Alert February 01, 2011

Financial Crisis Inquiry Commission Issues Final Report on Causes of the Financial Crisis of 2008

The Financial Crisis Inquiry Commission (“FCIC”) released, on January 27, 2011, its final 662-page Report (the “Report”) regarding the causes of the 2008 financial crisis.  The Report, which represents the views of the six-member majority (six out of ten Commissioners), concludes that the crisis was avoidable and assigns culpability to a broad range of factors and entities, including, among others:

  1. Fannie Mae’s and Freddie Mac’s failure to react to the risks of the subprime mortgage market and the housing bubble and the loosening of their credit underwriting standards;
  2. lapses in regulatory oversight;
  3. loose corporate governance practices and executive compensation practices that rewarded risk-taking without claw-back and other protections;
  4. inadequate levels of capital at banks and investment banks;
  5. credit rating agencies that gave asset pools high ratings with insufficient due diligence;
  6. bankers who failed to account for risks in the housing market;
  7. greater concentrations of high-risk trading in financial institutions’ trading portfolios;
  8. misuse of over-the-counter derivatives;
  9. misguided government housing and other policies; and
  10. fraud and, to a greater extent, greed.

The Report does not assign primary responsibility for the financial crisis to any one factor or entity and does not make any specific policy recommendations.  The Report includes two dissents, one by three members of the minority and one by Peter Wallison, the fourth member of the minority on the FCIC.