Conclusion of the US Financial Crisis Inquiry: \u00a0We conclude dramatic failures of corporate governance and risk management at many systemically important financial institutions were a key cause of this crisis. There was a view that instincts for self-preservation inside major financial firms would shield them from fatal risk-taking without the need for a steady regulatory hand, which, the firms argued, would stifle innovation. Too many of these institutions acted recklessly, taking on too much risk, with too little capital, and with too much dependence on short-term funding. The large investment banks and bank holding companies focused their activities increasingly on risky trading activities that produced hefty profits. They took on enormous exposures in acquiring and supporting subprime lenders and creating, packaging, repackaging, and selling trillions of dollars in mortgage-related securities, including synthetic financial products. Like Icarus, they never feared flying ever closer to the sun. Many of these institutions grew aggressively through poorly executed acquisition and integration strategies that made effective management more challenging.<\/p>\n
Too big to fail meant too big to manage. Financial institutions and credit rating agencies embraced mathematical models as reliable predictors of risks, replacing judgment in too many instances. Too often, risk management became risk justification. Compensation systems\u2014designed in an environment of cheap money, intense competition, and light regulation\u2014too often rewarded the quick deal, the short-term gain\u2014without proper consideration of long-term consequences. Often, those systems encouraged the big bet\u2014where the payoff on the upside could be huge and the downside limited. This was the case up and down the line\u2014from the corporate boardroom to the mortgage broker on the street.<\/p>\n
Our examination revealed stunning instances of governance breakdowns and irresponsibility. Five major investment banks\u2014Bear Stearns, Goldman Sachs, Lehman Brothers, Merrill Lynch, and Morgan Stanley\u2014were operating with extraordinarily thin capital.<\/p>\n
Too many of them were thinking alike. And the leverage was often hidden\u2014in derivatives positions, in off-balance-sheet entities, and through \u201cwindow dressing\u201d of financial reports available to the investing public. The kings of leverage were Fannie Mae and Freddie Mac, the two behemoth government-sponsored enterprises (GSEs)..<\/p>\n
Recently we permitted the growth of a shadow banking system\u2014opaque and laden with shortterm debt\u2014that rivaled the size of the traditional banking system. Key components of the market\u2014for example, the multitrillion-dollar repo lending market, off-balance-sheet entities, and the use of over-the-counter derivatives\u2014were hidden from view, without the protections we had constructed to prevent financial meltdowns. \u00a0When the housing and mortgage markets cratered, the lack of transparency, the extraordinary debt loads, the short-term loans, and the risky assets all came home to roost. What resulted was panic. We had reaped what we had sown.<\/p>\n","protected":false},"excerpt":{"rendered":"
Conclusion of the US Financial Crisis Inquiry: \u00a0We conclude dramatic failures of corporate governance and risk management at many systemically important financial institutions were a key cause of this crisis. There was a view that instincts for self-preservation inside major … Continue reading