"We conclude this financial crisis was avoidable," says the official report from the Financial Crisis Inquiry Commission, released yesterday. "The crisis was the result of human action and inaction, not of Mother Nature or computer models gone haywire."
The committee's report, two years in the making, is a 623-page tome of everything you could ever want to know about the financial crisis. Most of it is dry repetition of standard stuff reported ad nauseum over the past three years: Housing prices went up. Banks were idiots. The bubble popped. Hell broke loose.
But a few quotes caught my attention. Hopefully they will catch yours, too.
On regulation: We do not accept the view that regulators lacked the power to protect the financial system. They had ample power in many arenas and they chose not to use it. To give just three examples: the Securities and Exchange Commission could have required more capital and halted risky practices at the big investment banks. It did not. The Federal Reserve Bank of New York and other regulators could have clamped down on Citigroup's excesses in the run-up to the crisis. They did not. Policy makers and regulators could have stopped the runaway mortgage securitization train. They did not.
On trustworthy advice: More than 200,000 new mortgage brokers began their jobs during the boom, and some were less than honorable in their dealings with borrowers. According to an investigative news report published in 2008, between 2000 and 2007, at least 10,500 people with criminal records entered the field in Florida, for example, including 4,065 who had previously been convicted of such crimes as fraud, bank robbery, racketeering, and extortion.
On lobbying power to overturn regulations: From 1999 to 2008, the financial sector expended $2.7 billion in reported federal lobbying expenses; individuals and political action committees in the sector made more than $1 billion in campaign contributions. What troubled us was the extent to which the nation was deprived of the necessary strength and independence of the oversight necessary to safeguard financial stability.
Alan Greenspan on how to stop fraud: "If there is egregious fraud, if there is egregious practice, one doesn't need supervision and regulation, what one needs is law enforcement," Greenspan said. But the Federal Reserve would not use the legal system to rein in predatory lenders. From 2000 to the end of Greenspan's tenure in 2006 the Fed referred to the Justice Department only three institutions for fair lending violations related to mortgage.
Better late than never: The Fed did not begin routinely examining subprime subsidiaries until a pilot program in July 2007, under new Chairman Ben Bernanke. The Fed did not issue new rules ... until July 2008, a year after the subprime market had shut down. These rules banned deceptive practices in a much broader category of "higher-priced mortgage loans"; moreover, they prohibited making those loans without regard to the borrower's ability to pay, and required companies to verify income and assets. The rules would not take effect until Oct. 1, 2009, which was too little, too late.
On being caught off-guard: Charles Prince, the former chairman and chief executive officer of Citigroup, called the collapse in housing prices "wholly unanticipated." Warren Buffett, the chairman and chief executive officer of Berkshire Hathaway, which until 2009 was the largest single shareholder of Moody's Corp., told the commission that "very, very few people could appreciate the bubble," which he called a "mass delusion" shared by "300 million Americans." Lloyd Blankfein, the chairman and chief executive officer of Goldman Sachs Group, likened the financial crisis to a hurricane.
Ex-Countrywide CEO Angelo Mozilo on his contribution to society: "Countrywide was one of the greatest companies in the history of this country and probably made more difference to society, to the integrity of our society, than any company in the history of America."
Welcome to America: Consumers testified to being sold option ARM loans in their primary non-English language, only to be pressured to sign English-only documents with significantly worse terms. Some consumers testified to being unable to make even their initial payments because they had been lied to so completely by their brokers.
On the soundness of the mortgage market: The firm's analysis indicated that about $1 trillion of the loans made during the [2005-2007] period were fraudulent.
On self-control: As early as September 2004, Countrywide executives recognized that many of the loans they were originating could result in "catastrophic consequences." Less than a year later, they noted that certain high-risk loans they were making could result not only in foreclosures but also in "financial and reputational catastrophe" for the firm. But they did not stop.
The darlings that JPMorgan Chase (NYSE: JPM ) and Bank of America (NYSE: BAC ) bought: Nearly one-quarter of all mortgages made in the first half of 2005 were interest-only loans. During the same year, 68% of option ARM loans originated by Countrywide and Washington Mutual had low- or no-documentation requirements.
Nope, nothing to see here: The value of the underlying assets for CDS outstanding worldwide grew from $6.4 trillion at the end of 2004 to a peak of $58.2 trillion at the end of 2007. A significant portion was apparently speculative or naked credit default swaps.
On Goldman Sachs (NYSE: GS ) riding the AIG (NYSE: AIG ) bailout train: Goldman also produced documents to the FCIC that showed it received $3.4 billion from AIG related to credit default swaps on CDOs that were not part of Maiden Lane III. Of that $3.4 billion, $1.9 billion was received after, and thus made possible by, the federal bailout of AIG. And most -- $2.9 billion -- of the total was for proprietary trades (that is, trades made solely for Goldman's benefit rather than on behalf of a client) largely relating to Goldman's Abacus CDOs. Thus, unlike the $14 billion received from AIG on trades in which Goldman owed the money to its own counterparties, this $2.9 billion was retained by Goldman.
On the unflappable Citigroup (NYSE: C ) : The CEO of Citigroup told the commission that a $40 billion position in highly rated mortgage securities would "not in any way have excited my attention," and the co-head of Citigroup's investment bank said he spent "a small fraction of 1%" of his time on those securities. In this instance, too big to fail meant too big to manage.
On confidence and stupidity: At the end of 2007, Bear Stearns had $11.8 billion in equity and $383.6 billion in liabilities and was borrowing as much as $70 billion in the overnight market. It was the equivalent of a small business with $50,000 in equity borrowing $1.6 million, with $296,750 of that due each and every day. One can't really ask "What were they thinking?" when it seems that too many of them were thinking alike.
On Fannie and Freddie acting better than the private market: While they generated substantial losses, delinquency rates for GSE loans were substantially lower than loans securitized by other financial firms. For example, data compiled by the commission for a subset of borrowers with similar credit scores -- scores below 660 -- show that by the end of 2008, GSE mortgages were far less likely to be seriously delinquent than were non-GSE securitized mortgages: 6.2% versus 28.3%.
Lost housing wealth wasn't the biggest problem: Of the $17 trillion lost from 2007 to the first quarter of 2009 in household net wealth -- the difference between what households own and what they owe -- about $5.6 trillion was due to declining house prices, with much of the remainder due to the declining value of financial assets. As a point of reference, GDP in 2008 was $14.4 trillion.
On our neighbors to the north: Canada had strong home price increases followed by a modest and temporary decline in 2009. Researchers at the Federal Reserve Bank of Cleveland attributed Canada's experience to tighter lending standards than in the United States as well as regulatory and structural differences in the financial system.
Nope, no bubble here: In 2003, the average price was $155,000 for a new house in Bakersfield, at the southern end of California's agricultural center, the San Joaquin Valley. That jumped to almost $300,000 by June 2006.
The forgotten renters: Renters, who never bought into the madness, are also among the victims as lenders seize property after landlords default on loans. Renters can lose the roof over their heads as well as their security deposits. In Minneapolis, as many as 60% of buildings with foreclosures in 2006 and 2007 were renter-occupied.
Final words: As a nation, we set aggressive homeownership goals with the desire to extend credit to families previously denied access to the financial markets. Yet the government failed to ensure that the philosophy of opportunity was being matched by the practical realities on the ground. Witness again the failure of the Federal Reserve and other regulators to rein in irresponsible lending. Homeownership peaked in the spring of 2004 and then began to decline. From that point on, the talk of opportunity was tragically at odds with the reality of a financial disaster in the making.
You can read the rest of the report here. In the meantime, drop a thought or two in the comments section below.
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