The American economy came close to flat-lining in the closing months of 2008. A few months later, as the economy limped along, Congress established the Financial Crisis Inquiry Commission to get to the bottom of what almost killed the American economy.
In a report released today, the commission implicated a rogues' gallery of reckless insurance companies, lax regulators, foolish investment banks and yes, millions of Americans who took out ill-advised mortgages.
"This calamity was the result of human action, inaction and misjudgment, not of Mother Nature or computer models gone haywire," FCIC chairman Phil Angelides said in a news conference on the report's finding.
Here are the culprits highlighted by the commission.
Government regulators, including Treasury Secretary Henry Paulson, Federal Reserve Chairmen Alan Greenspan and Ben Bernanke. The FCIC found officials in the federal government encouraged the growth of the housing bubble and underestimated the danger its deflation would eventually cause. They singled out Greenspan, Fed chairman from 1987 until 2006, for pushing deregulation of the markets and keeping interest rates at historic lows at a time of solid economic growth, encouraging a massive flow of capital into the mortgage industry.
Paulson, Bernanke, the Clinton administration and the George W. Bush administration also came under fire, first for failing to perceive and address the danger posed by the housing bubble and then for an uneven response that injected uncertainty into financial markets by saving some financial institutions like Bear Sterns, but allowing others, like Lehman Brothers, to fail, the report says.
The FCIC also criticized the patchwork of financial regulators, including the Federal Reserve, the Securities and Exchange Commission, the Office of Thrift Supervision and others, that had the power to stem the flow of toxic subprime mortgages into the securities market and failed to act.
One reason for that was the political clout of the financial industry, which spent $2.7 billion on lobbying the federal government between 1999 and 2008. That influence allowed them to put pressure on regulators to back off aggressive actions. And since many large financial firms were eligible to be regulated by multiple agencies, they used that influence to steer themselves toward the most lax regulator.
"The government allowed financial firms to select their preferred regulators, setting off a race to the weakest supervisor," said FCIC commissioner John Thompson.
Mortgage lenders. Mortgage lenders were the first step in the deeply flawed mortgage process that was central to the financial crisis, according to the FCIC report. To push profits higher, they began to offer alternatives to the traditional, prime, 30-year, fixed mortgages that had been the norm, the report says.
During the run up to the financial crisis, they approved trillions of dollars' worth of variable rate loans, subprime loans to customers with poor credit, low- and no-documentation loans and other exotic lending instruments that would eventually be the volatile fuel for the housing conflagration. Lenders like Washington Mutual, Countrywide and IndyMac ended up paying the price becoming sold at fire-sale prices or failing altogether.