Analysis: Flawed report seen from financial crisis panel

WASHINGTON Tue Jan 11, 2011 3:12pm EST

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WASHINGTON (Reuters) - The final report of a U.S. congressional panel on the financial crisis -- due to hit bookstores in days -- won't be the blockbuster some hoped for, but it may help point the way toward mortgage market reform.

By mapping out the latest positions of influential Democrats and Republicans on how to fix the housing finance system and the giants that dominate it -- Fannie Mae and Freddie Mac -- the report could add value.

Otherwise, said analysts and academics, the Financial Crisis Inquiry Commission and its work are largely a missed opportunity that may have been doomed from the outset.

"Whatever it says, it is likely to be too little and too late. The timing was wrong from the start," said Columbia Law School Professor John Coffee.

The 10-member FCIC was set up by Congress in May 2009. It was assigned the task of explaining the causes of the worst financial crisis in generations -- a debacle that shook world markets, dragged the economy into a severe recession and unleashed a global wave of reforms that is still cresting.

More than two years after the peak of the crisis, and with reforms already approved by the U.S. Congress and being implemented by regulators, the commission is finally completing its job. It has produced a hefty document that is in the hands of publishers and set for release later this month.

The report, also to be made available online and later from the government printer, will contain some material of interest to experts, such as interviews and inside documents obtained by the panel, said people familiar with it.

But it will not present a consensus view on the origins of the crisis. The panel's 10 members were too divided for that, reflecting official Washington's deep partisan rivalries.

"I don't have high expectations for a Eureka moment ... This is not in the forefront of many investors' minds," said Matt McCormick, a portfolio manager at Bahl & Gaynor Investment Counsel Inc, a Cincinnati investment firm.

An FCIC spokesman would not comment on details in the report.

NO 'SMOKING GUN' EXPECTED

Nor will the report unveil a "smoking gun" that identifies wrong-doers, said those close to the commission.

Despite the enormity of the crisis, few individuals have been held accountable. Unlike the Enron-era scandals of almost a decade ago, there has been no parade of perp walks by handcuffed financiers, and there is little expectation of one.

Former Lehman Chief Executive Dick Fuld, former American International Group Financial Products head Joseph Cassano and Goldman Sachs CEO Lloyd Blankfein are some of the executives who have been grilled by the commission. However, the panel failed to extract any bold new revelations of wrongdoing during its public hearings.

Instead, the FCIC's Democrats will present a broad critique of the financial system likely to be familiar from last year's congressional hearings on Wall Street reform and many books and articles already published by academics and journalists.

The Democrats' analysis will focus, in large part, on "shadow banking," or unregulated financial firms, and runaway securitization of private mortgage debt, sources said.

In contrast, Republicans will largely blame government affordable-housing policies in their analysis.

"My views are that government housing policy created the financial crisis," said Peter Wallison, a Republican commission member and a fellow at the American Enterprise Institute, a conservative think tank, in an interview.

Last month the commission's four Republicans, including Wallison, offered a nine-page summary of their views. It criticized government housing policy and made no mention of predatory mortgage lending, or the possibility that Wall Street misled investors on securitized mortgage-backed products.

In short, the final report looks likely to fall far short of ripping the lid off the crisis in the comprehensive way that the Pecora Commission -- the model some hoped the FCIC would emulate -- did in the 1930s during the Great Depression.

"Even if the FCIC miraculously pulls itself together and comes out with a bipartisan report ... the often hectoring tone of questioning at some of the hearings damaged the credibility of the FCIC's work," said Karen Shaw-Petrou, managing partner at Federal Financial Analytics, a consulting firm.

"If the report is, as seems likely, couched as contentious majority versus minority conclusions, then each side will retreat to its corner and continue to spit at each other."

MORTGAGE DEBATE PROLOGUE?

One silver lining may be the value the report offers "as a prologue to the housing finance debate," said David Min, associate director at the Center for American Progress, a moderate think tank.

While Congress enacted landmark reforms in July touching almost every corner of the financial system, it did not tackle the troubled mortgage market or Fannie Mae and Freddie Mac, the government-sponsored enterprises, or GSEs, at its core. A debate on this issue is expected through 2011-2012.

"You have two sharply competing narratives here," Min said, referring to a Republican view that the GSEs should be closed and the mortgage market stripped of government backing, versus Democrats' desire for reforms that retain a government role.

To the extent that the FCIC report shows any movement on either side, it may point the way toward compromise, with the financial industry concerned that the Republican position is "kind of crazy" and some Republicans concerned too, Min said.

The report's release later this month will closely coincide with the unveiling by the Obama administration of its own housing finance reform plan.

Wallison said the FCIC Republicans' views on the crisis raise a range of questions, among them "how you handle Fannie Mae and Freddie Mac, which is one of the big substantive issues that will be coming up in this session of Congress."

(Reporting by Kevin Drawbaugh and Dave Clarke; Additional Maria Aspan and Ben Berkowitz in New York; Editing by Tim Dobbyn)

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