Crisis 2008: Democrats vs. Republicans

Congressional Democratic leaders appointed 6 of the commission members, and congressional Republican leaders appointed 4.

The commission has posted the FFIC crisis inquiry report, including the Republican rebuttals, on the Web.

THE DEMOCRATS

The Democratic appointees on the commission — including Phil Angelides, the chairman, and Brooksley Born, Byron Georgiou, Bob Graham, Heather Murren and John Thompson — say in the report that the financial crisis reached "seismic" proportions in September 2008 with the failure of Lehman Brothers Holdings Inc., New York, and the "impending collapse of the insurance giant AIG before it was bailed out by the Federal Reserve Board."

The Democrats cite AIG, New York, as the poster boy "for stunning instances of governance breakdowns and irresponsibility."

"We conclude a combination of excessive borrowing, risky investments, and lack of transparency put the financial system on a collision course with crisis," the Democrats say. "Clearly, this vulnerability was related to failures of corporate governance and regulation."

Unregulated trading in derivatives that insured mortgage-backed securities was a key cause of the crisis, and, "finally, when the housing bubble popped and crisis followed, derivatives were in the center of the storm," the Democrats say.

The AIG Financial Products unit was a major seller of credit default swaps (CDS) — derivatives that were used to insure mortgage-backed securities.

"AIG, which had not been required to put aside capital reserves as a cushion for the protection it was selling, was bailed out when it could not meet its obligations," the Democrats say.

The federal government committed more than $180 billion to shoring up AIG "because of concerns that AIG's collapse would trigger cascading losses throughout the global financial system," the Democrats say. "The existence of millions of derivatives contracts of all types between systemically important financial institutions–unseen and unknown in this unregulated market–added to uncertainty and escalated panic, helping to precipitate government assistance to those institutions."

The Democrats say the commission examination "revealed stunning instances of governance breakdowns and irresponsibility."

In the majority report, "you will read, among other things, about AIG senior management's ignorance of the terms and risks of the company's $79 billion derivatives exposure to mortgage-related securities," the Democrats say.

"In addition, the government's inconsistent handling of major financial institutions during the crisis — the decision to rescue Bear Stearns and then to place Fannie Mae and Freddie Mac into conservatorship, followed by its decision not to save Lehman Brothers and then to save AIG — increased uncertainty and panic in the market," the Democrats say.

THE REPUBLICANS

The Republican appointees on the crisis inquiry commission — Bill Thomas, the vice chairman, and Keith Hennessey, Douglas Holtz-Eakin and Peter Wallison — issued two separate dissenting statements.

Thomas, Hennessey and Holtz-Eakin joined in one, and Wallison wrote the other.

Thomas, Hennessey and Holtz-Eakin say they find areas of agreement with the majority but believe that the majority's approach "is

too broad."

"Not everything that went wrong during the financial crisis caused the crisis, and while some causes were essential, others had only a minor impact," Thomas and colleagues say. "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.

"The majority says the crisis was avoidable if only the United States had adopted across-the-board more restrictive regulations, in conjunction with more aggressive regulators and supervisors. This conclusion by the majority largely ignores the global nature of the crisis."

Wallison, a former Reagan administration official who is now with the American Enterprise Institute, Washington, cites the multi-decade policy of pushing home ownership for everyone as a primary cause of the crisis.

Wallison discounts the importance of derivatives trading as a cause of the crisis.

"Despite a diligent search, the FCIC never uncovered evidence that unregulated derivatives, and particularly credit default swaps, was a significant contributor to the financial crisis through 'interconnections'," Wallison says.

"The only company known to have failed because of its CDS obligations was AIG, and that firm appears to have been an outlier," Wallison says. "Blaming CDS for the financial crisis because one company did not manage its risks properly is like blaming lending generally when a bank fails."