Articles Posted in Financial Crisis Inquiry Commission

The U.S. Senate Permanent Subcommittee on Investigations plans to conduct a hearing over what it believes are abusive transactions made by financial institutions. Bloomberg is reporting that Deutsche Bank AG (DBK), Barclays PLC (BARC), and hedge fund manager Renaissance Technologies LLC will have representatives testifying at the hearing.

The July 22 hearing is expected to focus on barrier options transactions between the banks and the hedge fund manager. There are tax benefits that allegedly came from the options, which the Internal Revenue Service and Renaissance are in dispute over.

Bloomberg reports that the transactions let the hedge fund manager’s Medallion fund borrow up to $17 for every dollar the fund owned, which is more than it could have in a traditional margin-lending relationship. Under Federal Reserve rules, stockbrokers are not allowed to lend over $1 for each client money dollar. Usually, hedge funds can borrow no more than $5 or $6 for each dollar it has and only if there is a special agreement with the banks.

In North Carolina, U.S. District Judge Max O. Cogburn Jr. said that Bank of America Corp. (BAC) would have to face government two residential mortgage-backed securities lawsuits. The Securities and Exchange Commission and the Department of Justice contend that the bank misled investors about the quality of loans tied to $850 million in RMBS.

Bank of America wanted the cases dismissed. It argued that the investors, both financial institutions, never sued the bank.

Judge Cogburn, however, found that the SEC’s lawsuit properly laid out that the bank lied about the mortgages’ projected health in its RMBS fraud case. With the DOJ’s case, he gave the department 30 days to revise its securities lawsuit. He found that the Justice Department did not properly state its argument, which was that bank documents included false statements while leaving out key facts.

According to the Financial Crisis Inquiry Commission, the 2008 financial crisis could have been avoided, but, instead it was caused by Wall Street’s thoughtless risk-taking, corporate mismanagement, and government regulation-related failures. The New York Times says that the FCIC blames the Federal Reserve, two administrations, and other regulators for allowing the excessive packaging and sale of loans, poor mortgage lending, and risky bets on securities backed by loans. The FCIC reached its conclusions after 19 days of interviews and hearings. Over 700 witnesses were involved. The findings can be found in a 576-page book and transcripts and raw material are to be placed online.

However, not all 10 commission members are endorsing the final report. The three Republican members have put together their dissent that concentrates on a narrower set of causes. A fourth Republican panel member, Peter J. Wallison, has his own reason for dissent. The six Democrat members have endorsed the report.

The majority report places some blame on former Fed chair Alan Greenspan and his successor Ben S. Bernanke. While Greenspan was in charge of the central bank when the housing bubble was expanding, Bernanke was instrumental in responding to the financial crisis when it happened. The report describes the Bush Administration’s response as “inconsistent,” such as when it let Lehman Brothers collapse even after bailing out Bear Stearns. The decision by the Clinton Administration to shield over-the-counter derivates from regulation in 2000 is considered a “key turning point” leading to the economic collapse.

Also receiving some of the blame is current Treasury Secretary Timothy F. Geithner, who once served as Federal Reserve Bank of New York head. The report says that the New York Fed failed to detect signs that there were problems at Lehman and Citigroup. Regulators were blamed for not having the “political will” to scrutinize and hold responsible the institutions they were tasked with overseeing. Meantime, the FCIC says that the Securities and Exchange Commission failed to stop risky practices and make banks hold greater capital so that there would be a cushion for possible losses. It also accuses the Office of Thrift Supervision and the Office of the Comptroller of the Currency of stopping states from curtailing abuses.

Related Web Resources:
Financial Crisis Was Avoidable, Inquiry Finds, The New York Times, January 25, 2011

The FCIC Report

FCIC Report Misses Central Issue: Why Was There Demand for Bad Mortgage Loans?, Huffington Post, January 31, 2011

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