Day of Reckoning for the Financial Crisis
In the all of 2008, as the sub-prime crisis engulfed the world, I made a rash promise to a class room of Chinese graduate students at Tsinghua University in Beijing.
I told them this financial collapse was of a magnitude so much greater than anything except for the Great Depression that they'd see the U.S. take extraordinary action – as it did in the 1930's. Watch for some executives to be indicted and even go to jail. Washington will need to write tough new reform laws. There will be a 9-11 style Commission investigating the causes naming names and laying out the blame. America exported a catastrophe to the world. It will now show how it takes responsibility.
Until Thursday, when the Financial Crisis Inquiry Commission came through with a near 500-page report that blamed Fed Chairmen Alan Greenspan and Ben Bernanke and dozens on Wall Street for creating the debacle, I was looking very bad. No top executive had been charged with sub-prime crimes but thousands were bailed out and paid themselves extraordinary bonuses. The Dodd-Frank reform bill is an enigma. We won't know whether it has any teeth for years – we do know it sanctions banks too big to fail.
So I was down to my 9-11 Commission promise. A report that brings public and private figures to account, that makes it clear the housing collapse wasn't a natural occurrence and, that erases the "Washington made me do it" excuse has some merit. As the summary notes, "We conclude the crisis was avoidable…not of Mother Nature…The captains of finance and the public stewards of our financial system ignored warnings and failed to question, understand, and manage evolving risks…The prime example is the Federal Reserve's pivotal failure to stem the flow of toxic mortgages, which it could have done by setting prudent mortgage-lending standards." And it goes on.
In the same week when the President read out a laundry list of China's accomplishments – the fastest supercomputer, fastest trains, leader in green technology, super achieving students in math and science – it's still worth having something China cannot do. Investigate itself. The next time a banker says tougher regulation will force him to take business offshore, ask where he wants to transfer his bank charter to – Shanghai.
Commission members say banks lobbied hard to dilute the report. A Republican minority on the FCIC blames Washington for compelling banks to generate weak mortgages so borrowers could buy housing they could not afford. Those dissenting views are good –they show how much individual blame there is to distribute.
Americans seldom think of the outside world – they're privileged not to have to. But the world watches the U.S. with an intense interest in how it deals with adversity and comes to terms with its wrongs. The Commission points out that US$ 11 trillion in U.S. wealth were destroyed by the collapse. At the end of 2008, Hong Kong economist Andrew Sheng estimated global wealth losses at US$ 45 trillion. While the world economy is slowly rebuilding, vast damage was done and few will forget that U.S. financial innovation, often praised and seldom criticized was the cause.
Tsinghua students deciphered the sub-prime debacle pretty fast after learning the new phrase, "no skin in the game." Everyone except the final investor collected a fee and got out free because no one owned the toxic debt. When I asked one day if all of this seemed pretty complicated the answer I got from the front row was: "It's just like China professor. We get it." The Commission's report shows in detail how the banks manipulated the system. It also shows how a small group of men and women can make the nation confront its failure, just as the 9-11 Commission did after the World Trade Center attacks. The report is a victory for America's open government. It remains to be seen whether its disclosures will be enough to make weak leaders bring those who failed to protect the nation and the world to a full accounting of their actions.
All opinions expressed in this blog are those of the author alone and do not necessarily reflect the views of Caixin Media.
Robert Dowling is the former managing editor of Business Week International.
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