Rick Holmes: Return to the scene of the crime

Rick Holmes

Wall Street celebrated the second birthday of the bull market this week with typical self-congratulation. The stock market has risen 95.6 perent since hitting bottom on March 9, 2009.

The money is flowing again. The top five Wall Street firms set aside $90 billion for year-end bonuses, an amount, one blogger noted, greater than the GDPs of 13 countries. Looking back and squinting, you might think the financial crisis of 2008 was maybe just a bump in the road.

You'd be wrong. A report you may have missed tallied the damage left behind by the pothole on Wall Street: 26 million people unemployed; 4 million foreclosures, and $11 trillion in household wealth lost.

The report is the product of more than a year of research by the Financial Crisis Inquiry Commission, which held public hearings, subpoenaed and examined millions of documents and interviewed more than 700 witnesses. Its task was to pin down what triggered the Great Recession, a topic that appears too complicated to have been absorbed into our political debates.

In clear prose, the FCIC report (you can read it online at www.fcic.gov) explains there were lots of contributing factors, but to pretend everyone was at fault, or that there was nothing to be done about it, is both false and dangerous. Among its conclusions:

- "A combination of excessive borrowing, risky investments, and lack of transparency put the financial system on a collision course with crisis."

- "Widespread failures in financial regulation and supervision proved devastating to the stability of the nation's financial markets."

- "Dramatic failures of corporate governance and risk management at many systemically important financial institutions were a key cause of this crisis."

- "Compensation systems - designed in an environment of cheap money, intense competition, and light regulation - too often rewarded the quick deal, the short-term gain - without proper consideration of long-term consequences."

- "The government was ill prepared for the crisis, and its inconsistent response added to the uncertainty and panic in the financial markets."

- "The failures of credit rating agencies were essential cogs in the wheel of financial destruction." From 2000 to 2007, Moody's rated nearly 45,000 mortgage-related securities as triple-A, which means they were so secure they didn't even have to be reported on corporate balance sheets. It turns out they were anything but.

The wizards of Wall Street told themselves they were spreading risk, but they were really concentrating it in the riskiest corner of the market: bonds backed by subprime mortgage loans.

They believed the myth too many Americans bought into: That housing prices would keep going up forever. On that myth, people made second jobs out of buying and flipping homes. Homeowners refinanced and refinanced again, taking money out of their homes for luxuries or just to make ends meet. Mortgage lenders gave out loans with no downpayment and no documents required, confident they could sell the loans before anyone defaulted.

In "The Big Short," Michael Lewis poked deep into a few of the millions of securities, all rated triple-A, and found a California farm worker, who earned just $15,000 a year but was able to get a $750,000 mortgage, and a Las Vegas stripper able to borrow enough to purchase five investment properties.

Then it all went bust, and some of the smartest folks in finance, beginning with Fed chiefs Alan Greenspan and Ben Bernanke, never saw it coming.

Even Lewis, who has made a career out of making financial complexities comprehensible, despaired at the futility of explaining the cracks in the foundation of the house of cards built by mid-level bond traders at AIG, Merrill Lynch, Goldman Sachs and other firms:

"How do you explain to an innocent citizen of the free world the importance of a credit default swap on a AA tranche of a subprime-backed collateralized debt obligation?" he asks.

This was a bipartisan disaster. Both Bill Clinton and George W. Bush often bragged about the growing level of homeownership, and both parties in Congress pushed policies to make borrowing ever cheaper. For decades, the biggest Wall Street firms have supplied Washington with treasury secretaries, fed chairmen, campaign contributions and pressure to deregulate the financial industry.

As the edifice crumbled, Washington came together in a bipartisan bailout that rescued the risk-takers while their victims were left to foreclosures, bankruptcies and unemployment.

After the fact, the partisan finger-pointing started, made easier by the lack of public understanding of what really happened. The worst of this has been an effort by talk-radio conservatives to pin the blame on Jimmy Carter and Barney Frank.

Their reasoning is that the Carter-era Community Reinvestment Act forced banks to make bad home loans to low-income borrowers, and that Frank wielded the awesome power he held as ranking member of the House Financial Services Committee to pressure Fannie and Freddie to buy all those bad loans. The guys who invented the toxic instruments and made billions on the loans, under this scenario, were innocent victims of Democratic politics.

The FCIC report reels in these red herrings. Fannie and Freddie took excessive risks, like their Wall Street cousins, it says. "These two entities contributed to the crisis, but were not a primary cause." The proof: Mortgages Fannie and Freddie bought maintained their value throughout the crisis. It was other firms' loans that imploded.

Nor was the Community Reinvestment Act a significant factor. The CRA didn't even apply to the mortgage brokers that made the riskiest loans. Just 6 percent of the riskiest subprime loans had any connection to the law.

Two years later, there has still been no accountability for the crash. The major players walked away with their fortunes largely intact. There have been no arrests. The FCIC turned over its evidence to prosecutors, but while Bernie Madoff sits in prison for an unrelated scam, no indictments loom over the authors of the larger disaster.

As is often the case, what's legal turned out to be more dangerous than any crime. Of course, the financial industry, which the commission says spent $2.7 billion lobbying Washington and gave $1 billion in campaign contributions over a 10-year period, helped write the laws.

Yes, Congress passed a financial reform bill, which gives the government more tools to protect consumers against predatory lending and restructure financial behemoths the next time they get in trouble. But the banks that were too big to let fail in 2008 have only gotten larger, and their political influence is as undiminished as their bonuses.

The FCIC final report came out in late January and was barely noticed. Last month it released its trove of documents to the public and quietly closed up shop. It left behind this conclusion: "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."

That's a quote we may want to save for the next time the wizards of Wall Street come up with some get-rich-quick scheme that blows up the economy.

Rick Holmes, opinion editor of the MetroWest Daily News, blogs at Holmes & Co. (http://blogs.townonline.com/holmesandco). He can be reached at rholmes@wickedlocal.com.