The FCIC Farce
Insurance Experts' Forum, January 28, 2011
If anticlimax is defined as “an event, period, or outcome that is strikingly less important or dramatic than expected,” then it’s also an entirely apt description of the conclusions delivered by the Financial Crisis Inquiry Commission. Tasked with divining the causes of the financial and economic crisis, the 10-person committee produced a bloated report so broad in its findings that it’s more lamentable than actionable.
The report, which represented the unanimous view of the six committee members selected by Democrats, bulleted five overreaching causes for the crisis: widespread failures in financial regulation; dramatic breakdowns in corporate governance; excessive borrowing and risk by households and Wall Street; policy makers ill prepared for the crisis; and systemic breaches in accountability and ethics at all levels.
Since all of these explanations have long been posited in innumerable other forums, the committee’s buckshot approach to assigning causation is especially disheartening.
“Even at the time of our appointment to this independent panel, much had already been written and said about the crisis,” the report states. “Yet all of us have been deeply affected by what we have learned in the course of our inquiry. We have been at various times fascinated, surprised, and even shocked by what we saw, heard, and read. Ours has been a journey of revelation.”
Luckily, the journey embarked upon by three Republican-appointed committee members seemed to yield some more structured insight in a published dissent. In addition to producing a succinct, 10-point list of causes, the three dissenters knocked the majority’s approach to explaining the crisis as too broad.
“Not everything that went wrong during the financial crisis caused the crisis, and while some causes were essential, others had only a minor impact,” the dissent states. “Not every regulatory change related to housing or the financial system prior to the crisis was a cause. The majority’s almost 550-page report is more an account of bad events than a focused explanation of what happened and why. When everything is important, nothing is.”
A separate dissent by committee member Peter Wallison seems to suffer from the opposite problem. Wallison improbably assigns all blame for the crisis to Community Reinvestment Act of 1977. While the regulation likely contributed to the growth of high-risk mortgage lending, Wallison fails to offer evidence on how the law spurred a similar housing bubble in Europe or made the hammerheads at Lehman Brothers think being leveraged 31:1 is a good idea.
Considering that the Dodd-Frank train left the station long ago, perhaps the only thing more underwhelming the commission’s findings is its timing. To me, the optimal time to release such a diagnosis would be before any attempts at redress are made.
No matter its timing or source, no matter how many bright people you lock in a room, the real question may be whether a fix is possible at all? Considering the diverse international and interrelated nature of the financial markets, any regulatory change momentous enough to be effective also is highly unlikely. “That fact that you can parcel out the blame to a lot of different actors indicates that the problem is systemic,” Melvin Dubnick, professor of public administration at the University of New Hampshire tells Insurance Networking News.
Accordingly, Dubnick says that neither radical changes in the market nor reform of the regulatory system will work unless there are some fundamental changes in how key actors assume that they have a ‘moral’ responsibility to the communities they serve. “People in the financial services industry have to be responsible not just accountable—and being responsible comes from within,” he says. “Public policies can be designed to foster that but it’s no easy fix. I don’t think that there’s a solution out there right now that will cure everything in the long term.”
Bill Kenealy is a senior editor with Insurance Networking News.
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