Financial Crisis Inquiry Commission: Republican “Financial Crisis Primer”

When I first learned who had been appointed to the Financial Crisis Inquiry Commission ("FCIC"), which Congress set up in 2009 to investigate and report on the causes of the 2008 financial crisis, I thought there would likely be a majority and minority report. The reason for my doubts that there would be a unanimous report was that I knew something about two of the members, Brooksley Born and Peter Wallison. Ms. Born, the former Chairman of the CFTC, has been basking in the accolades thrown her way because she is viewed by many as having been right about the dangers of OTC derivatives. Mr. Wallison, who was General Counsel of the Treasury Department during the Reagan Administration, has been a fixture at the American Enterprise Institute, a conservative think tank in Washington, DC, for quite some time. One of his main preoccupations has been the dangers posed by Fannie Mae and Freddie Mac. I thought that Ms. Born would likely see much of the cause of the financial crisis to be due to OTC derivatives and Mr. Wallison would heap the blame on the two GSEs.

I was consequently pleasantly surprised in April, when I watched a FCIC hearing, that the members seemed to be getting along well, though I subsequently heard a rumor that they had all agreed to play nice in public, since it would not help any of them to engage in public disputes. I also was surprised at the tone of some of the questions asked by Vice Chairman Thomas of witnesses, which had more of a populist tone than one would expect from the former Republican Chairman of the House Ways and Means Committee.

Now the harmonious illusion has been shattered by the publication on December 15 of a short "Financial Crisis Primer" signed by all four Republican commissioners. It is easy to find criticisms of this paper on the web. For example, both Bethany McLean (in Slate) and Joe Nocera (in his New York Times column), whose recent book I commented on in the previous post, have provided devastating critiques of the "Primer." I agree with their comments.

It seems that the Primer was issued prior to the FCIC's report being finalized for political reasons. The Republicans want to head off any efforts at restrictive regulations, which the majority might recommend, while pushing their agenda to end the role of the GSEs and to combat the deficit, presumably by decreasing social spending. They are not wrong that the government played a role in the crisis, but they ignore the major role of private actors, including financial institutions ("Wall Street") and the rating agencies.

As for the GSEs, there has long been a Treasury view that these entities should probably never have been created and, in any case, never been allowed to get so big. Antipathy to Fannie Mae and Freddie Mac has been common to both Democratic and Republican administrations. The institutional view of Treasury has been that Fannie Mae was wrong in saying that the GSE model was one that worked. When I was at Treasury, we saw the dangers of mixing private profit incentives with a government backstop ("the implicit guarantee"). However, the GSEs were latecomers to the subprime mortgage party. Putting the degree of blame on them that the Primer does is a distortion of what happened.

Nevertheless, it is clear that something has to be done about Fannie and Freddie. The FCIC members do not need to exaggerate to make sure that this issue continues to be part of the Congressional agenda.

The concern expressed in the Primer about the budget deficit seems to be tacked on. The current fiscal situation cannot be said to have caused the crisis that took place more than two years ago. Why this is in the paper is not at all clear, since it will likely have no effect in the coming debates about taxes and spending.

What is a shame is that the Primer could have been written without any of the investigation that FCIC has undertaken. It was not written by people with an open mind, and it will probably have little effect except to minimize the impact of the FCIC's report. That may be the intent. Of course, that report, while probably presenting much useful and interesting information, may have its own exaggerations, but of course it is not possible now to tell how good or bad it will be. The signatories to the Primer, though, should hope that it is quickly forgotten, and they should strive to have something more thoughtful to say when the final FCIC report is issued.