Saturday, February 5, 2011

U.S. financial crisis fueled from negligence, risk-taking, panel says

WASHINGTON - A divided inquiry panel unveiled its final report on the U.S. financial crisis Thursday, providing the most authoritative account to date of the frenzy that gripped Wall Street giants packaging risky mortgage securities, the blunders of federal regulators and the contagion that nearly led to a depression.

Even after home prices began their descent in early 2006 the U.S. financial industry created $1.7 trillion in mortgage-backed securities and other products tied to the loans' performance, Phil Angelides, Democratic chairman of the Financial Crisis Inquiry Commission, told a news conference.

The 10-member panel released an exhaustive, 633-page report based on more than 700 interviews and millions of pages of documentary evidence - the first comprehensive analysis of the factors that led to the economic crash.

Written in narrative, it lays out a disaster that stalled the economy for three years, led to the demise of storied investment banks and could lead to foreclosures on as many as 13 million homes.

The report parcels out blame to Federal Reserve Chairman Ben Bernanke and his predecessor, Alan Greenspan, for their "pivotal failure" to rein in lenders who wrote loans for marginal borrowers, but also to Wall Street behemoths that repackaged the mortgages as securities and to credit-rating agencies that stamped them with exaggerated grades.

Key policy makers lacked a full understanding of the financial system they oversaw, it said, and at the height of the crisis pressed Fannie Mae and Freddie Mac, the huge government-sponsored secondary-mortgage lenders, to take on more risk, heightening taxpayer losses when they collapsed.

The four Republicans on the panel boycotted the news conference, submitting dissents saying the assessment was too simplistic.

Angelides, a former California state treasurer, said the panel hopes that Americans will read the report and learn that the meltdown was an avoidable "result of human action, inaction and misjudgment."

"There were warning signs," he said. "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."

Commission investigators found that banks dived into the subprime housing market with such abandon that three firms - Merrill Lynch, now a part of Bank of America Corp.; Citigroup Inc.; and the Swiss investment bank UBS AG - bought tens of billions of dollars in mortgage securities in 2007 when most investors were shunning them.

The firms found ways to peddle the same securities multiple times in complex offshore deals and to structure bets based on mortgage bonds' performance without actually buying them, creating a "self-fueling" offshore market, the panel concluded.

The panel charged that Citi and Merrill Lynch didn't understand the risks they were taking and failed to disclose in a timely fashion tens of billions of dollars in mortgage risks to their investors.

Asked about the findings, BofA spokesman Scott Silvestri said, "While most of these matters have been closely scrutinized and addressed, the work of the commission is important, and we'll review their reports carefully."

Several of the biggest banks took on so much risk that a negative 3 percent market move "could have consumed their capital reserves," said Commissioner Byron Georgiou, a Nevada securities attorney.

Indeed, Bernanke told the panel that of the nation's 13 most important financial institutions, "12 were at risk of failure within a week or two" in September 2008.

Georgiou cautioned that despite congressional reforms adopted last year to prevent a recurrence, in many ways "our financial system is still unchanged."

The report, which was delivered Thursday to President Barack Obama and Congress, found that:

- Major rating agencies, especially market leader Moody's Investors Service, didn't review the quality of the mortgages backing the securities they rated, which played a central role in creating the crisis. Angelides noted that 45,000 pools of mortgage bonds received the top AAA rating, a grade achieved today by only six U.S. companies.

- Ten large banks and investment banks paid Clayton Holdings Inc. to scrutinize more than 900,000 sample mortgages before they bought pools that contained millions of loans. But the samples sometimes amounted to as little as 2 percent of a bundle, and although Clayton rejected 28 percent of the sample loans, 39 percent of its rejections later were reversed.

- In September 2008, as panic spread, investors demanded their money, and hedge funds made such a run on Wall Street firms that investment bank Morgan Stanley's liquidity pool plunged from $130 billion to $55 billion in a week, and investment bank Goldman Sachs Group Inc.'s pool fell from $120 billion to $57 billion. The Federal Reserve propped up both firms with tens of billions of dollars.

While the report looks backward on many wrongs, it helps move the debate forward on one important matter: the future of Fannie Mae and Freddie Mac, which either guaranteed or bundled trillions of dollars in U.S. home loans.

Both have been in government conservatorship since then-Treasury Secretary Henry Paulson ordered them seized in August 2008.

Some conservatives have faulted the role of Fannie and Freddie in the crisis. But mortgage data and the panel majority's analysis of about 25 million mortgages to marginal borrowers show that Fannie's and Freddie's mortgages performed far better than those securitized by Wall Street.

Three of the four Republicans on the panel - former California Rep. Bill Thomas and economists Douglas Holtz-Eakin and Keith Hennessey - didn't dispute this aspect of the report. "Fannie Mae and Freddie Mac did not by themselves cause the crisis, but they contributed significantly in a number of ways," the three wrote.

by Greg Gordon and Kevin G. Hall McClatchy Newspapers Jan. 28, 2011 12:00 AM

U.S. financial crisis fueled from negligence, risk-taking, panel says

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