By William K. Black

The Financial Crisis Inquiry Commission (FCIC) issued its report today on the causes of the crisis. The Commissioners were chosen along partisan lines and the Republicans, one-upping the Republicans’ dual responses to President Obama’s State of the Union address, have issued three rebuttals. The rebuttals follow a failed preemptive effort by the Republicans to censor the report – they insisted on banning the use of the terms “shadow banking system” (the virtually unregulated financial sector that conducts most financial transactions), “Wall Street,” and “deregulation.” The Republicans then issued their first rebuttal last month, their “primer.” The primer, following the lead of the censorship effort, ignored the contributions that the shadow banking system, Wall Street, and deregulation made to the crisis. The combination of the demand that the report be censored and the primer’s crude apologia critical role that the unmentionable Wall Street, particularly its back alleys (the unmentionable “shadow banking system”), and the unmentionable deregulators played in causing the crisis was derided by neutrals. The failure of their preemptive primer has now led the Republican commissioners to release two additional rebuttals to the Commission report. Again, they issued their rebuttals before the Commission issued its report in an attempt to discredit it.

The primary Republican rebuttal was issued by Bill Thomas, a former congressman from California and the vice chairman of the commission; Keith Hennessey, who was President George W. Bush’s senior economic advisor, and Douglas Holtz-Eakin, who was an economic advisor to President Bush on the regulation of Fannie and Freddie and principal policy advisor to the Republican nominee for the President, Senator McCain.

Republican Commissioner Peter Wallison felt his Republican colleagues’ dissent was insufficient, so he drafted a separate, far longer dissent. Wallison is an attorney who was one of the leaders of the Reagan administration’s efforts to deregulate financial institutions and later became the leader of the American Enterprise Institute’s (AEI) deregulation initiatives. His bio emphasizes his passion for financial deregulation.

From June 1981 to January 1985, he was general counsel of the United States Treasury Department, where he had a significant role in the development of the Reagan administration’s proposals for deregulation in the financial services industry….

[He] is co-director of American Enterprise Institute’s (“AEI”) program on financial market deregulation.

Each of the Republicans commissioners was a proponent of financial deregulation and was appointed to the Commission by the Republican Congressional leadership to champion that view. Three of the Republican commissioners were architects of financial deregulation. For example, the Republican congressional leadership appointed Wallison to the commission because they knew that he was the originator and leading proponent of the claim that Fannie and Freddie were the Great Satans that had caused the current crisis. The fourth member, Representative Thomas, voted for the key deregulatory legislation when he was in Congress and was a strong proponent of deregulation.

The Republican commissioners’ desire to ban the use of the word “deregulation” in the Commission’s report is understandable. There was no chance that they would support a report that explained the decisive role that deregulation and desupervison played in making the crisis possible. Wallison was a major architect of three successful anti-regulatory pogroms (primarily, but not exclusively, led by Republicans) that created the criminogenic environments that led to our three most recent fraud epidemics and financial crises (the S&L debacle, the Enron era frauds, and the current crisis). The Republican congressional leadership appointed Wallison to the Commission in order to place the nation’s leading apologist for deregulation in a position where he could defend it. President Bush appointed Harvey Pitt to be SEC Chairman because he was the leading opponent in America of the SEC Chairman Levitt’s efforts to make the SEC a more effective regulator. In each case, “mission accomplished.”

Each of the Republican commissioners was in the impossible position of having to investigate and judge their own culpability for the crisis. The Republican politicians who selected them for appointment to the Commission knew that they were placing them in an impossible position and ensuring that the Commission would either give deregulation a pass or split along partisan lines and lose some of its credibility. The proverbial bottom line is that the Commission would fail to identify the real causes of the crisis and the control frauds that drove it would continue to be able to loot with impunity.

In contrast, only one of the six Democratic commissioners was involved in financial institution regulation or deregulation. None of the Democrats was known as a strong proponent of any particular view about the causes of the crisis prior to their appointment. Brooksley Born was head of the Commodities Futures Trading Commission (CFTC) under President Clinton. She famously warned of the systemic risks that credit default swaps (CDS) posed. Her efforts to protect the nation were squashed by the Commodities Futures Modernization Act of 2000, which deliberately created regulatory “black holes” by removing the CFTC’s authority to regulate many trades in financial derivatives. Enron exploited one of these black holes to create the California energy crisis of 2001. The largest banks and AIG exploited the black hole to trade CDS. While the squashing of Brooksley Born was a bipartisan effort (Senator Gramm and Alan Greenspan were the most prominent Republicans in the effort), it was led by the Clinton administration – Messrs. Rubin and Summers at their arrogant, anti-regulatory worst.

By appointing Born to the Commission, the Democrats were admitting their error and ensuring that one of the Democratic Party’s great embarrassments – passage of the Commodities Futures Modernization Act – would be exposed. The Democrats were fostering rather than seeking to forbid discussion of their dirty laundry by appointing someone with a proven track record of taking on her own party.

In 1999, Born resigned as CFTC Chair. She retired from her law firm in 2002. She did not influence or seek to influence regulatory policy role during the crisis. She was not active in making comments about the causes of this crisis prior to her appointment to the Commission.

The next, nastier stage in the Republican apologia for Wall Street and the anti-regulators has already begun. Bloomberg reports that House Oversight Committee Chairman Issa claims to be:

“looking into allegations of partisanship, mismanagement and conflict of interest at the commission. The California Republican and two other lawmakers sent a letter yesterday renewing a demand for documents on the panel’s spending, its use of media consultants and its staff turnover.”

Issa is a deeply committed anti-regulator. He will not be investigating the allegations of partisanship and conflicts of interest by the Republican commissioners who have exemplified partisanship and who are in the impossible position of having to examine their own culpability for the crisis. He will seek to discredit any report and any expert who explains why financial deregulation and desupervision are criminogenic.

The most important question we must answer about our financial crises is actually a two-part question: why are we suffering recurrent, intensifying crises? To answer it we must find not only the causes of the crises, but also (and even more importantly) why we fail to learn the correct lessons from the crises and keep making even worse policy mistakes. The answer to the second question is dogma. The definition of dogma is that it cannot be examined or changed – except to become even purer. The ever purer anti-regulatory dogma creates the ever more intensely criminogenic environments that produce intensifying crises. The Commission’s report makes that clear. For example, Alan Greenspan claimed that markets automatically exclude fraud. He did so after the most notorious “accounting control fraud” of the S&L debacle (Charles Keating) used him to praise his fraudulent S&L, leading to the most expensive failure in the entire debacle. Greenspan learned nothing useful from the S&L debacle. He concluded that there was no reason for the Fed to use its unique authority under HOEPA to stop the pervasively fraudulent “liar’s” loans that were hyper-inflating the real estate bubble and leading us to a crisis. Greenspan ignored the FBI’s September 2004 warning that mortgage fraud was becoming “epidemic” and would cause an “economic crisis.” This anti-regulatory dogma that Greenspan exemplified spread through much of the Western world, and the resultant crises have done the same.

We are witnessing in the multiple Republican apologias for their anti-regulatory policies an example of why we fail to learn the correct lessons from the crises. The groups most in the thrall of the dogma appoint true believers in theoclassical economics to the body that is supposed to find the truth. These anti-regulatory architects of the crisis then purport to be impartial judges of the causes of the crisis that they helped create. The Republican House leadership now openly threatens to use aggressively its subpoena authority to bash anyone who dares to oppose the dogma and the Republican effort to censor the decisive role the anti-regulators play in causing our recurrent, intensifying crises.

The Commission is correct. Absent the crisis was avoidable. The scandal of the Republican commissioners’ apologia for their failed anti-regulatory policies was also avoidable. The Republican Congressional leadership should have ensured that it did not appoint individuals who would be in the impossible position of judging themselves. Even if the leadership failed to do so and proposed such appointments, the appointees to the Commission should have recognized the inherent conflict of interest and displayed the integrity to decline appointment. There were many Republicans available with expertise in, for example, investigating elite white-collar criminals regardless of party affiliation. That was the most relevant expertise needed on the Commission. Few commissioners had any investigative expertise and none appears to have had any experience in investigating elite white-collar crimes. These Republicans, former Assistant U.S. Attorneys (AUSAs) and FBI agents would have played no role in the financial regulation or deregulation policies in the lead up to the crisis. They would not have had to judge their own policies and they would have brought the most useful expertise and experience to the Commission – knowledge of financial fraud schemes and experience in leading complex investigative and analytical skills.
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Category: Bailouts

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

21 Responses to “How can the Architects of the Crisis Investigate it?”

  1. Francois says:

    “How can the Architects of the Crisis Investigate it?”

    Is it safe to assume your question is rhetorical? :-)

  2. machinehead says:

    Black paints the FCIC in partisan terms, despite the disgraceful bailouts having been a thoroughly bipartisan effort. Watch the cash flow, not the post hoc apologia.

    The ossified 150-year-old Depublicrat duopoly will never investigate itself honestly. This pattern was evident in the flawed investigation of a shocking assassination nearly fifty years ago, and continues through the present.

    Aren’t we getting tired of the mindless ‘Tweedledee good, Tweedledum bad’ riff, when they are joined-at-the-hip siamese twins? Both these parties are rotten to the core. This is the 11th year of the Bush-Obama administration. Joe Biden says it’s stable; no need for regime change!

  3. ToNYC says:

    The House that these Architects built was planned as well as any transgression from basic morality. A covenant or social contract is granularly built off the loop’d hole. The current members of the panel do not accept the paradigm that Banks are Property Managers and not Creators of Capital. Capital in a Republic is in the essence the past and present wages and discounted future revenues and deferred consumption.
    Fed Reserve Chairman and NY Fed President from Goldman recently declaring an “extended period” of ZIRP was
    a misdirection of a 90% tax on US citizen savers interest. Fed makes its own Potemkin FRNs and pays its members the interest while pushing citizens aside and completely out of this basic American inalienable right as profound as real property rights.

  4. [...] Black: How Can The Architects of the Crisis Investigate It? The Big Picture – short answer: they [...]

  5. louiswi says:


    Have you noticed when you write “republicrat” in a word document it always asks if you don’t actually mean
    “republic rat”? It sounds like depublicrat might be the chicago way of saying de public rat.

    Could it be these kinds of rats are the ones spreading the disease and pestilence that now plagues our republic? Just a thought.

  6. Francois says:

    Agree with most of Prof. Black’s post, save this important tidbit that has escape pretty much everybody, since it doesn’t fit the Villagers’ and partisans “narrative”:

    By appointing Born to the Commission, the Democrats were admitting their error and ensuring that one of the Democratic Party’s great embarrassments – passage of the Commodities Futures Modernization Act – would be exposed. The Democrats were fostering rather than seeking to forbid discussion of their dirty laundry by appointing someone with a proven track record of taking on her own party.

    As a general take on the FCIC, I’d say that the short of this whole saga is quite simple: one had to be either naive or full of ideological shit to accept any role in the FCIC, considering how it was designed. The list of intentional shortcomings was too long and substantive (political bipartisan sign off for criminal referrals: Is this a bad joke??) to make any truly honest (or street smart) people to associate his/her name to this exercise in futility.

    It is just too damn bad that Brooksley Born got on board. Once victim, now sucker. Gotta hate that.

    As Yves Smith recounted recently, (text within [ ] is mine) there are some specific reasons why the presence of Ms. Born wasn’t all it cracked up to be:

    I participated in a blogger conference call with FCIC commissioners Phil Angelides and Brooksley Born. I’m clearly not cut out for public life. It was disconcerting to hear them thumping their talking points. For instance, Angelides began by saying that the purpose of the report was to explain why we faced the choice in 2008 of spending billions of dollars to bail out the financial system or let it fail.

    That’s a false dichotomy that serves to justify the unprecedented rescues. [ Well…duh! Got tell those who appointed you on a partisan basis that they were dead wrong in their approach, asleep at the switch, and more interested in larding up the 1st 700 billion $ package with an extra 150 billions of “preferred allocations”, a.k.a. pork and you tell me what they’re gonna say ] It implies that the only way the crisis could have been addressed was the course of action taken. We pointed out as the crisis was unfolding that some of the early interventions made matters worse. Even at the peak of the crisis, a range of other actions were possible but were not taken. The bias throughout the crisis was to throw money at the problem with virtually no strings attached, and even in the cold light of day, to take far too little in the way of corrective and punitive measures.

    Francois — People do not seem to realize how dangerous this laxity can be. Consider this:

    The failure to punish free riding and anti-social behavior destroys the very glue that holds a society together. For more on this there’s this essay from Hillard Kaplan and Michael Gurven.

    The researchers conclude:

    We propose that multi-individual negotiations result in the emergence of social norms that are collectively enforced. We base this proposal on a result obtained by Boyd and Richerson (1992), and treated more recently by Bowles and Gintis (2000), in which cooperation can be stable in large groups, if noncooperators are punished and if those who do not punish noncooperators are also punished.

    Back to Yves’s story:

    But the stunning part were Angelides’ and Born’s answers to my questions. I’ve been in communication with several disaffected insiders. And contrary to the efforts of Born and Angelides to depict critics as the dissenters (meaning the Republicans), these observers feel the investigation was inadequate and the report excluded critical drivers of the crisis. They have told me in some detail about how the staff performed its work in a vacuum. They reported that the commissioners spent virtually no time with the team leaders, did not provide input into the thinking process or interviews. They also complained of poor resource allocation decisions: that nearly 2/3 of the staff time was taken up with arranging and preparing for the public hearings, [ TV time...Bitchez!! ] which were not terribly productive. [ You don't say. Pray tell when were public hearings involving politicians lured by free TV time were productive. A half-a-pound warm Carol's cookie of your choice to the one who knows the answer.] And to add insult to injury, the staff prepared questions for the hearings only to find the commissioners ignoring them.

    Another problem area was the difficulty in getting subpoenas issued. The process was made difficult by design; it took sign off by commissioners of both parties. As a result, nearly all the document production was voluntary. In litigation, it is common practice in discovery for the target of a document request to stonewall and argue with the judge that the demand is overly intrusive, costly, etc. so as to wear down the other side and get the request trimmed back to as great a degree as possible. Here, with the commission having a very tight schedule to begin with, stonewalling would be a rational strategy, and my sources tell me that happened on a widespread basis, particularly after the firms under the spotlight began to see that subpoenas were unlikely to be issued.

    When I said I understood the document production was voluntary and asked why more subpoenas weren’t issued, I got party line: the firms had cooperated because they understood subpoenas would be forthcoming, and when firms like Moody’s and Goldman did not play ball, they were used. They contrasted their 19 subpoenas issued with three by the 9/11 commission (hardly a gold standard of investigation).

    Born stressed how many pages were produced (ahem , quantity is not tantamount to relevance), how this undertaking was even larger than the complex litigations she had overseen, and how much staff effort went into analyzing the material. I then asked how much time the commissioners spent with the lead investigators and staff. Angelides said “a ton” and that it varied by commissioner, but that he and Born “dove in”. But if you listened carefully, they did NOT discuss how they worked with staff, but that they read memos, listened to interviews, and so on.

    I called one of my contacts immediately afterward and played back the exchange. The reaction: “I can’t believe they suborned Brooksley Born”. The insider disputed the account, saying that the commissioners did not give the staff any insight into their thinking nor did they participate in the interview process (either providing questions or participating in any interviews to get a feel for the process; listening to them afterward or reading transcripts is just not the same). Others close to the investigation confirmed his report.

    While Born was brave enough in 1996 to engage in a pitched battle with much more powerful figures in Washington to regulate credit default swaps and suffer a humiliating loss, she has not bucked the system in a more fundamental way. Her participation in the FCIC gave it an aura of respectability and seriousness. To see her defend a flawed process and product shows either a lack of discernment or a misguided sense of loyalty to a diseased system.

  7. MayorQuimby says:

    I suggest everyone save as much money as is possible and tell your reps why. Money is your real vote.

    Vote wisely.

  8. Why post William K. Black here when you can read so many more his eminently middle of the road missives of his on the center of the road site the Huffington Post?

    Perhaps this one, “President Obama, Please Invite the Republican Leadership to Watch Blazing Saddles With You”

  9. Robespierre says:

    Forget the FCIC here is the real explanation of all

  10. Rescission says:

    This site has been taken over by William K Black. How many mortgage loans has this guy ever originated? How many loan files has he reviewed? I completely challenge his ideas of reforming the mortgage industry as idealistic, non-informed, academic nonsense. If we take all his suggestions, it would literally be impossible to make a mortgage loan. Has he spent any time in the private sector or tried to run a real business? The mortgage business today is completely over regulated, all rules are now made by the government, and is pretty much dead as far as free enterprise is concerned. Mission accomplished. By looking in the rear view mirror, people like Black waste time discussing things in hindsight, which is always 20-20.


    BR: Frighteningly ignorant comment

    You obviously don’t know what Bill Black’s bonafides are . . . The guy is an expert is in white-collar crime, public finance, and regulation. He’s forgotten more about regulation than you will ever learn.

    For those who might to learn a little more about BIll Black’s background, check out:

    “Control” Fraud


    Why Elite Frauds Cause Recurrent, Intensifying Economic, Political and Moral Crises

    Prepared Testimony of William K. Black” (PDF). Committee Hearing: Public Policy Issues Raised by the Report of the Lehman Bankruptcy Examiner. United States House of Representatives. April 20, 2010. p. 5.

    “Local Lehman arm led in Alt-A loans”.
    Greg Griffin
    Denver Post, September 16, 2008).

  11. Sunny129 says:

    Short of PECORA style commission, unlimited subpoena power, adequate budget and time, the TRUTH will never the see the light of the day. Add to this, the financial illiteracy of average Joe/Jane, authorities, regulators and lawmakers in complicit of this mega scandal know that this ‘smoke and mirror’ show will put that issue off the radar.

    All the fundamental problems are still there. Animal spirits is increased. Hedge funds are hiring again. QE3 will follow QE2.

    We are heading back to 2008 just, 10x more effect!

  12. Charlatan says:

    Prior to the report, there were three camps:

    1) Commentators and regulators( like BR and Mr. Black) who have correctly pointed out the causes of the crisis and the insignificance of things like the CRA,

    2) Shills like like Commissioner Wallison and ideologues (e.g. Thomas Sowell) who point the finger at the sloppy liberals in Washington and their evil housing initiatives.

    3) People who spend their time working, watching sports, going to the grocery store, etc. and don’t have the time or the inclination to figure out who’s right in all of this. All they hear is a lot of noise coming from both sides of the aisle on the nightly news as they channel surf.

    Well, guess what. After the FCIC report, there are still these same three camps. The Republicans have quite **successfully** muddied the waters. By shouting their stance loudly, they give their support base something to hold on to while making the issue cloudy for anyone else.

    Bottom line: You could count on one hand the number of people whose minds have been changed by the FCIC report.

  13. rip says:

    @Quimby: Great advice. Perhaps too subtle to many, but a great strategy.

  14. Topspin says:

    @rescission Wahhhh! It’s so hard to write mortgages when people have to qualify! Wahhhh! Free market enterprise means jack it up and pass it on like a hot potato.

  15. RC says:

    About a year or more back when I saw Prof. Black’s interview on Yahoo Tech-Ticker, the first thing came to my mind is that why is he not heading investigation on the financial meltdown? There were quite a few similarities between this crash and the S&L crisis.

    Then who better than someone who sorted out the S&L mess be suited to investigate this crash … I wonder if Prof. Black was even contacted about helping in investigation by the authorities !!!

  16. Francois says:


    “I wonder if Prof. Black was even contacted about helping in investigation by the authorities !!!”

    Do you really wonder? The powers that be have NO interest whatsoever in unveiling the truth. In fact, behind their wealth, self-assured demeanor derived from attribution of power and prejudices, one can distinguish the smell of raw fear.

    How do I know?

    Just observe their reactions when a constituent or a real journalist start asking the tough questions. The array of evasive maneuvers is a sight to behold. That is why they avoid these situations like the plague. In the last 30 years, it has become a very rare occurrence to witness a politician facing a determined, clam and knowledgeable interrogator (constituent or a real journalist) that cannot be easily dismissed. No wonder certified balloon heads like Sarah Palin have minders severely screening every public appearance. Can’t have the script suffer any faux pas.

    Even a Jedi of the rhetoric like Obama has never faced someone who is willing and able to ask the tough civil rights or economic questions. Think it is a coincidence?

    So…no! The truth will not be known as long as the current crop of politicians, Supreme Court judges (K.R.A.T.S) and dittohead pundits from the Village control the game.

    Oh! Let’s not forget the Fed too; they control directly or indirectly, more than 50% of all the economists that matters in this country.

  17. DeDude says:

    I am glad the Dems didn’t try to compromise with these GOPsters. At least we got a report that pointed to most of the main drivers of the crisis and will allow true reporters to highlight items that have not been fixed yet.

  18. Rescission says:

    Thank you for the links to Bill Bright’s works. I read them all.

  19. contrabandista13 says:

    The isue here is that the report has little or no credibility, we knew that already… We’ve known that from day one….. Does anyone here consider any information content, created by the Washington Group, reliable….? I don’t think so…… This report was created by a PR agency to be spoon fed to the American People by the MSM in snippets along with the latest gossip on Lady Gaga and Hanna Montana….. Which only goes to proove that, you can fool most of the people most of the time.


    BR: I totally disagree! The report got the broad strokes right, and while its not perfect — I would have preferred a Pecora Commisssion type investigation — the conclusions they reached based on data and facts are satisfying.

  20. Donald says:

    Hilarious youtube link! I wish it was illegal to steal money.

  21. AHodge says:

    you could also blame the two parties for this as they collectively responsible for the FCIC( and all govt). everybody on there constrained by party stoogedom.

    after zero interogating and near zero analysis, including the role of accounting and buy side, FCIC democrats did come up with a partial blame list and a half analysis. i glad the SEC at least mentioned. But this is still a glass 3/4 empty.

    you are just gratetful for any good news. actually so am i