Virtual reality: Seeing is believing

Virtual reality thrusts viewers into the frontline of global events - and puts film-goers at the heart of the action
Homeless Veterans appeal: MP says Coalition ‘not doing enough’

Homeless Veterans appeal

MP says Coalition ‘not doing enough’ to help
Larry David, Steve Coogan and other comedians share stories of depression in new documentary

Comedians share stories of depression

The director of the new documentary, Kevin Pollak, tells Jessica Barrett how he got them to talk
Has The Archers lost the plot with it's spicy storylines?

Has The Archers lost the plot?

A growing number of listeners are voicing their discontent over the rural soap's spicy storylines; so loudly that even the BBC's director-general seems worried, says Simon Kelner
English Heritage adds 14 post-war office buildings to its protected lists

14 office buildings added to protected lists

Christopher Beanland explores the underrated appeal of these palaces of pen-pushing
Human skull discovery in Israel proves humans lived side-by-side with Neanderthals

Human skull discovery in Israel proves humans lived side-by-side with Neanderthals

Scientists unearthed the cranial fragments from Manot Cave in West Galilee