(Reuters) - A minority report on the causes of the financial crisis, drawn up by three Republican members of a commission investigating it, takes fewer shots at Wall Street and government officials than the main report from commission Democrats.
The 10-member Financial Crisis Inquiry Commission was set up by Congress in May 2009 to explain the causes of the worst financial crisis in generations.
On Thursday it will deliver its final report with the Democratic majority issuing one analysis and panel Republicans offering two dissents.
Following is a summary of the Republican dissent written by Bill Thomas, a former chairman of the House Ways and Means Committee; Douglas Holtz-Eakin, a former director of the Congressional Budget Office; and former National Economic Council Director Keith Hennessey.
Below that is a summary of a separate dissent from Peter Wallison, the fourth Republican commissioner.
The three Republicans’ dissent lists 10 causes for the 2007-2009 crisis that shocked capital markets and dragged the economy into a severe recession from which it has yet to fully recover:
CREDIT BUBBLE - A credit bubble caused by global capital flows into the United States and Europe from China and other developing nations reduced interest rates and encouraged risky lending. “U.S. monetary policy may have contributed to the credit bubble but did not cause it,” says the dissent.
HOUSING BUBBLE - A housing bubble emerged that was caused by “many factors,” including population growth in “Sand States” such as Arizona, Florida, Nevada and California.
SUBPRIME LENDING - Subprime mortgage lending exploded and was often deceptive and confusing, fueled by cheap credit. Leading lenders were Countrywide, Washington Mutual, Ameriquest and HSBC Financial HSBA.L. This amplified the housing bubble.
The report places some blame on regulation, pointing to poor state-level oversight. Weak “disclosure standards and underwriting rules made it easy for irresponsible lenders to issue mortgages that would probably never be repaid,” it said.
“Federally regulated bank and thrift lenders, such as Countrywide, Wachovia, and Washington Mutual, had lenient regulatory oversight on mortgage origination as well.”
The GOP report said, “All these factors were supplemented by government policies ... that subsidized homeownership but created hidden costs to taxpayers and the economy. Elected officials of both parties pushed housing subsidies too far.”
CREDIT RATINGS, SECURITIZATION - Failures in the credit rating industry and securitization process created toxic assets and further fueled subprime lending.
BAD RISK MANAGEMENT - Big companies piled up housing risk, some knowingly and some not. The report said, “An essential cause of the financial and economic crisis was appallingly bad risk management by the leaders of some of the largest financial institutions.”
TOO LITTLE CAPITAL - Companies held too little capital relative to their risks, and relied too much on short-term repo and commercial paper markets for financing. This was often inadequately disclosed, creating market uncertainty and reducing capital availability market-wide when crisis hit.
CONTAGION - A risk of contagion made policy-makers reluctant to allow the failure of a large company in distress for fear that its obligations to other companies would bring down the system.
COINCIDENCE - Companies that were unrelated failed around the same time because they all had the same problems.
PANIC - The September 2008 crisis triggered a global panic.
CONTRACTION - The crisis caused an economic contraction. The panic ended in early 2009, but the economy has yet to recover.
FANNIE, FREDDIE - The report faulted Fannie Mae and Freddie Mac, the two U.S. housing finance operations, for helping undermine the securitization process. And it emphasized that they were extreme cases of ‘too big to fail.’
It said, “Fannie Mae and Freddie Mac did not by themselves cause the crisis, but they contributed significantly in a number of ways.”
A SECOND REPUBLICAN DISSENT - Wallison, the fourth Republican commissioner, penned his own dissent that lays most of the blame for the crisis on government housing policies.
Wallison singled out a 1992 law that created the Office of Federal Housing Enterprise Oversight to regulate Fannie and Freddie as promoting homeownership to the extent that it led to a “degrading” of mortgage underwriting standards.
He argued that by the time of the crisis about half of the 55 million mortgages in the United States were subprime loans or similarly risky. When many of those loans went bad, the financial crisis followed, according to Wallison who is a fellow at the conservative American Enterprise Institute in Washington.
“Although there were many contributing factors, the housing bubble of 1997-2007 would not have reached its dizzying heights or lasted as long, nor would the financial crisis of 2008 have ensued, but for the role played by the housing policies of the U.S. government over the course of” the Clinton and Bush administrations, Wallison wrote. (Reporting by Kevin Drawbaugh and Dave Clarke)
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