Financial Crisis Commission Says Meltdown Was Avoidable
The Financial Crisis Inquiry Commission (FCIC) has concluded that the financial meltdown was avoidable and spreads the blame for it among regulators, politicians, financial firms and credit rating agencies, according to Reuters. The report is set to be released on Thursday January 27th but drafts have been circulating following a leak of the contents by the New York Times.
Federal Reserve Chairman Alan Greenspan and his successor Ben Bernanke were singled out and criticized along with the Clinton Administration. American International Group, Fannie Mae, Merrill Lynch, Bear Stearns, Goldman Sachs, Lehman Brothers and Morgan Stanley were among the financial firms addressed, especially for “operating with such extraordinarily thin capital that less than a 3% drop in asset value could wipe out a firm.”
The credit rating agencies such as Moody’s, McGraw-Hill, Standard & Poor’s and Fimalac SA’s Fitch Ratings did not escape scrutiny for their part by rubber stamping their approval on securities that proved to be more risky than marketed because they were backed by mortgages given to borrowers who were unable to make payments on the loans. The panel wrote that “the failures of the credit rating agencies were essential cogs in the wheel of financial destruction” and added that “Moody’s put little weight on the possibility that prices would fall sharply nationwide.” According to a Bloomberg article, Moody’s assumed a 4% increase annually in home prices. The results were disastrous resulting in downgrading 83% of the mortgage backed securities (MBS) it had rated triple-A in 2006, to junk according to the commission report.