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Question of the Day – The Financial Crisis Inquiry Commission
By JLP | January 10, 2010
I read in this weekend’s WSJ that there is a Financial Crisis Inquiry Commission that is responsible for figuring out WHAT caused the most recent financial crisis.
So, here’s today’s Question of the Day…
What would you tell them were the causes of the crisis?
Here are a few I can think of:
1. Interest rate policy by the Fed. Keeping interest rates too low for too long created too much liquidity. Lower interest rates also drove home sales, which fueled home price increases and formed a bubble.
2. Government involvement in trying to promote homeownership. We shouldn’t have been selling homes to people who couldn’t afford them.
3. Mark-to-market accounting that forced banks into a liquidity crisis. I have read that this crisis could have been averted had the mark-to-market accounting rule not been enforced. I’m not sure if this is true or not but it’s something to think about.
4. Financial instruments that collateralized mortgage debt and obfuscated risk.
5. Too many brokers and banks writing loans with no skin in the game. They would simply write the loan and then sell it off to yield-hungry investors.
6. Credit rating agencies that failed to properly rate risk.
What did I miss?
The main question is: why do we need a commission in the first place? This stuff isn’t hard to figure out. It is typical government though: allow a crisis to happen and then assign a commission to figure out why it happened.
Thoughts?
Topics: Credit Crisis, Question of the Day | 9 Comments »
January 10th, 2010 at 7:42 pm
It gives the politicians an authoritative source to point to and a launching point for new legislation.
January 10th, 2010 at 8:20 pm
Don’t forget over-leveraging. $30 for every $1 of real money meant that it only took a small percentage of defaults to have huge effects.
January 10th, 2010 at 9:26 pm
What’s the term, stated income loans or something like that…i.e loans with no proof of income, just “stating” what you make.
Also, where were the CPA/auditors in all this. Hate to disparage my colleagues, but I don’t know how a representative sampling of these loans could have passed an audit. Internal or external.
January 11th, 2010 at 2:37 am
I would add the fact that AIG issuing and insuring their own securities was a bad idea.
I couldn’t agree more that a commission is totally unwarranted, as everybody involved in policy decision making is fully aware of how things went down. If they really need a refresher, Richard Posner’s “A Failure of Capitalism” pretty effectively lays is out.
January 11th, 2010 at 9:05 am
Home appraisers artifically inflating the price of a houses in order to satisfy real estate agents and banks to close a sale/refinance. Fair market value was not important – real estate always goes up. These bogus appraisals were then used by other brokers as baseline comp valuations.
January 11th, 2010 at 10:18 am
Greed caused it, just like every bubble. In this case, the “greedy” people where borrowers, banks, brokers, appraisers, real-estate agents, bond holders, rating agencies, and the list goes on and on.
January 11th, 2010 at 10:40 am
BG,
Thanks for the catch. I did make an update to the post. I’m not sure how I missed that disclaimer. I guess I was so focused on the numbers.
Bottom line: if an insurance company is willing to mislead people like this, should people want to do business with them?
January 11th, 2010 at 11:27 am
I would add the repeal of Glass-Steagall which led to the over-leveraging that Dreamer stated.
As for #3, mark-to-market accounting, that’s actually a good thing. The problem is that bankers want to use it when asset values were rising, so they could make even more loans, but not when they were falling. A lot of people have been swayed by the media to think that it’s a bad thing, but all it’s really doing is forcing banks to mark assets at the current market value. But what banks want is to mark it to maturity based on some model (aka mark to fantasy). This is no different than telling yourself that your portfolio that drop by 50% last year is still worth double what it used to be! No, it’s not! It’s now only worth 50% and would be worth even less if you tried to liquidate it all!
January 13th, 2010 at 9:40 am
I Would add “Too big to fail.” I was looking at one of the panelists’ blogs. Most of his questions could be summed up as:
Did you know you were too big to fail and how did that affect decision-making.
Firms gain from the government covering risks. I don’t see why the banks would say anything that would hinder this status.