What Caused the Financial Crisis? Still 22 Possibilities

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The head of the Financial Crisis Inquiry Commission, Phil Angelides, stopped by the office this morning. I think the idea of this commission is a very good thing. I continue to feel that something wrong happened in the run up to the financial crisis that was not just the result of a group miss-think but actual bad actors, and without a commission with subpoena power to get to the bottom of things it is likely that we will never have real regulatory reform and will probably start seeing CDOs of CDSes (you don’t want to know what these things are, but look it up if you like) again real soon.

But Angelides’ visit underscored just how hard his job is. Here’s why:

First of all, as Angelides points out, he doesn’t have a heck of a lot of resources. And he has got a good current example of that. The report that was released on what caused Lehman to fail cost $38 million to produce. Angelides’s total budget: $8 million. He’s got to figure out not just what caused Lehman to fail but the entire financial system.

The second is Angelides mandate. When Angelides got the job last July, he was tasked with leading an investigation into 22 areas that could have caused the financial crisis. He was instructed by law to publish a report on the findings by the end of 2010. Now after 8 months in (and just 9 and 1/2 months to go), and two sets of commission hearings, how many of those possible explanations for the financial crisis has he crossed off his list? None. Zippo.

Take the Community Reinvestment Act. The CRA, which encouraged banks to make loans to lower-income folks and minorities, has been a favorite whipping boy of some people who are looking to score political points with the financial crisis. So the CRA, unsurprisingly, makes it onto Angelides’ list of areas he has to look into. So at the FCIC’s second set of hearings, not one but three professors are asked about the CRA as a cause of the financial crisis. One presented a whole paper about it. All three say that CRA was not a factor. I asked Angelides today if he thinks the CRA is to blame. He said his panel is still looking into it.

In fact, not only is Angelides not crossing things off his list, he’s adding to them. And while I agree, despite what Fuld and some other ex-Lehmanites are saying , that you can say what was being done at Lehman was probably either accounting or disclosure fraud, it is hard to say it was a cause of the financial crisis.

Of course, it is certainly true that there is more than one factor that lead to the financial crisis. I co-wrote an article back in 2007 for Money that pointed to four general bad actors, and that was just in the mortgage market. And I think the so-called global pool of money also played a role as well. But the problem Angelides is that you can’t pass regulations against 22 different causes of the financial crisis. Blaming everyone is good fodder for magazine articles, but it doesn’t work as the basis of regulation.  Even I can concede that trying to restricted all of these things would be bad for business.

Angelides has 10 members of his panel and they come from both the right and the left. And that is a challenge. But he has got to get the group to see that if the FCIC concludes that 22 factors or more lead to the financial crisis, people are just going to throw their hands up and decided there is no way to stop financial crisis, and move on. That could lead to a long-term uncertainty in America that could hold down assets prices for houses and stock permanently. For the commission to have a real impact it has to start saying yes, more than one thing caused the financial crisis, but at least some things are so remote that they are worth crossing off the list.

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