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Commission Report Blames Deregulation For Housing Crash

Olga Khazan |
January 26, 2011 | 1:57 p.m. PST

Senior Editor

By now, the narrative of the subprime mortgage crisis is well-documented: Risky loans were doled out to unqualified buyers, then those loans were packaged into derivative products and sold to other banks. Now that the dust has settled from the fall of that house of cards, it's time to point fingers.

Today, a federal commission laid the blame for the 2008 housing crisis largely at the feet of the two Fed chairmen, Alan Greenspan and his successor Ben Bernanke, for allowing deregulation to fuel a massive trade in bad mortgages.

The New York Times reports:

"The majority report finds fault with two Fed chairmen: Alan Greenspan, who led the central bank as the housing bubble expanded, and his successor, Ben S. Bernanke, who did not foresee the crisis but played a crucial role in the response. It criticizes Mr. Greenspan for advocating deregulation and cites a “pivotal failure to stem the flow of toxic mortgages” under his leadership as a “prime example” of negligence.

It also criticizes the Bush administration’s “inconsistent response” to the crisis — allowing Lehman Brothers to collapse in September 2008 after earlier bailing out another bank,Bear Stearns, with Fed help — as having “added to the uncertainty and panic in the financial markets.""

The commission provided several other examples of how authorities' "see-no-evil" approach led to risky decisions by banks.

  • "The Securities and Exchange Commission failed to require big banks to hold more capital to cushion potential losses and halt risky practices, and that the Fed “neglected its mission.”
  • The decision in 2000 to shield the exotic financial instruments known as over-the-counter derivatives from regulation, made during the last year of President Bill Clinton’s term, is called “a key turning point in the march toward the financial crisis.”

However, the report also shot holes in some other popular theories about the housing collapse. The commission found that the culture of homeownership and the policies of mortgage insurers Fannie Mae and Freddie Mac were not chief causes for the meltdown.

"It says the low interest rates brought about by the Fed after the 2001 recession; Fannie Mae and Freddie Mac, the mortgage finance giants; and the “aggressive homeownership goals” set by the government as part of a “philosophy of opportunity” were not major culprits."

The Center for Responsible Lending concurred with that finding, writing in a press release today:

"The facts show that Fannie Mae and Freddie Mac (the government-sponsored enterprises, “GSEs”) were followers, not leaders, in the events leading up to today’s foreclosure epidemic." 

Fannie and Freddie did purchase subprime mortgage derivatives, but those securities were created by Wall Street firms, the group said.

The full findings of the bipartisan commission will be released Thursday in a 576-page book.



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