A Guest Review of The Financial
Crisis Inquiry Report
By Phil
Thornton, Clarity Economics
In the UK,
financial journalists and commentators are used to ploughing through wooden-worded
inquiry reports from MPs and peers as useful sources for a story but never as
literature. In the United States there is a positive trend for writing reports
based on official inquiries into major events as if they were novels. The
reports, often of Dickensian book-length, follow the time-honoured pattern of
beginning, middle and end, with a moral lesson to round it off.
but, unlike 9/11, concluding with not one but three alternative moral lessons.
The title of
the first section – Crisis on the Horizon: Before Our Very Eyes – gives
a good indication of the James Ellroy style of prose. Short sentences abound. “Ours
was a journey of revelation,” says the committee of authors drawn from Senators
and Representatives from both the main parties.
In its format
it begins with an examination of four key developments that helped shape the
events that shook the financial markets and economy: shadow banking, financial
regulation, mortgage innovation, and securitisation. It then focuses on some of
the key ingredients of the subprime housing crisis including a detailed chapter
(with diagrams) on the collateralised debt obligation (CDO) “machine”, which
was the tool for packaging, dispersing and ultimately concealing the
securitised mortgages. A chapter entitled “Madness” includes an excoriating
section on the failings of the ratings agency. It then offers a blow-by-blow
narrative of the crisis itself starting in late 2006 when the ABX index of
mortgage-backed -BBB credit default swaps started to go south and Goldman Sachs
began selling out its subprime holdings. It follows the well-known of sequence of dominoes: BNP Paribas’s
hedge funds; the rescue of Bear Stearns; the takeover of Freddie Mac and Fannie
Mae; the totemic bankruptcy of Lehmans; the bailout of AIG and finally the
brink of depression.
Sometimes the
evidence the FCIC obtained just brings you up short. At one point Jamie Dimon,
CEO of JP Morgan – and he, remember, he is one of the good guys in this story –
reveals he missed the house price bubble. “Somehow we just missed, you know,
that home prices don’t go up forever and that it’s not sufficient to have
stated income.”
learn that Lehmans CEO Dick Fuld was kept “out of the loop” of Treasury
Secretary Paulson’s attempts to persuade Bank of America CEO Ken Lewis to buy
the crippled bank. When Fuld realised something was amiss two days before
Lehmans finally failed, he “began to call Lewis at home. Lewis’s wife told Fuld
that Lewis would not come to the phone and to stop calling”. More Coronation
Street than Wall Street.
However, readers
looking for analysis will be disappointed. The Dickens analogy is appropriate
as the bulk of the report is focused on relaying the sequence of events,
interspersed with quotations from 700 major and bit players.
critique is to misunderstand the point of the book. Analysis is available in
spades elsewhere courtesy of Messrs Roubini, Stiglitz, Rajan, Johnson, Rogoff, Krugman et
al.
Actually, analysis
does appear here but given the political nature of the debate in three forms: a
majority conclusion and two minority dissenting statements. The authors of the
former are all Democrats and of the latter two, Republicans.
the dividing line is whether the bulk of blame lies with government or the
private sector.
Each side blames both but retains its greatest ire for its own
pet hatreds.
the majority, the primary cause is 30 years of deregulation. On top of that
there were “dramatic failures of corporate governance”, excessive borrowing and
risky investments, a “systematic breakdown” in governance and ethics, OTC
derivatives “contributed significantly” to the crisis while rating agencies
were “essential cogs in the wheels of financial destruction”.
part the minorit(ies) blame ineffective rather than too little regulation and point
to the global nature of the housing and credit bubbles as the real cause. The
Government’s housing policy is blamed for subsidising home ownership and they see
no evidence CDSs caused the crisis.
Aside from
the snapshot of the two sides of the political debate in 2010, the book is
ultimately a cornucopia of information about every aspect of the financial
crisis. As such it will undoubtedly be a vital reference work for future
examinations of the crisis, particularly its artfully quoted and well referenced
interviews with the major players
The debate
over the exact cause of the crisis is destined to carry on for decades more.
This book settles little. Perhaps it’s best to leave this review with a
quotation that best sums up the book’s literary style:
“The crisis was the result of human action and
inaction, not of Mother Nature or
computer models gone haywire. To paraphrase Shakespeare, the fault lies not in the stars,
but in us.”