The Financial Crisis Inquiry Commission delivered the results of its nearly two-year-long investigation into the causes of the financial and economic crisis on Thursday, but with dissenting views from some of the Republican members of the commission.

The commission concluded that the crisis was avoidable and was caused by a variety of factors:

•   Widespread failures in financial regulation, including the Federal Reserve’s failure to stem the tide of toxic mortgages;
•  Dramatic breakdowns in corporate governance including too many financial firms acting recklessly and taking on too much risk;
•  An explosive mix of excessive borrowing and risk by households and Wall Street that put the financial system on a collision course with crisis;
•  Key policymakers ill prepared for the crisis, lacking a full understanding of the financial system they oversaw; and,
•  Systemic breaches in accountability and ethics at all levels.

“Despite the expressed view of many on Wall Street and in Washington that the crisis could not have been foreseen or avoided, there were warning signs,” said commission chairman Phil Angelides, a former California state treasurer, in a statement. “The greatest tragedy would be to accept the refrain that no one could have seen this coming and thus nothing could have been done. If we accept this notion, it will happen again.”

The commission’s report also offers conclusions about specific components of the financial system that contributed significantly to the financial meltdown. Here the commission concluded that collapsing mortgage-lending standards and the mortgage securitization pipeline lit and spread the flame of contagion and crisis, over-the-counter derivatives contributed significantly to this crisis, and the failures of credit rating agencies were essential cogs in the wheel of financial destruction.

The commission also examined the role of government-sponsored enterprises such as Fannie Mae and Freddie Mac, with Fannie Mae serving as the case study. The commission found that the GSEs contributed to the crisis but were not a primary cause. They had a deeply flawed business model and suffered from many of the same failures of corporate governance and risk management seen in other financial firms, but ultimately followed rather than led Wall Street and other lenders in purchasing subprime and other risky mortgages.

The commission’s conclusions were drawn from the review of millions of pages of documents, interviews with more than 700 witnesses, and 19 days of public hearings in New York, Washington, D.C., and other communities across the country hit hard by the financial crisis.

The report also contains a 27-page dissenting statement by commission vice chairman Bill Thomas, a former Republican congressman from California, and two other members of the commission: Douglas Holtz-Eakin, a former chief economist in the George W. Bush administration; and Keith Hennessey, a former senior White House economic advisor to Bush.

“The majority’s approach to explaining the crisis suffers from the opposite problem—it is too broad,” they wrote. “Not everything that went wrong during the financial crisis caused the crisis, and while some causes were essential, others had only a minor impact. 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.”

They primarily blamed the crisis on 10 factors: the credit bubble; the housing bubble; nontraditional mortgages; credit ratings and securitization; financial institutions that concentrated highly correlated housing risk; leverage and liquidity risks; the “risk of contagion” because policymakers were afraid of a large firm’s sudden and disorderly failure triggering balance sheet losses in its counterparties; a “common shock” in which policymakers were afraid of a large firm’s sudden and disorderly failure triggering balance sheet losses in its counterparties; financial shock and panic; and the financial crisis leading to a broader economic crisis.

A separate dissent came from commissioner Peter J. Wallison, a co-director of the American Enterprise Institute’s program on financial policy studies. His dissenting statement runs nearly 100 pages and argues that the U.S. government’s housing policies were the major contributor to the financial crisis.

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