Thursday, January 27, 2011

The Financial Commission Dissent

Hennessey released a dissent from the FCIC's report which will be released tomorrow.

Long. But here are a few dollops.

...we heard frequent arguments that there was a single cause of the crisis. For some it was international capital flows or monetary policy; for others, housing policy; and for still others, it was insufficient regulation of an ambiguously defined shadow banking sector, or unregulated over-the-counter derivatives, or the greed of those in the financial sector and the political influence they had in Washington.

In each case, these arguments, when used as single-cause explanations, are too simplistic because they are incomplete. While some of these factors were essential contributors to the crisis, each is insufficient as a standalone explanation.

The majority’s approach to explaining the crisis suffers from the opposite problem– it 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. 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

A credit bubble appeared in both the United States and Europe.

The report largely ignores the credit bubble beyond housing. Credit spreads declined not just for housing, but also for other asset classes like commercial real estate. This tells us to look to the credit bubble as an essential cause

There were housing bubbles in the United Kingdom, Spain, Australia, France and Ireland, some more pronounced than in the United States.

Large financial firms failed in Iceland, Spain, Germany, and the United Kingdom, among others. Not all of these firms bet solely on U.S. housing assets, and they operated in different regulatory and supervisory regimes

OK. Now for what the dissenters call "10 Essential Causes" in rough chronological order:

Credit bubble, Housing Bubble, Non-Traditional Mortgages, Credit Ratings/Securitization, Financial Institutions' Concentrated/Correlated Financial Risk, Leverage and Liquidity Risk, Risk of Contagion, "Common Shock" (lotsa financials with exactly the same problem all at once), Financial Shock/Panic, and Financial Shock causes Economic Crisis.

The dissent takes a much higher-level view--the "39,000 foot look" at the crisis than did the majority report.

What they identify is a serious lack of 'the vision thing,' which was worldwide and by no means restricted to lenders or regulators.

It had a lot to do with consumers, too.

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