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68–396 PDF 2011

S. HRG. 112–100 

REVIEWING THE FINANCIAL CRISIS INQUIRY 

COMMISSION’S FINAL REPORT 

HEARING 

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

ON 

REVIEWING THE FINANCIAL CRISIS INQUIRY COMMISSION’S FINAL 

REPORT 

MAY 10, 2011 

Printed for the use of the Committee on Banking, Housing, and Urban Affairs 

( 

Available at: http://www.fdsys.gov/ 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

TIM JOHNSON, South Dakota, Chairman 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

ROBERT MENENDEZ, New Jersey 

DANIEL K. AKAKA, Hawaii 

SHERROD BROWN, Ohio 

JON TESTER, Montana 

HERB KOHL, Wisconsin 

MARK R. WARNER, Virginia 

JEFF MERKLEY, Oregon 

MICHAEL F. BENNET, Colorado 

KAY HAGAN, North Carolina 

RICHARD C. SHELBY, Alabama 

MIKE CRAPO, Idaho 

BOB CORKER, Tennessee 

JIM DEMINT, South Carolina 

DAVID VITTER, Louisiana 

MIKE JOHANNS, Nebraska 

PATRICK J. TOOMEY, Pennsylvania 

MARK KIRK, Illinois 

JERRY MORAN, Kansas 

ROGER F. WICKER, Mississippi 

DWIGHT FETTIG, Staff Director 

WILLIAM D. DUHNKE, Republican Staff Director 

CHARLES YI, Chief Counsel 

GLEN SEARS, Senior Policy Advisor 

LISA FRUMIN, Legislative Assistant 

ANDREW OLMEM, Republican Chief Counsel 

MIKE PIWOWAR, Republican Senior Economist 

CHAD DAVIS, Republican Professional Staff Member 

DAWN RATLIFF, Chief Clerk 

WILLIAM FIELDS, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor 

(II)

C O N T E N T S 

TUESDAY, MAY 10, 2011 

Page 

Opening statement of Chairman Johnson ............................................................. 1 

Opening statements, comments, or prepared statements of: 

Senator Shelby .................................................................................................. 2 

WITNESS 

Phil Angelides, Chairman, Financial Crisis Inquiry Commission ....................... 3 

Prepared statement .......................................................................................... 27 

Responses to written questions of: 

Senator Shelby ........................................................................................... 29 

Senator Reed .............................................................................................. 31 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

Statement submitted by Peter J. Wallison, Arthur F. Burns Fellow in Financial Policy Studies, American Enterprise Institute ........................................... 32 

JPMorgan Study ‘‘Eye on the Market’’ .................................................................. 43 

Financial Crisis Inquiry Commission archived Web site list ............................... 48 

Financial Crisis Inquiry Commission preliminary staff report ‘‘The Mortgage 

Crisis’’ .................................................................................................................... 49

Financial Crisis Inquiry Commission memorandum ‘‘Analysis of Housing 

Data’’ ..................................................................................................................... 77 

(III)

(1) 

REVIEWING THE FINANCIAL CRISIS INQUIRY 

COMMISSION’S FINAL REPORT 

TUESDAY, MAY 10, 2011 

U.S. SENATE, 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, 

Washington, DC. 

The Committee met at 10:05 a.m., in room SD–538, Dirksen Senate Office Building, Hon. Tim Johnson, Chairman of the Committee, presiding. 

OPENING STATEMENT OF CHAIRMAN TIM JOHNSON 

Chairman JOHNSON. I would like to call this hearing to order. 

The Financial Crisis Inquiry Commission was created with the 

enactment of the Fraud Enforcement and Recovery Act in May 

2009. During the debate on the bill, a partisan group of Senators, 

led by Senator Isakson, offered an amendment to establish a commission to examine the causes of the current financial and economic crisis in the U.S. The amendment was approved by a 92–4 

vote. 

The law creating the FCIC explicitly requires that the Chairperson of the Commission shall appear before the Committee on 

Banking, Housing, and Urban Affairs of the Senate regarding such 

reports and the findings of the Commission. 

After culling through the thousands of documents, interviewing 

hundreds of key individuals, and holding over a dozen public hearings, the FCIC in January put forward a thorough and credible account of what went wrong. The factual findings of the final report 

echo what many other independent sources as well as the Committee have identified as key causes of this crisis, such as the widespread breakdown of basic protections for consumers, investors, 

and taxpayers. 

Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act to address these problems, and it must be 

fully and properly implemented. The FCIC report shows that repealing or undermining Dodd-Frank, as some have proposed, would 

take us back to the same weak financial system that ushered in 

the worst economic crisis in generations and whose painful costs 

are still being felt. 

Systemic risks would remain unsupervised; there would be no focused consumer watchdog; investors would be exposed to more 

Ponzi schemes; reckless financial firms would undermine those who 

played by the rules; taxpayers would be on the hook for more bailouts. 

2 

We cannot allow Dodd-Frank to be dismantled. As costly as the 

great recession has been, we simply cannot afford to go back to the 

old financial system that destroyed millions of jobs and cost the 

economy trillions of dollars. To do so would be dangerous and irresponsible. 

I look forward to hearing from Mr. Angelides about the findings 

of the Commission so we can continue our work to make sure history does not repeat itself. I want to thank Mr. Angelides, all the 

Commissioners, and the staff for their hard work on this report. 

I now recognize Ranking Member Shelby for any opening statement he may have. Senator Shelby. 

STATEMENT OF SENATOR RICHARD C. SHELBY 

Senator SHELBY. Thank you, Mr. Chairman. 

Today, as you indicated, we will hear from Phil Angelides, Chairman of the Financial Crisis Inquiry Commission. The Commission’s 

statutory mission was, and I will quote, ‘‘to examine the causes, domestic and global, of the current financial and economic crisis in 

the United States.’’ The final report of the Commission was delivered to Congress in January. For some, the Commission’s report 

represents a comprehensive record of the crisis. For me, it represents a missed opportunity. 

Before the Commission was created, I called for this Committee 

to conduct a comprehensive investigation into the causes of the financial crisis. I believe that the American people deserve a full accounting of what happened. I also believe that such an accounting 

would lay a foundation for financial reform legislation. 

As I have said many times, before Congress considered how to 

reform our financial regulatory structure, we should have first determined the underlying causes of the crisis. Without a comprehensive understanding of what went wrong, Congress would not be 

able to determine how our regulatory structure failed and what reforms were needed. 

I noted that this Committee responded to the Great Depression 

by launching the so-called Pecora investigation. That investigation 

went on for more than 2 years and laid the foundation for groundbreaking legislation, including the Banking Act of 1933, which created the FDIC; the Securities Act of 1933; and the Securities and 

Exchange Act of 1934, which created the Securities and Exchange 

Commission. 

Ultimately the Democratic majority refused to undertake such a 

Committee-led investigation. Instead, it created an independent 

Commission to examine the origins of the crisis and make recommendations on how to reform our financial system. 

In the absence of a Committee effort, I reluctantly supported the 

creation of the Commission. If the Committee was not going to do 

this work, I believed at least someone should. Unfortunately, while 

the Commission worked, the Administration and the majority 

moved forward with financial reform legislation. Rather than help 

inform Congress, the Commission’s findings were largely ignored as 

the Democratic majority drafted and passed over 2,300 pages of 

new law without a firm grasp of the facts behind the financial crisis. 

3 

Predictably, without a clear record to justify specific provisions, 

the Dodd-Frank legislation merely became a wish list of reforms 

long sought by liberal activists, special interests, and Federal bureaucrats. Today the costs and unintended consequences of DoddFrank continue to mount while the benefits of the legislation remain unclear. 

Mr. Chairman, I believe that this Committee squandered a historic opportunity when it chose not to conduct its own inquiry. It 

only exacerbated that mistake when it decided to legislate before 

the Commission even had a chance to begin its work, let alone finish its report. And while it is unfortunate that the Commission was 

unable to reach a bipartisan consensus on its final report, it is 

more unfortunate that in the end it did not matter. 

Thank you, Mr. Chairman. 

Chairman JOHNSON. Are there any other Members who would 

like to be recognized for a brief statement? If not, I will remind my 

colleagues that we will keep the record open for 7 days for statements, questions, and any other material you would like to submit. 

I will now introduce our witness for today’s hearing. Mr. Phil 

Angelides served as the Chairman of the Financial Crisis Inquiry 

Commission. He was previously elected as California’s State Treasurer and served from 1999 to 2007. As early as 2002, he warned 

of the excesses and abuses in the Nation’s financial markets, mobilizing pension funds and investors across the country to push for 

reforms, fight fraud, and improve corporate governance. 

Mr. Angelides, you are now recognized for 5 minutes to give your 

opening statement. Please proceed. 

STATEMENT OF PHIL ANGELIDES, CHAIRMAN, FINANCIAL 

CRISIS INQUIRY COMMISSION 

Mr. ANGELIDES. Thank you, Chairman Johnson, Ranking Member Shelby, and Members of the Committee. Thank you for your invitation to discuss the report of the Financial Crisis Inquiry Commission. It was my honor to chair the panel, which officially disbanded on February 13th of this year. I want to thank my fellow 

Commissioners and our staff for their service to our country. 

Let me begin by noting that the financial crisis has been of no 

small consequence to our Nation. There are more than 24 million 

Americans who are out of work, cannot find full-time work, or have 

given up looking for work. About 4 million families have lost their 

homes to foreclosure, and millions more have slipped into the foreclosure process or are seriously behind on their mortgage payments. Nearly $9 trillion in household wealth has vanished. The 

budgets of the Federal Government and of State and local governments across the country have been battered by the economic tailspin precipitated by the financial meltdown. And the impacts of the 

crisis are likely to be felt for a generation, with our Nation facing 

no easy path to renewed economic strength. 

In 2009, Congress tasked the Commission to examine ‘‘the causes 

of the current financial and economic crisis in the United States’’ 

and to probe the collapse of major financial institutions that failed 

or would have failed if not for exceptional assistance from the Government. We were true to our charge and we fulfilled our mandates. 

4 

Our task was to determine what happened and how it happened 

so we could understand why it happened. In doing so, we sought 

to answer this central question: How did it come to pass that in 

2008 our Nation was forced to choose between two stark and painful alternatives: either risk the total collapse of our financial system and economy, or inject trillions of taxpayer money into the system and into private companies, even as millions of Americans still 

lost their jobs, their savings, and their homes? 

In the course of our investigation, we reviewed millions of pages 

of documents, interviewed more than 700 witnesses, and held 19 

days of public hearings. The Commission also drew from a large 

body of existing work developed by congressional committees, Government agencies, academics, and others. 

The Commission’s report contains six major conclusions: 

First and foremost, we concluded that this financial crisis was 

avoidable. The crisis was the result of human action, inaction, and 

misjudgment, not Mother Nature. Financial executives and the 

public stewards of our financial system ignored warnings and failed 

to question, understand, and manage evolving risks within a system so essential to the well-being of the American people. 

Second, we found widespread failures in financial regulation that 

proved devastating to the stability of our Nation’s financial markets. 

Third, our report describes dramatic breakdowns in corporate 

governance and risk management at many systemically important 

financial institutions. 

Fourth, we detail the excessive borrowing, risky investments, 

and lack of transparency that combined to put our financial system 

on a collision course with catastrophe. 

Fifth, we concluded that key policy makers were ill prepared for 

the crisis and that their inconsistent responses added to uncertainty and panic. 

And, finally, we documented how breaches in accountability and 

ethics became widespread at all levels during the run-up to the crisis. 

Our report, as well as the two dissents, can be found at our Web 

site, www.FCIC.gov. That Web site also contains approximately 

2,000 documents; public testimony at our hearings; audio, transcripts, and summaries of more than 300 witness interviews; and 

additional information to create an enduring historical record of 

the crisis. 

Conclusions aside, our report contains a valuable and accurate 

historical accounting of the events leading up to the crisis and the 

crisis itself. While Commissioners were not unanimous on all issues 

or on the emphasis placed on causes of the crisis, there was notable 

common ground among nine of ten Commissioners on a number of 

matters such as flaws in the mortgage securitization process, the 

presence of serious mortgage fraud, appallingly poor risk management at some large financial institutions, and failures of the credit 

rating agencies. Indeed, Mr. Thomas, Mr. Holtz-Eakin, and Mr. 

Hennessey stated in their dissent that they found areas of agreement with our conclusions. As just one example, nine of ten Commissioners determined that the Community Reinvestment Act was 

not a significant factor in the crisis. 

5 

Finally, you have asked me to comment on the Dodd-Frank financial reform law. With our inquiry and report completed and the 

facts in evidence, I believe that it is important speak to this matter. I believe that the law’s financial reforms are strong and needed 

and that the law directly and forcefully addresses issues and conclusions identified in our report. 

In the wake of this crisis, it is critical that the Dodd-Frank law 

be fully implemented, with sufficient resources for proper oversight 

and enforcement, to help prevent a future crisis. It is important for 

regulators and prosecutors to vigorously investigate and pursue 

any violations of law that have occurred to ensure that justice is 

served and to deter future wrongdoing. And it is essential that we 

focus our efforts anew on rebuilding an economy that provides good 

jobs for Americans and sustained value for our society—in place of 

an economy that in the years before the crisis was inordinately 

driven by financial engineering, risk, and speculation. 

In conclusion, it is my hope that our report will serve as a guidepost in the years to come as policy makers and regulators endeavor 

to spare our country from another catastrophe of this magnitude. 

Thank you. I look forward to your questions. 

Chairman JOHNSON. Thank you for your testimony. 

As we begin questioning the witness, I will ask the clerk to put 

5 minutes on the clock for each Member’s questions. 

Mr. Angelides, would you briefly tell us what you found to be the 

most compelling finding in the report? Also, the Commission included a vast array of facts surrounding the crisis in their final report. Has anyone on or off the Commission disputed any of those 

facts? 

Mr. ANGELIDES. Thank you, Mr. Chairman. Let me start with the 

second part of that question. 

It has now been more than 3 months since the release of this report, and while clearly there was disagreement among Commissioners on certain aspects of the conclusions, I will say that one of 

the things that I think the Commission should be proud of is that, 

as to our factual accounting of the events leading up to the crisis 

and the crisis itself, this report—the facts of this report have stood. 

There have not been challenges to the factual accuracy of this report. 

In fact, Mr. Holtz-Eakin, one of our members, said after the release of the report, he said, ‘‘What we will leave behind and what 

the staff in particular is to be congratulated for is an archive of extraordinary information of the testimony and the hearings, of the 

subpoenas and the documents we acquired. I believe that is the 

lasting legacy of this Commission.’’ 

So if you look at our report, I believe about 410 pages of the report is really the results of our investigation, the factual accounting 

of what occurred from the 1970s on, and particularly with emphasis on the 2007–08 time period. And it is a factual, accurate, historical accounting that has gone, to my knowledge, unchallenged in 

terms of that accuracy. 

With respect to the most compelling findings, I think I would 

offer this: The report very strongly articulated the view that this 

was not, as some on Wall Street would have us believe, a perfect 

storm. This was not, as Mr. Blankfein said, an ill wind or a hurriVerDate Nov 24 2008 13:49 Oct 17, 2011 Jkt 048080 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 L:\HEARINGS 2011\05-10 REVIEWING THE FINANCIAL CRISIS INQUIRY COMMISSION’S 
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cane that blew from offshore. This crisis really was the result of 

human action, inaction, and misjudgment, and what was most 

striking to me is the number of warning signs that appeared along 

the road to disaster: the unsustainable rise in housing prices; the 

widespread reports of predatory and egregious lending practices, in 

fact, that appeared in the 1990s in Cleveland, Ohio, and many 

other communities across this country; the creation of $13 trillion 

of mortgage securities, many of which turned out to be wholly defective; the doubling of mortgage debt in this country; and the dramatic change in the risk profile of many of the large financial institutions that ultimately were deemed systemically important. 

So I think for me the most compelling finding of this report was 

the avoidability of this crisis, and what accompanied it was a widespread breakdown in regulation, both gaps that existed as well as 

the failure of regulators to use their statutory authority, coupled 

with the reckless behavior of some of the largest financial institutions in this country. 

Chairman JOHNSON. I am disappointed that there are some who 

seek to repeal or undermine the implementation of the Dodd-Frank 

Act, which was designed to fix what was broken in the financial 

system. Wouldn’t repealing the Dodd-Frank Act increase our 

chances of having the same financial crisis that is described in your 

final report? Would you also explain why full Dodd-Frank implementation is important to fix the problems the report identifies? 

Mr. ANGELIDES. Let me first say that the Commission itself was 

assiduous, as we undertook our investigation and as we did our research leading up to the release of our report in January, in a 

sense to focus on our work and our factual inquiry and not on the 

legislative debates occurring in this building. We knew we were 

given a job to do, and we focused on doing that job. 

It was really only after the issuance of our report—and obviously 

after Dodd-Frank was signed into law—that I looked at essentially 

how our report matched up with Dodd-Frank. And let me just suggest to you that we identified a number of failures which the legislation addresses very directly and very forcefully. 

Clearly, one of the items that we indicated—let me just give you 

a couple of examples in the area of supervision and regulation. One 

of the areas that we identified as a weakness were some of the 

gaps that had grown in the regulatory framework as our financial 

system had evolved over the 30 years from the late 1970s, early 

1980s, to the time of the crisis, 2007–08. By the beginning of 2008, 

the shadow banking system, that system of lightly if regulated at 

all nonbank financial institutions, that that system now had about 

$13 trillion in assets; the regulated bank and thrift system had 

about $11 trillion in assets. 

One of the things the Dodd-Frank bill does by creating the Financial Stability Oversight Council and providing it with the ability to monitor systemic risk and also to impose greater scrutiny 

and greater requirements on systemically important institutions, is 

it helps close up that gap in our regulatory framework that existed 

before the crisis. 

Another example, I think, of where Dodd-Frank is important and 

responsive to the conclusions and the facts we laid out was that it 

empowered the Financial Stability Oversight Council, in fact, to act 

7 

where it saw risk in individual institutions that could jeopardize 

the system as a whole. 

Yet another example is the imposition of a new regulatory regime on credit rating agencies, and, of course, what I think is a 

seminal decision, to regulate the massive over-the-counter derivatives market that did play a role in the crisis of 2007–08. And with 

respect to that matter, what we found in our report was that credit 

derivatives themselves, the over-the-counter credit derivatives, did 

help fuel the mortgage securitization boom. We found that by virtue of the creation of synthetic CDOs, it helped amplify the effect 

of the housing bubble collapse. And at the end, as panic set into 

the markets and market participants had very little knowledge of 

what counterparty positions were, the general absence of information on over-the-counter derivatives fed the panic in the fall of 

2008. 

So those are just a couple of examples. I could go on, but just 

briefly I would say I certainly believe the reforms in the consumer 

protection area are important. Our report documents many, many 

instances where lenders made loans to borrowers who clearly did 

not have the ability to pay. We recount instances, for example, 

where mortgage brokers deliberately steer lenders into loans that 

are the most expensive for the borrower, not the best for the borrower. And so that is another aspect of the Dodd-Frank bill that 

is very responsive to our findings. 

Chairman JOHNSON. Senator Shelby. 

Senator SHELBY. Thank you, Mr. Chairman. 

Mr. Chairman, the Commission’s report concludes that the GSEs 

‘‘followed rather than led’’ the private sector into subprime. But 

earlier this month, a prominent industry analyst, Michael 

Cembalest, who once shared that same view, issued a report in 

which he changed his opinion, and I would like to submit that for 

the record at this time. I will read just a few sentences, if I could 

put it in the record. 

Quoting Mr. Cembalest, the analyst, ‘‘In January 2009, I wrote 

that the housing crisis was mostly a consequence of the private sector. However . . . what emerges from new research is something 

quite different: Government agencies now look to have guaranteed, 

originated, or underwritten 60 percent of all ‘nontraditional’ mortgages, which totaled $4.6 trillion in June 2008. What’s more, this 

research asserts that housing policies instituted in the early 1990s 

were explicitly designed to require U.S. Agencies to make much 

riskier loans, with the ultimate goal of pushing private sector 

banks to adopt the same standards.’’ 

Senator SHELBY. Mr. Chairman, because this analyst was presented with the same research available to you—I hope it was the 

same—and found it credible enough to change his position, why 

have you not changed your position—or have you?—on the GSEs’ 

role here? Did they follow or did they lead? 

Mr. ANGELIDES. They followed, and I would like to speak about 

that for a few minutes. 

Senator SHELBY. OK. 

Mr. ANGELIDES. And let me say, Senator Shelby, that we spent 

an enormous amount of time on this issue, and I will just tell you, 

as someone who had come from the private sector immediately beVerDate Nov 24 2008 13:49 Oct 17, 2011 Jkt 048080 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 L:\HEARINGS 2011\05-10 REVIEWING THE FINANCIAL CRISIS INQUIRY COMMISSION’S 
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fore my appointment and spent more than half my career in the 

private sector, I did not come into this inquiry with a preconceived 

notion of the extent of Fannie and Freddie’s involvement in this 

crisis. So—— 

Senator SHELBY. Well, obviously this gentleman did not either 

because he agreed with you, and then with more data he changed 

his mind. I am just—— 

Mr. ANGELIDES. Maybe I could re-persuade him. So let me start 

by saying this was an area in which at least there was some agreement—not total agreement—between nine of ten Commissioners. 

The dissent filed by Mr. Holtz-Eakin, Mr. Thomas, and Mr. 

Hennessey said Fannie Mae and Freddie Mac did not by themselves cause the crisis, but they contributed significantly. 

What we found is we found that they were not a primary cause 

but they did contribute, so let me talk for a few minutes about 

what we found and how we did our analysis because I think this 

is important. 

We took a deep-dive look at the GSEs, and the way we conducted 

our inquiry because of our budget and time, we selected 10 institutions for in-depth investigations, institutions like Merrill Lynch, 

Countrywide, Goldman Sachs, and we looked very intensely at 

Fannie Mae, even though we also looked a good deal at Freddie 

Mac. And let me start by saying that there is no question that the 

GSEs were a disaster. To date, they have cost the taxpayers more 

than $151 billion, so let us get that off the table. 

Senator SHELBY. Thus far. 

Mr. ANGELIDES. This did not go well. They had a flawed business 

model, which, I might add, in some ways was eventually emulated 

by firms on Wall Street, the privatizing of gain and the socializing 

of loss. They were of significant scale in the marketplace so they 

mattered. They used their political power to ward off effective regulation. They clearly ramped up their purchasing and guarantee of 

the riskiest loans in 2005, 2006, and 2007 as the market was peaking, and they did have corporate governance failures of a magnitude of other major Wall Street firms. But here I think are some 

very important points. 

First of all, the GSE mortgage-backed securities, because the 

marketplace believed there was this implicit, which became explicit, Government guarantee, if you look at their valuations starting in about January 2007 all the way up to the day before they 

are put into conservancy, the value of mortgage-backed securities 

purchased or guarantees by the GSEs did not decline during that 

period. You know, they were around 98, 99, 100, 102. 

The reason I mention that—and I think this is a technical but 

important point—is these securities did not cause the losses that 

manifested themselves on Wall Street in 2007 and 2008, the big 

losses at Merrill and Citi that were brought about by the market 

value declination of subprime securities those institutions were 

holding. So I think that is important to keep in mind. They did not 

begin the stampede of losses on Wall Street. Those were caused by 

the private label securities. 

With respect to whether they followed or led, here is what we 

found. They clearly participated in the expansion of subprime and 

other risky lending, but when they purchased private label securiVerDate Nov 24 2008 13:49 Oct 17, 2011 Jkt 048080 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 L:\HEARINGS 2011\05-10 REVIEWING THE FINANCIAL CRISIS INQUIRY COMMISSION’S 
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ties, they purchased the highest rated portions of those securities, 

and they never represented a majority of the purchases. In 2001, 

they were 10.5 percent of the purchases of subprime private label 

securities. By 2004, they were up to 40 percent. But by 2008, they 

fell back to 28 percent. 

We reviewed thousands of documents, and what we found is that 

they upped their investments in subprime and risky loans in the 

2005 to 2007 period to regain market share that they had lost to 

Wall Street, to respond to the expectations of analysts, and, frankly, to ensure generous compensation for their executives. 

But most importantly, here is something we did that we hope— 

again, conclusions aside—will lead to, I think, good analysis of 

what occurred. 

We took a look at about 25 million loans that had been 

securitized in the marketplace by Wall Street and other nonFannie, Freddie firms, by Fannie and Freddie, and by FHA, and 

what we found is that those loans that were securitized by Fannie 

and Freddie did perform significantly better than the private label 

securities. Now, because there were a lot of them, it clearly had an 

impact. But just to put this on the record, apples-to-apples, the 

Fannie and Freddie securitizations performed exceptionally better 

than the private label Wall Street securities. 

For example, if you take borrowers who have credit scores below 

660, by the end of 2008, the private label securities packaged by 

Wall Street had default rates of 28 percent. For a similar set of 

borrowers with the same credit scores, the default rate of Fannie 

and Freddie loans were about a little over 6 percent, I believe, 6.3 

percent. So the worst of the loans, the most toxic loans, in fact, 

were done by the non-GSE entities first, and then the magnitude, 

or the lack of quality was most striking. 

So, again, we believe they contributed, but they did not lead this 

charge. 

Senator SHELBY. Mr. Chairman, I have one question, then I have 

others—— 

Mr. ANGELIDES. Sure. 

Senator SHELBY. ——I will submit for the record, if I could. The 

Commission’s Vice Chairman, former Congressman Bill Thomas, 

raised several concerns about the partisan nature of the Commission, and I would like you to address some of them. How many 

days’ notice, for example, did Commissioners get prior to votes on 

motions, and was this different for Republican Commissioners 

versus Democratic Commissioners? We have been told that it was. 

How many days’ notice did Commissioners get prior to the final 

vote on findings and conclusions, and was this different for Republican Commissioners versus Democratic Commissioners? And why 

were the minority views excluded by a partisan six-to-four vote 

from the report and restricted in the commercial book? I think 

those are important, because, Mr. Chairman, we are looking for a 

bipartisan deal here, as you well know. 

Mr. ANGELIDES. Good. Good questions. So let me start off and 

talk just about process for a few minutes, and let me say, again, 

at the end of the day, the bulk of this report is, I believe, a historical accounting which I hope and believe will be of extraordinary 

10 

use to your Committee as well as the American public, and I hope, 

frankly, regulators—— 

Senator SHELBY. We hope so, too. 

Mr. ANGELIDES. ——regulators, and I will say, also, I hope prosecutors read this book and take a look at it, because we had a limited budget, limited time—— 

Senator SHELBY. A close look, right? 

Mr. ANGELIDES. Hmm? 

Senator SHELBY. Prosecutors ought to take a close look. 

Mr. ANGELIDES. They should, and the fact is we had limited 

time, limited resources. We could open a number of doors. We 

opened those doors and I hope the prosecutors and regulators walk 

through those doors. 

But I want to talk about process because this is important. First 

of all, I want to answer very specific questions that you asked. We 

had a—for most of our tenure, we had a 7-day notice rule for all 

agendas and the process would be that I would propose an agenda 

and the Vice Chairman would have a chance to look at it and 

amend that and then it was sent to Commissioners. 

Now, near the end of the process, Mr. Ranking Member Senator 

Shelby, we shortened that, and I do not believe the vote was a split 

vote, I believe to a 48-hour notice because of all the kind of hurdles 

we had to go over to get to production of that report. And so the 

fact is we did have agendas that were available and materials were 

made available to Commissioners at the same time. 

Now, during the course of this, there were a couple of instances 

where members made proposals the day before or during Commission meetings consistent with the agenda, and I might say that 

that happened both ways, where—and I am sure this happens in 

this Committee, where Members will say, I want to offer this or I 

want to offer that. But it was equal opportunity in terms of process, and I just want to say flatly that is the case. We—— 

Senator SHELBY. You referenced the Committee, so I want to—— 

Mr. ANGELIDES. OK. 

Senator SHELBY. I have been on the Committee 25 years and I 

can say under both Democrats and Republican chairmen that my 

recollection is that it has been one of fairness both ways on this 

Committee, and I believe it will always be. 

Mr. ANGELIDES. Well, and I want to say this. Every member had 

the full opportunity to attend and participate in every meeting and 

to raise issues that they wanted pursued, and some members 

were—some were more aggressive than others. For example, Mr. 

Wallison always had ideas about things we should pursue, and obviously we had to balance matters, but we did our best to balance 

every member’s desire to probe areas. Every member had the opportunity to attend hearings. 

All materials were made available at the same time to all members, and in fact, for example, we had an interview grid that was 

available—we had a Commissioner work space. Any Commissioner 

could look at that. They could tell the staff people they thought 

ought to be interviewed, interviews they wanted to participate in. 

All drafts of the report, every single one was made available to 

every member at the same time. We started to roll out Commission 

chapter drafts in about July and in earnest in about September 

11 

and every Commissioner got those. Some took advantage of commenting; others did not. 

And I might add that all staff per the statute, really, I think, 

that came out of the Senate, all staff had to be approved by the 

Chairman and the Vice Chairman. So with respect to kind of equality of opportunity, fairness of the process, I do not think there is 

any question that this was an extremely open and fair process 

while there are ultimately some policy disagreements. 

Now, with respect to the matter of dissents, we accorded every 

member, all 10 members, the ability to file a dissenting or additional view. In fact, those who signed the report, you know, for example, had they not been fully satisfied with the conclusions, had 

that opportunity, also. And just as a rule of reason, we accorded 

every Commissioner—we looked, by the way, at the whole history 

of what other commissions had done. We accorded every Commissioner nine pages in the commercially printed version and we allowed members to combine them so they chose. In addition, I shall 

say, we placed no limit on what could be placed on our electronic 

version on the Web and no limit in what could be put in the GPO 

version. 

Now, Mr. Thomas, Mr. Holtz-Eakin, and Mr. Hennessey chose 

not to use any additional space on the Web or in the Government 

Printing Office edition. Mr. Wallison did take advantage of that 

extra opportunity. 

Senator SHELBY. Thank you, Mr. Chairman. 

Chairman JOHNSON. Senator Reed. 

Senator REED. Thank you very much, Chairman Johnson, and 

Chairman Angelides, thank you and your colleagues for, I think, an 

extraordinary bit of work. And the more I have the opportunity to 

listen to you, I think a lot of it is a tribute to your mastery of detail 

and your extraordinary efforts over the course of these many 

months, so thank you for your personal contribution. 

Mr. ANGELIDES. Thank you, sir. 

Senator REED. Lately, other reports have come online, and I am 

just wondering if you have been aware of them and if you agree. 

For example, Senators Levin and Coburn, their Permanent Subcommittee on Investigations has just released a report about ‘‘The 

Anatomy of the Financial Collapse: Wall Street and the Financial 

Crisis.’’ Have you been—are you aware of that? Some of their conclusions suggest that there were market participants that anticipated the crisis, were, in fact, shorting some of these products at 

the same time they were selling the products to the public, and it 

also raises issues that you raised with respect to whether some of 

these large institutions actually understand the risks they are undertaking. So if you could just generally comment on your reaction 

to the Levin-Coburn report and on anything else, Mr. Chairman. 

Mr. ANGELIDES. Absolutely. Let me start with my observations 

about the Levin-Coburn report. I believe that they did an excellent 

job. I must admit, I have not read the totality of it, but I am well 

into it. I look forward to the day when I can start reading nonfinancial documents, but the minute they put that out, I was 

back—they sucked me back in. 

The first thing I want to say is because, again, we had limited 

time, limited resources, we looked forward to the report of the PerVerDate Nov 24 2008 13:49 Oct 17, 2011 Jkt 048080 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 L:\HEARINGS 2011\05-10 REVIEWING THE FINANCIAL CRISIS INQUIRY COMMISSION’S 
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manent Subcommittee because what we wanted to be able to do 

was build on the work of other entities, and as you know, while the 

final report came out this year, a lot of their information was available during the year. And, in fact, strategically, we also decided to 

the extent that the subcommittee was producing information, we 

would use their information in our analysis rather than reinvent 

the wheel. So, in a sense, it was an effective tag team. 

By way of example, while we both looked at the activities of 

Goldman Sachs, they focused a lot of their efforts on Washington 

Mutual. Therefore, we focused one of our in-depth investigations on 

Countrywide. Where in the matter of the credit rating agencies 

they spent a lot of time with Standard and Poors, we decided, because they had built a lot of information in that regard, we would 

focus more of our attention on Moody’s to kind of complete the picture. 

So first and foremost, if you look at our report, you will see a lot 

of references to Senate documents produced by that investigation. 

I do think that if you look at the two reports, they are very complementary, not of each other, but complementary in the sense that 

the conclusions reinforce each other. We, too, found, obviously, 

practices of market participants where on one hand they were selling securities into the marketplace very aggressively, often without 

proper disclosures, at the same time that they were shorting those 

same instruments. Now, they would take the position that they 

were being simply market makers, but what our investigation revealed, and I believe the investigation of the Senate subcommittee 

revealed, is that in many respects they were more than 

marketmakers. They were shorting on their own account. 

What we found, and I believe what the Senate investigation also 

indicated, is while they were selling securities in the marketplace, 

they were not making the kind of disclosures about what they 

knew and about what their activities were. So that is one area, 

clearly, where there was some symmetry and some synergy. 

I also ought to say that both reports catalogued the extraordinarily risky practices that were undertaken by some institutions. 

In the course of our investigation, we catalog how Countrywide 

makes riskier and riskier loans. We cataloged in our investigation 

how they lower their lending standards. We catalog how they buildup their portfolio of option ARM loans to a really extraordinary 

level, by the way, at the same time that the number of option ARM 

loans that Countrywide is making, I think 1 percent of them are 

negatively amortizing in 2004. I think something like 53 percent 

are negatively amortizing by 2006, and 90 percent by 2007. But as 

they undertake these activities, Mr. Mozilo and other executives 

are warning that these very practices, and I believe these are their 

words, have the possibility of bringing on financial and 

reputational catastrophe for the company, but they keep on going. 

And I believe if you look at the Senate subcommittee’s investigation of Washington Mutual, you see the same pattern, extraordinary risk going on while the executives at some level understand 

or at least recognize the level of risk and they do nothing to stop 

it. 

Senator REED. Well, my time has expired, Chairman, but again, 

let me thank you. And also, I think what you underscore is at least 

13 

the question about whether markets are so efficient that they always self-correct and always self-regulate. I think we have an example here where very successful, apparently, business leaders 

were powerless, really, to stop because of many motivations, even 

things they thought were reckless, and there were no regulators to 

stop them, either, so it just continued to deteriorate. So I think it 

underscores the need for balanced regulation. 

Mr. ANGELIDES. Well, and I just want to—I know your time has 

expired, but Mr. Chairman, if I might, just one brief comment, and 

that is that—— 

Chairman JOHNSON. Proceed. 

Mr. ANGELIDES. As I said, I have spent the majority of my career 

now in the private sector, and so I think one of the greatest engines is the private enterprise system and the ability to take risk 

and to succeed and to fail. Where I think there is difference here 

is that the financial system is so elemental to the stability of the 

overall economy and particularly the large systemically important 

institutions have such a ripple effect on the financial system and 

the economy as a whole, I do think this is one area where we have 

to have the kind of adequate oversight to ensure stability. This is 

one place where we do want to curb excess risk because of the systemic implications, both to the system and to the economy as a 

whole. 

Senator REED. Thank you, Mr. Chairman. Thank you. 

Mr. ANGELIDES. Thank you, Senator. 

Chairman JOHNSON. Senator Wicker. 

Senator WICKER. Thank you, Mr. Chairman, and thank you, Mr. 

Angelides. I appreciate you being with us today. 

I am a bit struck by your testimony about Dodd-Frank being responsive to the findings of your Commission in several respects. As 

a matter of fact, your Commission reported on January 27, 2011, 

and Dodd-Frank was enacted in 2010, so the authors of DoddFrank would have to have been clairvoyant to be responsive to 

those findings. 

But I would like to ask about one area in which perhaps DoddFrank failed to look into the future very well and divine what your 

findings would be, and I quote from page Roman numeral XXV of 

the conclusions, where your Commission states, ‘‘We conclude the 

failures of credit rating agencies were essential cogs in the wheel 

of the financial destruction. The three credit rating agencies were 

key enablers of the financial meltdown. The mortgage-related securities at the heart of the crisis could not have been marketed and 

sold without their seal of approval. Investors relied on them, often 

blindly. In some cases, they were obligated to use them.’’ And then 

continuing on, the Commission states flatly, ‘‘this crisis could not 

have happened without the rating agencies.’’ 

And so let me ask you, in light of this finding, are you disappointed in the very tepid treatment that Dodd-Frank gave to the 

rating agencies? 

Mr. ANGELIDES. By the way, and let me thank you, Senator. Let 

me also say this is one area where at least the three Republican 

members who filed their dissent agreed with us that the rating 

agencies substantially contributed to the creation of toxic financial 

assets. 

14 

I believe this is an area where we can do more, and I will say 

I believe, and correct me if I am wrong, that Dodd-Frank does have 

a study in it with respect to the selection of rating agencies by 

issuers. I believe it is one of the study items in the legislation. 

Senator WICKER. Indeed, yes. That was substituted in place of 

the Franken-Wicker Amendment—— 

Mr. ANGELIDES. Correct. Oh, was that your amendment? 

Senator WICKER. ——which would have been much stronger. 

Mr. ANGELIDES. Oh, along with Senator Franken? Well, I will 

just say this, and now I speak personally. I am an advocate of trying to break the issuer rating relationship, which I believe is fundamentally at the heart of many of the conflicts we saw. And so 

I am glad that the legislation has the study. I would urge this 

Committee and I would urge others to take the next step, and as 

that study is completed, take whatever action is necessary legislatively or regulatory to break that link—— 

Senator WICKER. Well, I—— 

Mr. ANGELIDES. ——between issuers and ratings. So—— 

Senator WICKER. OK. Well, thank you for that—— 

Mr. ANGELIDES. ——and one thing, Senator, just on—I guess it 

is your time, so I will say it after. 

Senator WICKER. No, go ahead. It is just that we only have the 

5 minutes, so—— 

Mr. ANGELIDES. All right. Well, and that is I would also—— 

Senator WICKER. You have a right to complete your answer. 

Mr. ANGELIDES. Well, I would hope, also, that one of the things 

that could be looked at is the model used to be of credit rating 

agencies that you had essentially subscriber pays. And at the end 

of the day, somehow, we have got to move, in my view, toward a 

model where the investors themselves are paying because those are 

the folks for whom the ratings are supposedly to benefit. 

Senator WICKER. Well, I think you and I are in bipartisan agreement that a lot needs to be—a lot more needs to be done on the 

issue of the rating agencies. 

Briefly, in the time we have, what do you think about the fact 

that there are no real standards, no real working structure to classify mortgage instruments into basic categories, such as prime or 

subprime or the more intermediate alt-A category? Do you think 

there is some benefit to be gained from establishing such classifications and categories? 

Mr. ANGELIDES. I believe it is hard to do legislatively. I think it 

can be done regulatorily. And if my memory serves me, DoddFrank does have some provisions about—I cannot remember the 

exact term, whether it is high-quality mortgages are specified in 

the legislation, but some categorization, I think, is sensible. I think 

it has to be done at the regulatory level and it ought to be done 

by one single entity. 

Senator WICKER. OK. Thank you. 

Chairman JOHNSON. Senator Brown. 

Senator BROWN. Thank you, Mr. Chairman, and Chairman 

Angelides, thank you for joining us. 

Thank you for the part of your report that described the growth 

of risky and subprime mortgages in Cleveland and the work of 

then-Treasurer Jim Rokakis in alerting the public and others to 

15 

that and the incredible devastation it caused, and I appreciate your 

discussion of it and analysis of it. 

A section of the report is devoted to financial sector growth, and 

you allude to this problem in other chapters. As my fellow Members of the Committee know, we have seen a huge change in our 

economy in the last 30 years. Manufacturing some 30 years ago 

made up about 25 percent of our GDP. It now makes up about 11 

percent. Financial services made up about 11 or 12 percent 30 

years ago and now makes up 21.5 percent. So we have seen really 

a flip in position of financial services and manufacturing, and we 

know in terms of a ticket to the middle class what manufacturing 

has meant. We know what has happened with financial services. 

President Bush’s Treasury Secretary John Snow told the Commission, ‘‘We have a lot more debt than we used to have, which 

means we have a much bigger financial sector. I think we overdid 

finance versus the real economy and got a little lopsided as a result.’’ But it does not appear during the process of your hearings 

and since the report that much has changed. And prior to that, in 

2006, finance companies made 27 percent of the corporate profits 

in this country. The fourth quarter of last year, the financial industry accounted for about 30 percent of corporate profits. 

What are the implications ongoing, Chairman Angelides, what 

are the implications between this imbalance between finance and 

manufacturing, but more precisely between finance and just the 

rest of the economy? 

Mr. ANGELIDES. Well, thank you very much for asking that question, because I will tell you that the further I get away from the 

issuance of our report, I believe this is one of the most fundamental 

issues. And, in fact, you just cited from page 66 of our report this 

phenomenal growth, 15 percent of corporate profits coming from 

the financial sector in 1980, growing to over 30 percent in the 

2000s. The amount of debt being taken on by financial companies 

versus nonfinancial companies, it goes from, I think in 1978, $13 

in debt for financial companies for every $100 for nonfinancial companies, companies producing services and goods, to $51 for financial companies for every $100 for nonfinancial companies by 2007, 

increasing the amount of debt emanating out of the financial sector. 

And let me be blunt, Senator. I think this is a problem. I think 

in many respects, the financial sector became the master, not the 

servant, of the economy. 

I came into this position after some 20 years in the private sector 

with this quaint notion that the financial system was there to deploy capital to build enterprises, create jobs in the United States. 

I was shocked at the extent at which it had become a gambling 

parlor. And unlike Claude Raines, I was truly shocked at the level 

of gambling going on on Wall Street. And I do think postcrisis that 

our policy emphasis has to be back on how you build a real economy of sustainable wealth. 

We had a very robust debate in our Commission about the effect 

of the credit bubble. But I will say this. The greatest tragedy of the 

last decade and a half is that we used all that foreign investment, 

all that cheap money, to create $13 trillion of phony mortgage secuVerDate Nov 24 2008 13:49 Oct 17, 2011 Jkt 048080 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 L:\HEARINGS 2011\05-10 REVIEWING THE FINANCIAL CRISIS INQUIRY COMMISSION’S 
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rities, not to create jobs and enterprise in this country, and I do 

think at the heart that is our most enduring challenge today. 

And when you talk about the deficit, you cannot ignore the fact 

that between the mid-2000s and postcrisis, the Federal deficit 

ballooned by about a trillion dollars annually. When you take diminution in revenues and the measures that have been adopted on 

a bipartisan basis, take away the stimulus on which there has been 

debate, two-thirds of that $1 trillion annual deficit is due to this 

financial crisis. So I think, at this point, it is the heart of the question. 

Senator BROWN. Thank you. Thank you, Mr. Chairman. 

Chairman JOHNSON. Senator Hagan. 

Senator HAGAN. Thank you, Mr. Chairman, and Mr. Angelides, 

I really do appreciate you being here and I appreciate the hard 

work you did on this Commission. It was—— 

Mr. ANGELIDES. Thank you, Senator. 

Senator HAGAN. I do appreciate that. One of the conclusions that 

the Commission reached, as you were saying, sort of, that was the 

key policy makers were ill-prepared for the crisis and that their inconsistent responses added to the uncertainty and panic during the 

crisis. And it would seem to me that this conclusion would support 

strong leadership at the heads of our banking regulators. When you 

look at the range of financial regulators, we have a number of key 

posts today that are unfilled or are filled with temporary appointments. This is despite the fact that a number of qualified candidates have been put forward. Can you comment on how you think 

having these vacancies and temporary appointments might impact 

our ability to successfully implement the Dodd-Frank bill and our 

ability to manage through a financial market downturn? 

Mr. ANGELIDES. Well, let me just say, first of all, about our finding. I think in many respects, this is one of our most significant 

findings, and I would also say one of our most disturbing findings, 

because what it really said was that as the crisis begins to unravel 

in 2007 and 2008, we have a situation where Treasury, then headed by Mr. Paulson, the Federal Reserve, then headed by Mr. 

Bernanke, and the Federal Reserve Board of New York, headed by 

Mr. Geithner, in many respects did not have the knowledge, had 

not asked the questions, had not kept up with the evolution in the 

financial system that allowed them to see the nature of the crisis 

that was unfolding. And so a lot of the response was a finger in 

the dike response because of the lack of information that even the 

public stewards of our system had. 

In that context, having leaders who are in place who are knowledgeable, combined with a level of data and information and, 

frankly, constant questioning by policy makers and regulators is 

fundamentally important. And I will say that both gaps in knowledge and gaps in leadership could be fatal. In this instance, it was 

near-fatal. Now, at the end of the day, these leaders, to their credit, 

were able to scramble, and at a tremendous cost to the American 

taxpayers were able to stabilize the system. But what was most 

striking is the extent to which those in charge did not have the 

knowledge. That can only be exacerbated by the lack of people in 

positions to carry out the mandates. 

17 

Senator HAGAN. Both the Commission’s report and the dissenting 

views cite the mortgage market as a source of systemic failures 

that led to the crisis. However, you reached the conclusions that 

the Government housing policies were not a significant factor in 

the crisis. How do you reconcile these two conclusions, which appears at the time to be at odds with one another? 

Mr. ANGELIDES. All right. So let me take these—I mean, when 

we talk about Government housing policies, we were very, I think, 

very specific. Rather than just saying ideologically, do you think 

they do or they did not, we looked at each specific policy. Our conclusion, I think, with the mortgage interest deduction, it had been 

around for decades. That is not something that had changed, even 

though it is a legitimate policy driver for consumption of housing, 

and some would argue over-consumption of home ownership. 

We looked very specifically at the Community Reinvestment Act, 

and you will note that we looked at a number of studies. We also 

made document requests and follow up of several major institutions. And in the end of the day, it appeared that only about 6 percent of the high-cost loans, which would be a proxy for subprime 

loans, were made—were related in any way to the CRA. And when 

you looked—and, of course, many of the biggest subprime lenders— 

Ameriquest, New Century—were not even subject to the CRA. So 

we did not find a correlation there and that was supported by nine 

of ten Commissioners. 

We looked in great depth at the affordable housing goals of 

Fannie and Freddie and we interviewed, I believe, about 50 folks. 

Only two of the people—and by the way, those are people at 

Fannie, Freddie, HUD, FHFA, OFHEO, and also other market participants—and I believe in the end of the day, only two of those individuals thought that those affordable housing goals were primary 

drivers. 

But we also did analysis of the losses at Fannie and Freddie, and 

they were by no means the predominant locus of the losses. In fact, 

at those institutions, while the goals were 50 percent or below, 

which I believe is from 2004 and before, everyone pretty much said 

Fannie and Freddie could meet those goals in their ordinary course 

of business. When the goals got above 50 percent in 2005, it did 

put pressure on them and they did start making targeted loans for 

affordability which did have an impact. 

But by no means, if you look at the numbers which are in our 

report, I believe pages 185 to 187—I know this is bad that I know 

all these numbers, but I have read it a lot—you will see actual data 

about how much of the losses are attributable to those affordable 

housing loans. They were not the drivers. They were at the margin. 

The one thing I would say, though, in the end, is that the public 

rhetoric around home ownership in some aspects ended up providing cover for activities that were pernicious. And, I mean, one 

of the real tragedies of this crisis is that in the end, it was not even 

about adding more home owners to our Nation. One of the most 

striking facts I came across in our investigation, which was right 

out there and obvious, is the home ownership rate in this country 

actually peaked in the spring of 2004. So all that terrible lending 

in the end of 2004, 2005, 2006, and 2007 did not even add home 

18 

owners in this country. It was, in a sense, ground cover for what 

became very pernicious activities. 

Senator HAGAN. I am sorry. How does it not add to—— 

Mr. ANGELIDES. From 2004 on, our home ownership rate peaked 

in the spring of 2004. The worst lending really happened in the end 

of 2004, 2005, 2006, 2007. So the notion that all this mortgage 

lending was adding to home ownership was false. It just was not. 

It was feeding speculators. It was helping people refinance their 

homes. It was not, in the end, adding to new home ownership in 

this country. I mean, that is one of the real tragedies of this crisis. 

There was not even a good, in the end, public policy driver or rationale for what occurred. 

Senator HAGAN. Recently, the Treasury Department, the Center 

for American Progress, the American Enterprise Institute, and others, they have all released proposals on housing finance reform. 

Could you give us your thoughts on these proposals and what do 

you see as the important features of housing finance reform that 

will ensure that housing does not contribute to a future crisis? 

Mr. ANGELIDES. I cannot say that I have seen—I have had a 

chance to read the Treasury report. Are you talking about on the 

future of Fannie and Freddie? 

Senator HAGAN. Yes. 

Mr. ANGELIDES. I cannot tell you that I have seen the Center for 

American Progress report. And, you know, I will just make a short 

observation on this. I would not posit myself as the expert. I do 

think there is a legitimate but well-defined and focused role for 

governmental support for the housing finance sector. But I think 

it has to be finite, specific, well defined, constrained. And I just 

want to say what I believe everyone—not everyone, but we should 

certainly understand this model of a publicly traded, profit-driven 

institution carrying out public policy that we had in Fannie and 

Freddie, with the implicit and then explicit guarantee of the Federal Government along with all the subsidies that went with it— 

that model should never be replicated. But for decades, we had a 

relatively steady State model where we did provide ballast for the 

housing finance sector, and it worked relatively well. 

There is just one quick note. During the course of our testimony—and the Committee may want to look at this—Professor 

Dwight Jaffee of the University of California, Berkeley, told us that 

one of his research students had uncovered papers at the Johnson 

Library in Austin in which there was a very robust debate back in 

1968 where, when Lyndon Johnson wanted to spin Fannie Mae out 

of the U.S. Government because of the balance sheet of the Government—we were running a deficit at the time, and he did not want 

that, and the proposal was to create a private entity, a Government-sponsored enterprise. The folks who were asked to look at it 

said, you know, this could be very risky because at the end of the 

day they will have all the ability to take the upside and the taxpayers will be left with the downside, and that should never be replicated. 

Chairman JOHNSON. Senator Merkley. 

Senator MERKLEY. Thank you very much for your testimony and 

for your hard work on this Commission. I wanted to ask you to exVerDate Nov 24 2008 13:49 Oct 17, 2011 Jkt 048080 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 L:\HEARINGS 2011\05-10 REVIEWING THE FINANCIAL CRISIS INQUIRY COMMISSION’S 
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pand a little bit on the issue of State preemption and how that 

kind of was interwoven into this. 

When I was a State legislator, I was pursuing trying to take on 

some practices in the last decade related to prepayment penalties, 

steering payments, undocumented loans, and largely preemption, 

as it was applied to the States, prevented us from being able to do 

more than regulate State banks, which created kind of an unlevel 

playing field issue that was difficult to overcome. 

I believe that the OCC has played a significant role in pushing 

these issue of preempting States from being able to regulate on a 

variety of issues, and could you kind of explore this a little bit for 

us? 

Mr. ANGELIDES. Yes, I can. And, in fact, this is a matter, Senator, with which our report deals in some detail. And essentially, 

as we know in the 2003–04 time period, the Office of the Comptroller of the Currency as well as the Office of Thrift Supervision 

moved very aggressively to preempt State efforts to regulate unfair 

lending practices of national banks and thrifts, and it had a very 

significant effect. 

We received a lot of testimony on this matter. I think what is 

quite striking is between 2000 and 2003 States were very active in 

this arena in trying to curb abusive predatory lending, and they 

were doing so really because of the absence of action by the Federal 

Reserve. 

There was a legitimate policy argument for Federal preemption 

with respect to national banks and thrifts, but what really should 

have happened in my view at that time is instead of the Feds just 

moving in to preempt States, they should have entered into essentially joint action with the States so collectively they were going 

after both the national thrifts who were engaged in unfair and 

predatory lending, while the States joined with them in going after 

State-regulated institutions. And a significant portion of the problem loans were, in fact, being initiated by national banks and 

thrifts, and at least by our review, after the preemption, I think it 

is fair to say the OCC and the OTS tied the hands of the States 

and then sat on their own hands. 

It would have been different had they preempted and then aggressively pursued, which they did not do. 

Senator MERKLEY. So one piece of this certainly was in mortgage 

lending, but there were also these unmargined derivatives essentially that related to risks ranging from the up and down of oil futures to other complex financial derivatives in the credit default 

swap world. 

Do you see the issue as mainly the impact mainly happening 

around mortgages or also in this other area? 

Mr. ANGELIDES. Well, a significant impact in the mortgage arena. 

There is just no question about that. 

By the way, can I add one other thing on the mortgage arena? 

This was made worse by the fact that the Federal Reserve that was 

the one entity that had the full authority to write rules that applied to every mortgage lender, whether they were State charter or 

federally chartered, did nothing. In 2001, in the wake of information about growing predatory lending practices, the Fed did adopt 

some rules under HOEPA, which was a law passed by the Congress 

20 

in 1994. Those rules, at the time it was projected they would cover 

38 percent of subprime lending. They were so weak that they covered 1 percent. 

When we questioned Mr. Greenspan about this, he said, well, the 

solution is—and, by the way, it was not until 2006 that the Fed 

actually issued voluntary guidance to national banks and thrifts 

about subprime lending, and it was not until July 2008 when the 

system was collapsing on itself that they finally adopted a rule to 

say you cannot lend to people who cannot afford to take the loan. 

Now, Mr. Greenspan at the time said, well, the solution was not 

more regulation; it was law enforcement. And when we looked at 

the records, the Federal Reserve referred only three unfair lending 

cases to the Department of Justice from 2000 to 2006: a small bank 

in Carpentersville, Illinois; a small bank in Victorville, California; 

and the New York branch of Societe Generale. So they stopped the 

States, and then they did nothing. 

With respect to derivatives, the 2000 law was pretty clear that 

it forbade regulation of over-the-counter derivative instruments by 

both the Federal and the State governments. I cannot remember 

what year it was—I think it was 2000 or 2001—that the New York 

Department of Insurance issued a ruling that, in fact, confirms 

their inability to regulate naked credit default swaps as insurance 

instruments. And certainly with respect to AIG, that ends up being 

a very significant phenomenon. 

Senator MERKLEY. Thank you. 

Chairman JOHNSON. We will proceed to a short second round. 

In your report, the Commission wrote, ‘‘The Federal Reserve’s 

pivotal failure was to stem the flow of toxic mortgages which it 

could have done by setting prudent mortgage lending standards. 

The Federal Reserve was the one entity empowered to do so, and 

it did not.’’ 

Would you please discuss how consumer protection was an afterthought for Bank regulators and why an independent agency focused solely on consumer protection would help prevent another 

crisis? 

Mr. ANGELIDES. Just on this matter—and I addressed it in my 

remarks to Senator Merkley, and that is that I do believe this was 

a pivotal failure. The Federal Reserve had substantial information 

about the nature of loans that were being made. In fact, it was not 

just the information they had in the late 1990s and early 2000s, 

but in 2005, they commissioned their staff to take a look at what 

was happening in the marketplace, and they took a look at the 

practices of large lenders—the largest mortgage lenders. And I remember, I believe at the time, that the results in terms of what 

they were finding was quite astounding. If you would give me just 

1 second, Senator. 

I believe they found in 2005, page 105, they found that—well, I 

am not finding it right now, and I do not want to take your time. 

But they found of the largest mortgage lenders, they found, for example, I believe, that 59 percent of Countrywide’s loan originations 

were nontraditional loans. They took a look at the biggest lenders, 

and it was stunning, the extent to which they had moved away 

from prudent lending. And they had a lot of information. They 

never acted. As I said, it took about a year from that study in 2005 

21 

for them even to get the voluntary guidance out the door. And then 

it took Mr. Bernanke coming in and issuing the new rules in July 

of 2008. 

It was on their screen, and they just did not act, and I do think 

that part of the reason was the nature of the Federal Reserve is 

they did not—that really was not their focus. That really was not 

what they were built to do. And so I do think there was an absence 

of attention to consumer protection. And I do believe an independent consumer protection entity within the Federal Reserve can 

be very helpful in at least focusing attention on abuses in the marketplace and the rising problems in that marketplace. 

Chairman JOHNSON. Senator Shelby. 

Senator HATCH. Thank you. 

It seems to me from what we have learned from your report and 

what we have learned from hearings and other investigations that 

the Federal Reserve and the other regulators—not just the Federal 

Reserve as regulators—basically failed the American people. Is that 

fair, Mr. Chairman? 

Mr. ANGELIDES. Yes, and I want to say something very directly. 

We found there were gaps, Senator. 

Senator SHELBY. That is right. 

Mr. ANGELIDES. And so I want to say this: We found there were 

gaps, and there is no question that there were large regulatory 

gaps. But also where regulators had the authority, they did not use 

it. 

Senator SHELBY. They had it but they did not use it, right. 

Mr. ANGELIDES. Yes. The SEC could have reduced risk and increased capital and liquidity at the investment banks. They did not 

do it. The Federal Reserve Bank of New York could have reined in 

the excesses of Citigroup. They did not do it. So, yes, I think it was 

a dual phenomenon of regulators not exercising the power they had 

as well as very specific gaps that did exist that precluded both 

oversight as well as the ability to stabilize the situation. 

Senator SHELBY. So while the bank crisis grew underneath their 

feet, they continued to sleep in a sense or look the other way, however you want to describe it. 

Mr. ANGELIDES. I think our report is very clear on that, yes. 

Senator SHELBY. And you agree with that. 

Mr. ANGELIDES. Yes, sir. 

Senator SHELBY. Let me get into another area of loans, down 

payments, and so forth. Did you in your investigation or the Commission’s get into the area of where loans were made with, say, 

nothing down, for example, or a concoction of borrowing the down 

payment, you know, some way, with a second mortgage, or 3 percent down as opposed to 5 percent down, 10 percent down, 20 percent down, and the rate of foreclosures in these categories? 

For example—I do not know this. This is just anecdotal, but perhaps you do. But if someone paid 20 percent down, real equity in 

a bona fide transaction, the chances, it would seem to me, of a foreclosure would be much smaller than 3 percent down or 0 percent 

down and so forth. Did you get into this area? And if you did not, 

why did you not? 

Mr. ANGELIDES. So, yes, here is—— 

Senator SHELBY. Do you see where I am going? 

22 

Mr. ANGELIDES. Yes. Well, here is how we did it, and I will have 

to refresh my memory on all the various places throughout this report. 

Senator SHELBY. Would you furnish, share some of this for the 

record of the Committee? 

Mr. ANGELIDES. I certainly could. 

Senator SHELBY. But go ahead. 

Mr. ANGELIDES. If you would give me the chance—— 

Senator SHELBY. Absolutely. 

Mr. ANGELIDES. ——on the plane home tonight to course through 

this. 

Senator SHELBY. Yes, sir. 

Mr. ANGELIDES. But there are a couple of things we did. 

Throughout the report we catalogued the frankly grotesque deterioration of mortgage lending standards in terms of what kinds of 

loans were being made over a period of time. And, in fact, just on 

that point, I am going to just give you one little section. 

You know, for example, on page 107, we talk about 

Countrywide’s option ARM business. You know, those are the loans 

where you did not even have to pay enough to cover the interest. 

Those loans that began to grow up—— 

Senator SHELBY. It is like those kinds of loans were a recipe for 

a disaster. 

Mr. ANGELIDES. Yes. 

Senator SHELBY. And the regulators should have realized that. 

Mr. ANGELIDES. Well, yes, and, you know, in fact, one of the reasons they went from the OCC as a regulator to the OTS as a regulator—which Dodd-Frank does deal with, got rid of that regulatory 

shopping opportunity. But, you know, the OCC was beginning to 

have concerns; the OTS was not. But as an example, Senator, by 

the second quarter of 2005, 25 percent of all its loans, 

Countrywide’s loans, were option ARM by the second quarter of 

2005. 

Senator SHELBY. By option ARM, just for the record, explain that 

because you are talking to the American people here. 

Mr. ANGELIDES. Yes. That is a loan where the borrower does not 

even—can decide to pay less than—it is not even an interest-only 

loan. You can pay less than the interest, so your balance is growing. They are the most dangerous kinds of loans. 

Senator SHELBY. And that is a time bomb, is it not? 

Mr. ANGELIDES. It is kind of like a time bomb. 

Senator SHELBY. A financial time bomb. 

Mr. ANGELIDES. But, for example, they decided in July 2004 they 

would lend up to 90 percent of homes’ appraised value, up from 80 

percent. They reduced minimum credit scores to as low as 620. In 

early 2005—— 

Senator SHELBY. Who approved or looked the other way as this 

was going on? Who approved these kind of loans? 

Mr. ANGELIDES. Well, first of all, the Fed looked the other way. 

They had a lot of this information, and they did not act. And the 

two bank regulators, OCC and OTS, did not act. And in particular 

in this case, Countrywide moved from the OCC/Fed to the OTS—— 

Senator SHELBY. Looking for the weak regulator. 

23 

Mr. ANGELIDES. Well, yes. And, in fact, very specifically they 

make the move because internal e-mails say: You know what? OCC 

and Fed are beginning to get concerned. Let us move over to the 

OTS because OCC is being too tough now on appraisals and it 

could, quote-unquote, kill the business; and the OCC and the Fed 

are beginning to get uncomfortable with these option ARM loans. 

So in this instance, it was the Fed, the OCC, and the OTS. 

Senator SHELBY. Can I go back to a question I asked a minute 

ago? 

Mr. ANGELIDES. Oh, I apologize. Yes. 

Senator SHELBY. For example, if there is nothing down, in some 

of the stuff you describe, we know that is a financial disaster waiting to happen. What about if it is 3 percent down? Can you furnish 

this for the record, if you could? What are the percentage of foreclosures there as opposed to 5 percent down or 10 percent down or 

20 percent down? I think this would be interesting. In other words, 

the less people have in the game, the less skin or money they have 

in the game, the chances are toward a default? 

Mr. ANGELIDES. So let me say, as I said—and I got a little specific there. Throughout the book we do catalogue the deterioration 

in lending standards, and I will have to look at how we then correlate that to default rates. I mentioned earlier to you in the context of Fannie and Freddie how we had looked at a basket of 25 

million loans. What I am aware of is we also took that data and 

sliced it into, I think, about 500-some buckets of different kinds of 

loans—one that had lower down payments, ones that had high 

loan-to-value ratios. 

What I will have to look at, Senator, is how finely we broke down 

what kinds of loans had what kinds of default rates, and so if I 

could swing back to you on that. I know that we did look at those 

big buckets I told you, which—— 

Senator SHELBY. That is forensic financial accounting, but that 

is good. 

Mr. ANGELIDES. Let me see what we did on that, how far we 

broke it down. [Ed.: Please see, http://www.gpoaccess.gov/fcic/ 

fcic.pdf to refer to the Committee’s request for further information: 

(1) ‘‘Page 110 re: delinquencies among borrowers with ‘piggyback’ 

loans’’; (2) ‘‘Pages 111, 222, and 402 re: the performance of mortgage loans included within our case study mortgage-backed security CMLTI 2006-NC2’’; (3) ‘‘The first subchapter of Chapter 11 of 

the report, entitled ‘Delinquencies: The Turn of the Housing Market’ commencing on page 214, with specific reference to Figure 11.2 

on page 217.’’] 

Senator SHELBY. You mentioned President Johnson’s concern 

way back where we create a hybrid where you socialize the risk— 

that is, it sits in the taxpayer’s lap, like it is today, Fannie and 

Freddie—and privatize the profits. That is a dangerous situation, 

is it not? 

Mr. ANGELIDES. Yes. 

Senator SHELBY. So that is what we have in Fannie Mae and 

Freddie Mac except now we do not have an implicit guarantee, we 

have an explicit, because Fannie and Freddie are sitting in the taxpayer’s lap right now. Is that correct? 

Mr. ANGELIDES. Correct. 

24 

Senator SHELBY. OK. Thank you. 

Mr. ANGELIDES. Except the profit motive part of that has been 

wiped out because of the conservancy. 

Senator SHELBY. Thank you. 

Chairman JOHNSON. Senator Hagan, do you have a quick question? 

Senator HAGAN. Thank you, Mr. Chairman. 

Mr. Angelides, as you know, the Dodd-Frank left a number of 

rules and regulations to implement, and when you think about the 

work that is being done right now by the regulators, what areas, 

just for example, do you think would require the most monitoring 

and attention by Members of this Committee in our oversight role? 

Mr. ANGELIDES. OK. Let me make one broad statement, then 

maybe a couple specific comments. 

One broad statement, and I do think it is a significant issue, 

again, as someone who has been in both the private and the public 

sector, I think having sufficient resources and talent in your regulatory entities to oversee this very fast moving, very quickly evolving industry is important. I have said—and I do not mean this disrespectfully, but Wall Street is a little bit like a greased pig. They 

move fast, they are hard to catch. And this is a conversation I had 

with Chairman Bernanke. Making sure sufficient resources are 

available at these regulatory entities I think is fundamentally important. But also making sure pay scales, career opportunities are 

such that we can attract talent to those regulatory entities is one 

of the biggest challenges, and I think one that has not yet been 

fully met. So I would focus on the resource issue generally. 

With respect to very specific areas that require attention, I would 

think that particularly the derivatives area, because we are talking 

about taking a massive market that grew to $600 trillion in notional value, the over-the-counter derivatives market, and now the 

CFTC, the Commodity Futures Trading Commission, has the Herculean task of moving that market to publicly traded exchanges. 

And that will be a large job, and it is one that requires, I think, 

very significant attention. And I would hope that the nature of 

oversight is not obviously to constrain regulators but to push them 

along, make sure they are meeting deadlines and making sure they 

have the resources to do their job. 

The other area, I think, that is worth focusing on is, you know, 

as you know—and you probably hear this in your districts often or 

your States—people have a level of frustration about why have 

there been no prosecutions, where has the justice been. And obviously we do not want hangman justice in the United States, we do 

not want vengeance, but we do want people to know that the justice system is for all, that there is not a dual system of justice, one 

for people of wealth and power and one for everyone else. And we 

want to make sure deterrence is in place. 

So another area, I think, of oversight is on the enforcement side. 

One of the things that happened in the S&L crisis was that regulators were very active partners with prosecutors in identifying potential wrongdoing, in a sense being their sherpas. And I do think 

it is an appropriate role for this Committee to have oversight on 

enforcement efforts to make sure that justice is being done and deterrence is in place. And when you look at actions that are being 

25 

taken and the nature of settlements that often are pennies on the 

dollar with no admission of wrongdoing, I think that is a legitimate 

area for oversight as to whether you are satisfied as elected representatives of various States in this country that enforcement is 

as a fulsome as it needs to be. 

Senator HAGAN. Thank you. 

Chairman JOHNSON. Senator Merkley. 

Senator MERKLEY. Thank you very much, Mr. Chair. 

I want to explore a little bit what you term in your report ‘‘the 

CDO machine,’’ and certainly throughout the 2 years I have served 

on this Committee, CDOs have come under a lot of discussion, and 

kind of a piece of the puzzle that I was not familiar with was the 

retention of the higher AAA portions of the CDOs by banks because 

of their lower capital charges. 

Indeed, there has been a lot of discussion of the fact that an investment bank would buy the lower tiers, combine them, reissue 

the mortgage securities into CDOs, and then CDOs squared, if you 

will, because doing so would transform and create a whole new set 

of AAA-rated securities that produced a tremendous amount of 

profit. Certainly the main fundamental justification of this was geographic diversity. However, there has been a lot of discussion of 

the credit rating agencies not really having the information to recognize they all suffered from the same critical flaw, which was 2- 

year teaser rates. 

But the broader issue that I want to ask you to comment on is 

the role of buying one’s own securities in terms of creating artificial 

demand to drive the market or kind of creating certain conflicts of 

interest along the way. And this is relevant as we look down the 

road here because there is a discussion of kind of how to treat securities under the issue of proprietary trading under Dodd-Frank. 

And on one level, it sounds like a very, very complicated, troublesome machine, which elements could be re-created that cause all 

sorts of trouble. On another level, it is, like, hey, here are securities 

that are often AAA rated, what is the issue? So just your thoughts. 

Mr. ANGELIDES. Oh, boy. Well, first of all, what did happen during this crisis is, you know, the whole notion of securitization was 

it was supposed to spread the risk. It was supposed to create diversification in a number of ways. First of all, in the instruments 

themselves, as you said, they were supposed not to be correlated, 

and the original CDOs that came in the marketplace actually were 

instruments that were composed of different kinds of assets: auto 

loans, airplane leases, mortgages. So, in fact, they were supposed 

to be uncorrelated. If one went bad, it was not likely that another 

would go bad. 

When the mortgage securities started to be created, they were 

assumed to be not highly correlated, and, of course, they end up 

being extraordinarily correlated, both geographically and in the 

type of mortgages that were contained within. And what you also 

had a phenomenon—so, you know, risk was supposed to be dispersed in that way. 

The other way risk was supposed to be dispersed was that the 

large financial institutions would securitize these, sell them to investors across the world. Well, what starts happening in 2006 and 

2007 is institutions like Citigroup and Merrill Lynch cannot sell 

26 

the most super senior tranches of these CDOs because the yields 

are too low, and they certainly cannot sell them at par, which is 

interesting because they booked them at par even though they 

could not sell them at that. And I think that is another whole 

issue. They were in a sense booking their profits and earnings as 

if they were worth $100 when they were worth less. 

But they end up retaining these on their books as they are trying 

to offload, frankly, the riskier stuff. They cannot offload the, quoteunquote, super senior super safe, and they thought it is OK, we 

will keep these because they do not have much risk. Well, in fact, 

when the whole market came apart, I believe Citigroup had built 

up an exposure of some $50-plus billion, as had Merrill Lynch, and 

when the market value of subprime securities plummet, they take 

enormous losses. In 2007, each institution takes more than $20 billion in losses. 

So it is a legitimate area of inquiry to examine what these major 

money centers, systemically important institutions are holding on 

their books and what the real risks associated with them are. 

Is that responsive? 

Senator MERKLEY. Yes. It is kind of the beginning of a much 

more in-depth conversation. Thank you. 

Mr. ANGELIDES. But for me that was one of the more—I mean, 

I think for us in the Commission, I think it is one of the most significant pieces of information here, is how those institutions ended 

up in a sense holding onto those and, you are right, with very little 

capital standards because they were, quote-unquote, super senior 

and super safe. But their market valuations were dramatically hit, 

and, you know, they took enormous losses, which really are the 

losses that began the ripple effect, the unraveling of the financial 

crisis in 2007 and early 2008. 

Senator MERKLEY. Thank you. 

Chairman JOHNSON. I hope today’s hearing equips us with a better understanding of the financial crisis so that we can work together to make sure history does not repeat itself. As costly as the 

great recession has been, we simply cannot afford to go back to the 

old financial system that destroyed millions of jobs and cost the 

economy trillions of dollars. 

Thanks again to my colleagues and our panelist for being here 

today. This hearing is adjourned. 

Mr. ANGELIDES. Thank you, Senator Johnson, and thank you, 

Members of the Committee. 

[Whereupon, at 11:32 a.m., the hearing was adjourned.] 

[Prepared statements, responses to written questions, and additional material supplied for the record follow:] 

27 

PREPARED STATEMENT OF PHIL ANGELIDES 

CHAIRMAN, FINANCIAL CRISIS INQUIRY COMMISSION

MAY 10, 2011 

Chairman Johnson, Ranking Member Shelby, and Members of the Committee, 

thank you for the invitation to discuss the report of the Financial Crisis Inquiry 

Commission. It was my honor to chair the panel, which officially disbanded on February 13 of this year. I want to thank my fellow Commissioners and our staff for 

their service to our country. 

Let me begin by noting that the financial crisis has been of no small consequence 

to our Nation. There are more than 24 million Americans who are out of work, cannot find full time work, or have given up looking for work. About 4 million families 

have lost their homes to foreclosure and millions more have slipped into the foreclosure process or are seriously behind on their mortgage payments. Nearly $9 trillion in household wealth has vanished. The budgets of the Federal Government and 

of State and local governments across the country have been battered by the economic tailspin precipitated by the financial meltdown. And, the impacts of the crisis 

are likely to be felt for a generation, with our Nation facing no easy path to renewed 

economic strength. 

In 2009, Congress tasked the Commission to examine ‘‘the causes of the current 

financial and economic crisis in the United States,’’ and to probe the collapse of 

major financial institutions that failed or would have failed if not for exceptional 

assistance from the Government. We were true to our charge and we fulfilled our 

mandates. 

Our task was to determine what happened and how it happened so we could understand why it happened. In doing so, we sought to answer this central question: 

How did it come to pass that in 2008 our Nation was forced to choose between two 

stark and painful alternatives—either risk the total collapse of our financial system 

and economy—or inject trillions of taxpayer dollars into the system and into private 

companies—even as millions of Americans still lost their jobs, their savings, and 

their homes? 

In the course of the Commission’s exhaustive investigation, we reviewed millions 

of pages of documents, interviewed more than 700 witnesses, and held 19 days of 

public hearings in New York, Washington, DC, and in communities across the country. The Commission also drew from a large body of existing work developed by congressional committees, Government agencies, academics, and others. 

The Commission’s report contains six major conclusions: 

First and foremost, we concluded that this financial crisis was avoidable. The crisis was the result of human action, inaction, and misjudgment, not Mother Nature. 

Financial executives and the public stewards of our financial system ignored warnings and failed to question, understand, and manage evolving risks within a system 

so essential to the well-being of the American public. 

Second, we found widespread failures in financial regulation that proved devastating to the stability of the Nation’s financial markets. 

Third, our report describes dramatic breakdowns in corporate governance and risk 

management at many systemically important financial institutions. 

Fourth, we detail the excessive borrowing, risky investments, and lack of transparency that combined to put our financial system on a collision course with catastrophe. 

Fifth, we concluded that key policy makers were ill prepared for the crisis, and 

that their inconsistent responses added to uncertainty and panic. 

And finally, we documented how breaches in accountability and ethics became 

widespread at all levels during the run-up to the crisis. 

Our report, as well as the two dissents, can be found at our Web site, 

www.FCIC.gov. That Web site also contains approximately 2,000 documents; public 

testimony at our hearings; audio, transcripts, and summaries of more than 300 witness interviews; and additional information to create an enduring historical record 

of the crisis. 

In addition to the major causes we identified, the Commission determined that 

collapsing mortgage-lending standards, the flawed mortgage securitization pipeline, 

over-the-counter derivatives, and the actions of the credit rating agencies contributed significantly to the financial meltdown. 

The Commission also investigated, among other things, whether the crisis was 

caused by excess capital availability and liquidity; the activities of Fannie Mae and 

Freddie Mac; and Government housing policies. We concluded that excess liquidity, 

by itself, did not need to cause a crisis, and that Fannie Mae and Freddie Mac conVerDate Nov 24 2008 13:49 Oct 17, 2011 Jkt 048080 PO 00000 Frm 00031 Fmt 6621 Sfmt 6621 L:\HEARINGS 2011\05-10 REVIEWING THE FINANCIAL CRISIS INQUIRY COMMISSION’S 
28 

tributed to the crisis but were not a primary cause. We determined that Government housing policies were not a significant factor in the crisis. 

Conclusions aside, our report contains a valuable and accurate historical account 

of the events leading up to the crisis and the crisis itself. While commissioners were 

not unanimous on all issues or on the emphasis placed on causes of the crisis, there 

was notable common ground among nine of ten commissioners on a number of matters such as flaws in the mortgage securitization process, the presence of serious 

mortgage fraud, appallingly poor risk management at some large financial institutions, and failures of the credit rating agencies. Indeed, Mr. Thomas, Mr. HoltzEakin, and Mr. Hennessey stated in their dissent that they found areas of agreement with our conclusions. As just one example, nine of ten commissioners determined that the Community Reinvestment Act was not a significant factor in the crisis. 

Finally, you have asked me to comment on the Dodd-Frank financial reform law. 

With our inquiry and report completed and the facts in evidence, I believe that it 

is important speak to this matter. I believe that the law’s financial reforms are 

strong and needed, and that the law directly and forcefully addresses issues and 

conclusions identified in our report. 

In the wake of this crisis, it is critical that the Dodd-Frank law be fully implemented, with sufficient resources for proper oversight and enforcement, to help prevent a future crisis. It is important for regulators and prosecutors to vigorously investigate and pursue any violations of law that have occurred to ensure that justice 

is served and to deter future wrongdoing. And, it is essential that we focus our efforts anew on rebuilding an economy that provides good jobs for Americans and sustained value for our society—in place of an economy that in the years before the 

crisis was inordinately driven by financial engineering, risk, and speculation. 

In conclusion, it is my hope that our report will serve as a guidepost in the years 

to come as policy makers and regulators endeavor to spare our country from another 

catastrophe of this magnitude. 

Thank you. I look forward to your questions. 

29 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR SHELBY 

FROM PHIL ANGELIDES 

Q.1. For each of the following individuals, please state whether the 

Commission or staff conducted interviews with them. If so, please 

explain why the audio files, transcripts, and/or notes for these 

interviews are not posted on the Commission’s Web site. If not, 

please explain why the Commission did not conduct an interview 

with each of those individuals. 

a. James A. Johnson (Fannie Mae CEO, 1991–1998) 

b. Franklin Raines (Fannie Mae CEO, 1999–2004) 

c. Leland Brendsel (Freddie Mac CEO 1987–2003) 

d. Gregory Parseghian (Freddie Mac CEO 2003–2003) 

e. Mark Kinsey (Acting Director OFHEO 1997–1999) 

f. Brian Montgomery (FHA Commissioner 2005–2009) 

g. John C. Weicher (FHA Commissioner 2001–2005) 

h. William Apgar (FHA Commissioner 1998–2001) 

A.1. Response not provided. 

Q.2. The Commission’s statutory mission is ‘‘to examine the causes, 

domestic and global, of the current financial economic crisis in the 

United States.’’ However, the Financial Times notes that the final 

report ‘‘suffered from lack of global context.’’ How do you respond 

to this criticism? 

A.2. Response not provided. 

Q.3. Commissioners Keith Hennessey, Doug Holtz-Eakin, and Bill 

Thomas ask four important questions in their dissenting statement. Please respond to each of them. 

a. If the political influence of the financial sector in Washington 

was an essential cause of the crisis, how does that explain 

similar financial institution failures in the United Kingdom, 

Germany, Iceland, Belgium, the Netherlands, France, Spain, 

Switzerland, Ireland, and Denmark? 

b. How can the ‘‘runaway mortgage securitization train’’ detailed 

in the majority’s report explain housing bubbles in Spain, 

Australia, and the United Kingdom, countries with mortgage 

finance systems vastly different than that in the United 

States? 

c. How can the corporate and regulatory structures of investment banks explain the decisions of many U.S. commercial 

banks, several large American university endowments, and 

some State public employee pension funds, not to mention a 

number of large and midsize German banks, to take on too 

much U.S. housing risk? 

d. How did former Fed Chairman Alan Greenspan’s ‘‘deregulatory ideology’’ also precipitate bank regulatory failures across 

Europe? 

A.3. Response not provided. 

Q.4. According to a recent Financial Times article, Commissioner 

Douglas Holtz-Eakin said that the absence of a bipartisan conVerDate Nov 24 2008 13:49 Oct 17, 2011 Jkt 048080 PO 00000 Frm 00033 Fmt 6602 Sfmt 6602 L:\HEARINGS 2011\05-10 REVIEWING THE FINANCIAL CRISIS INQUIRY COMMISSION’S 
30 

sensus in the final report was ‘‘a great failure.’’ What specific facts 

and conclusions did the Commissioners disagree on? 

A.4. Response not provided. 

Q.5. According to the Financial Times, a big problem with the final 

report is ‘‘a high level of inconsistency.’’ The report concludes that 

the crisis was ‘‘avoidable.’’ However, report spreads the blame 

across a laundry list of factors, such as widespread failures in financial regulation, failures of corporate governance and risk management at financial institutions, excessive borrowing, lack of 

transparency, inconsistent Government responses to the crisis, and 

an erosion of standards of responsibility and ethics. Was the crisis 

‘‘avoidable?’’ Or, was it caused by a wide-ranging set of disparate 

factors? 

A.5. Response not provided. 

Q.6. One of the Commission’s statutory functions is ‘‘to refer to the 

Attorney General of the United States and any appropriate State 

attorney general any person that the Commission finds may have 

violated the laws of the United States in relation to such crisis.’’ 

Did you refer any person to any Federal or State law enforcement 

agency? If so, did any of those referrals result in any enforcement 

actions? 

A.6. Response not provided. 

Q.7. Many people have argued that the repeal of Glass-Steagall 

was a major cause of the financial crisis. The final report discussed 

the repeal of Glass-Steagall, but it did not draw any conclusions. 

How did you determine that the final report should be silent on 

whether the repeal of Glass-Steagall was a major cause of the crisis? 

A.7. Response not provided. 

Q.8. The Commission’s Vice-Chairman, Congressman Bill Thomas, 

raised several concerns about the partisan nature of the Commission. I would like you to address some of them. Please respond to 

the following. 

a. How many days notice did Commissioners get prior to votes 

on motions? Was this different for Republican Commissioners 

versus Democrat Commissioners? 

b. How many days notice did Commissioners get prior to the 

final vote on findings and conclusions? Was this different for 

Republican Commissioners versus Democrat Commissioners. 

c. Why were minority views excluded by a partisan 6–4 vote 

from the report and restricted in the commercial book? 

A.8. Response not provided. 

Q.9. In previous Congressional testimony, you said that DoddFrank’s ‘‘financial reforms are strong and needed, and the law directly and forcefully addresses issues and conclusions identified in 

our report.’’ What is the single most important conclusion in your 

report? How does Dodd-Frank specifically address that single most 

important conclusion? 

A.9. Response not provided. 

31 

Q.10. The Commission’s Vice-Chairman Bill Thomas said in Congressional testimony ‘‘Regarding the Dodd-Frank Act, I do believe 

that our work has shed light on a number of problems in our financial markets that have not been sufficiently addressed, as well as 

cases of regulatory overreach where the financial and economic crisis was used as cover to regulate activities that had little to do 

with the financial crisis.’’ What is the most important problem 

identified in your report that was not addressed by Dodd-Frank? 

What is the most prominent case of regulatory overreach in DoddFrank? 

A.10. Response not provided. 

Q.11. The Commission has been criticized for conflicts of interest 

on the part of Commission staff. For example, multiple staff members, including the executive director, were detailed from the Federal Reserve and have since returned to the Fed. Since the Commission investigated the Fed’s role in the crisis, it appears that 

these employees had a conflict of interest. Were any Commission 

staff detailees or former employees of any banks that the Commission investigated? If not, why did you ignore the same type of conflicts of interest by allowing Fed employees to serve on the Commission’s staff? 

A.11. Response not provided. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR REED 

FROM PHIL ANGELIDES 

Q.1. On April 29, 2011, the Department of the Treasury announced 

its intention to exempt foreign exchange swaps and forwards from 

the scope of the Dodd-Frank Wall Street Reform and Consumer 

Protection Act. Do you have an opinion on this intended action? 

If so, please explain. 

A.1. Response not provided. 

Q.2. The FCIC’s Report referred to certain accounting and reporting practices as ‘‘window dressing.’’ Do you believe that the regulators and accounting profession have sufficiently dealt with this 

practice? Why or why not? 

A.2. Response not provided. 

Q.3. Do you believe that auditors could have provided advanced 

warning to investors or others of issues or practices that were the 

subject of the FCIC’s report? 

Why or why not? If you believe they could or should have, but 

did not, what policy changes would you recommend? 

A.3. Response not provided. 

32 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

STATEMENT SUBMITTED BY PETER J. WALLISON, ARTHUR F. BURNS 

FELLOW IN FINANCIAL POLICY STUDIES, AMERICAN ENTERPRISE 

INSTITUTE 

Chairman Johnson, Ranking Member Shelby, and Members of the Senate Banking Committee: 

Thank you for the opportunity to submit written testimony in connection with today’s hearing on the work of the Financial Crisis Inquiry Commission. I regret that 

a prior commitment prevents me from appearing in person. I was a member of this 

10-member commission, and dissented from the Commission majority’s report. In 

this testimony, I will outline the substance of my dissent and explain why I believe 

a dissent was necessary. 

Before turning to the substance of my dissent, however, I would like to comment 

on how the Commission was organized and run. 

The Commission’s Process 

The financial crisis was an unprecedented event, possibly the worst financial 

breakdown in U.S. history, and will be studied for years by historians, economists 

and other scholars in the hope of understanding what caused it and how similar 

events can be avoided. From the beginning of the Commission’s substantive operations, however, it was not run as the serious, objective investigation that it should 

have been. Instead, it focused only on a narrow set of issues, and never succeeded 

in providing the data and the perspectives that might have been helpful to future 

scholars and policy makers. It is all too common that the reports of special Government investigative commissions like the FCIC are shelved and never seen again. 

But this Commission’s work, I’m sorry to say, fully deserves that treatment. 

I have had some limited experience with Government commissions, including the 

1976 Rockefeller commission study of the CIA’s activities in the United States, but 

I have never seen a Commission as badly organized and run as this one. Since there 

has always been great uncertainty about what caused the financial crisis, I expected 

that, at the outset of the Commission’s work, the members would have had an opportunity to discuss what they thought were the most important issues for the staff 

to investigate. If I had made a list at that time, it would have included many of 

the ideas—hypotheses, I would have called them—that were widely discussed in 

public debates and for that reason alone deserved to be looked into in detail. These 

included the possibility that the crisis was caused by (i) easy Fed monetary policy 

in the early 2000s; (ii) a flood of funds from abroad looking for high returns; (iii) 

the repeal of a portion of the Glass-Steagall Act; (iv) mark-to-market accounting; (v) 

Government housing policies and the role of the Government-sponsored enterprises; 

(vi) the growth and collapse of an unprecedented housing bubble; (vii) lack of or insufficient regulation, (viii) interconnections among financial institutions, and many 

others. My initial view was that many of these hypotheses were not factors in the 

crisis, but I thought they should be investigated so that the Commission could provide to Congress, scholars and the American people the best answers that a thorough and objective investigation could reveal. 

As it turned out, the members of the Commission never had an opportunity to 

discuss these issues, or to have any influence at all on the direction the Commission 

took in its inquiry and ultimately in its report. According to my records, in the 18 

months the Commission was in operation, there were only 12 meetings at which the 

members of the Commission could exchange views on the causes of the financial crisis. Of these meetings, only six were day-long sessions. The only time that the Commission members sat around a table to discuss the causes of the crisis occurred during 3 days in early September, well after the discussion could have had any effect 

on the direction of the investigation. 

The members were appointed in July 2009 and the first few months of the Commission’s existence were spent in hiring the staff and establishing the basic rules 

for how the Commission would operate. By the late fall of 2009, we were ready to 

begin the substantive portion of the Commission’s work. This would have been the 

point at which several days of discussion among the members about the causes of 

the financial crisis would have turned up agreements and disagreements that might 

have shaped and broadened the subsequent investigation. However, there was never 

a time during this period when the members were invited to sit around a table and 

consider what issues the Commission would actually investigate. 

Instead, in early December, we were given a list of monthly public hearings that 

the Commission would conduct virtually through the end of its tenure. The list included hearings on subprime lending, securitization and the GSEs, the shadow 

33 

1 Commission Majority Report, pp. xviii–xxvi. 

2 Edward Pinto, ‘‘Triggers of the Financial Crisis’’ (Triggers memo). http://www.aei.org/ 

paper/100174. 3 Edward Pinto, ‘‘Government Housing Policies in the Lead-up to the Financial Crisis: A Forensic Study’’, http//www.aei.org/docLib/Government-Housing-Policies-Financial-Crisis-Pinto102110.pdf. 

banking system, credit rating agencies, complex financial derivatives, excessive risk 

and financial speculation, too big to fail, and macroeconomic factors. Many of the 

items in this list qualified as important issues, but to schedule them as public hearings in advance made no sense. The hearings should have been shaped by what was 

turned up in the investigation, not function as the drivers of what the Commission 

would study. There was a pervasive sense that a serious investigation was being 

sacrificed to the publicity that could be wrung from public hearings. Moreover, since 

the work of the staff was inevitably going to be devoted to preparing for the hearings, establishing a list of hearings in advance threatened to reduce both the 

amount and the scope of the Commission’s investigative work. 

In practice, this meant that a large number of important issues were not to be 

addressed in any detail by the Commission. There was just no time for the staff to 

prepare for the hearings and also do a thorough investigation. As a result, the Commission majority’s report shows the superficiality of its work in many important 

areas. For example, the discussions of the role of monetary policy and the flow of 

investment funds from abroad—two possible causes of the financial crisis that have 

drawn a lot of attention from scholars—are no more detailed than newspaper or 

magazine articles; no new data is provided and no conclusions are presented. Instead, the Commission majority reserved their conclusions for the issues that were 

the focus of the hearings: that that the financial crisis was caused by insufficient 

regulation—particularly a failure to ‘‘rein in excesses in the mortgage and financial 

markets’’—weak risk management, unregulated over-the-counter derivatives, and 

excessive risk-taking. 1 It’s not that many other causes were considered and dismissed; in many cases, they were not considered at all. 

In January, I told vice chair Bill Thomas that I was thinking of resigning. It was 

clear to me that we were not going to be doing a thorough or objective investigation. 

Thomas promised changes, but none of any significance was ever made. The direction things were taking was also clear to others. The Commission’s principal investigators protested the idea that the subjects of the public hearings were set in advance, before any investigation had been done. They were ignored. They drafted a 

memo to chairman Angelides and vice chair Thomas, explaining their position. I was 

told by one investigator that Thomas ‘‘begged’’ them not to send it, promising that 

things would change. They didn’t send the memo, but nothing changed. Their view, 

and mine, was that the hearings should come out of the investigation—when things 

had been found that warranted a public hearing. Confirming the fear that the hearings were scheduled for publicity rather than substantive purposes, the first hearing 

was a fiasco. Without any preparation for this hearing, the Commission summoned 

the CEOs of four of the largest U.S. financial institutions, seemingly just so they 

could be photographed being sworn in. The New York Times and the Wall Street 

Journal were in rare agreement about this hearing, with the Times heading its editorial ‘‘The Show Must Not Go On.’’ Eventually, one of the investigators, Martin 

Biegelman, resigned. He reportedly gave the chair and vice chair a memo describing 

the reasons for his resignation. This memorandum was not shared with the other 

commissioners and has never been made public. 

The most disappointing fact about the Commission’s management was its lack of 

objectivity. One particular example stands out. In March 2010, Edward Pinto, a 

resident fellow at the American Enterprise Institute (AEI) who had served as chief 

credit officer at Fannie Mae, provided to the Commission a 70-page, fully sourced 

memorandum on the number of subprime and other high risk mortgages in the financial system immediately before the financial crisis. In that memorandum, Pinto 

recorded that he had found over 25 million such mortgages (his later work showed 

that there were approximately 27 million). 2 Since there are about 55 million mortgages in the U.S., Pinto’s research indicated that, as the financial crisis began, half 

of all U.S. mortgages were of inferior quality and liable to default when housing 

prices were no longer rising. In August, Pinto supplemented his initial research 

with a paper documenting the efforts of the Department of Housing and Urban Development (HUD), over two decades and through two Administrations, to increase 

home ownership by reducing mortgage underwriting standards. 3

Pinto’s work has been cited with approval by many scholars and experts in mortgage finance. His research raised important questions about the role of Government 

housing policy in fostering the growth of the subprime and other high risk mortVerDate Nov 24 2008 13:49 Oct 17, 2011 Jkt 048080 PO 00000 Frm 00037 Fmt 6621 Sfmt 6621 L:\HEARINGS 2011\05-10 REVIEWING THE FINANCIAL CRISIS INQUIRY COMMISSION’S 
34 

gages that played such a key role in both the mortgage meltdown and the financial 

panic that followed. Any objective investigation of the causes of the financial crisis 

would have looked carefully at this research, exposed it to the members of the Commission, and taken Pinto’s testimony in an open or closed hearing. But the Commission took none of these steps. Although Pinto met several times with the staff, his 

research was never made available to the other members of the FCIC, or even to 

the commissioners who were members of the subcommittee charged with considering the role of housing policy in the financial crisis. In early April, the Commission held 3 days of hearings on securitization, subprime mortgages, and the GSEs. 

There were numerous witnesses, but despite my requests Pinto was not among 

them. In the end, the Commission never seriously challenged Pinto’s work or developed any data of its own on the number of subprime and Alt-A loans outstanding. 

Instead, it makes numerous statements about the housing market and the role of 

the GSEs that have no basis in fact. Some of these are discussed in later sections 

of this testimony. 

There were many other more technical deficiencies. The Commission’s report 

claimed that it interviewed hundreds of witnesses, and the majority’s report is full 

of statements such as ‘‘Smith told the FCIC that . . . .’’ However, unless the meeting was public, the commissioners were not told that an interview would occur, did 

not know who was being interviewed, and of course did not have an opportunity to 

question the interviewees or understand the contexts in which the statements 

quoted in the report were made. Thus, the extensive use of interviews—instead of 

references to documents—raises a question whether there was bias in the witnesses 

chosen for interviews and the particular statements chosen for the report, and 

whether their statements were challenged in any way, with documentation or otherwise, during the interviews. A review of a sample of the transcripts and interview 

memoranda suggests that this did not happen. The Commission majority’s report 

uses these unchallenged statements of fact and opinion by interviewees as substitutes for hard data, which is notably lacking in their report; opinions in general 

are not worth much as evidence, especially in hindsight and when given without opportunity for challenge. The Commission claims that it reviewed millions of pages 

of documents. It probably received millions of pages of documents, but whether they 

were actually reviewed is doubtful. Very little in the report quotes from documents 

the Commission received, rather than from people it interviewed. 

The Commission’s authorizing statute required that the Commission report on or 

before December 15, 2010. The original plan was for us to start seeing drafts of the 

report in April. We didn’t get any drafts until November, when we started to receive 

drafts of chapters in no particular order. We were given an opportunity to submit 

written comments on these chapters, but never had an opportunity to go over the 

chapters as a group or to know whether our comments were accepted. We received 

a complete copy of the majority’s report, for the first time, on December 15, the date 

on which the Commission’s authorizing statute required that the report be completed. The draft was almost 900 double-spaced pages and was to be approved 8 

days later, on December 23. Again, we never sat around a table and reviewed the 

final draft section by section. This is not the way to achieve a bipartisan report, or 

the full agreement of any group that takes the issues or its assignment seriously. 

But, somehow, the Commission majority managed to approve this report, although 

it seems to have been almost entirely the work of the chairman and the staff. 

In summary, the overall direction of the Commission majority’s report was determined before the Commission started its work. Throughout its 18-month life, the 

Commission focused only on issues that the chairman wanted to cover, was more 

interested in publicity than in a thorough investigation, and never paid serious attention to other views. It was not in any sense an objective or thorough study, did 

not produce any facts or data that could aid scholars in the future (although its disclosure of documents might assist scholarly research), and in my view was a waste 

of the taxpayers’ money. Most important, considering the purpose of the Commission, was its failure to shed any light on the validity of the many theories that have 

been advanced to explain the financial crisis. Policy makers, scholars, and the American people deserved a reasoned analysis of these ideas. In the end, what they got 

was a just so story about the financial crisis, rather than a report on what caused 

the financial crisis. 

I will now turn to the substantive reasons for my dissent. In my view, if we are 

to avoid another financial crisis in the future, it is necessary to understand the 

causes of the crisis that the Commission was impaneled to investigate. I decided to 

write a dissent when it became apparent to me that the Commission would not even 

attempt to meet this standard. In my view, there were two elements of the financial 

crisis that were truly unique—the size of the housing bubble that developed between 

1997 and 2007 and the number of subprime and Alt-A mortgages that were present 

35 

in the financial system when that bubble began to deflate. The Commission’s management seemed determined to avoid any serious investigation of the underlying 

causes of either of these phenomena, and it seemed to me that a failure to consider 

their role in the financial crisis would give a distorted and biased picture to policy 

makers, scholars, and the American public. 

What Caused the Financial Crisis? 

George Santayana is often quoted for the aphorism that ‘‘Those who cannot remember the past are condemned to repeat it.’’ This is not as easy as it sounds. 

There are always many factors that could have caused an historical event; the difficult task is to discern which, among a welter of possible causes, were the significant ones—the ones without which history would have been different. Using this 

standard, I believe that the sine qua non of the financial crisis was U.S. Government housing policy, which fostered the creation of 27 million subprime and other 

risky loans—half of all mortgages in the United States. These were ready to default 

in unprecedented numbers as soon as the massive 1997–2007 housing bubble began 

to deflate, and as I will show these defaults ultimately caused the weakness and 

failure among the world’s largest financial institutions that we now recognize as the 

financial crisis. 

With this background, I would like to outline for the Committee the logical process that I followed in coming to the conclusion that it was the U.S. Government’s 

housing policies—and nothing else—that was the underlying cause of the 2008 financial crisis. 

This position has been dismissed as simplistic. It is certainly true that many 

major events have multiple causes that are difficult to untangle. But some events 

can be traced back to a single cause, which—with sufficient attention—can be separated from surrounding events. A child playing with matches can burn down a 

house. The fact that the child was left alone in the house, that house did not have 

a security system that reported the fire, and that the fire department’s truck broke 

down on the way to the fire are not other causes. If the child had not been playing 

with matches, the house wouldn’t have burned down. In the same way, although 

there are many factors surrounding the financial crisis, I believe it is possible to 

show that if there had not been a housing bubble of unprecedented in size and duration, and if that bubble had not contained an unprecedented number of subprime 

and Alt-A mortgages, there might never have been a financial crisis. 

The Key Questions 

The inquiry must begin with what everyone agrees was the trigger for the crisis— 

the so-called mortgage meltdown that occurred in 2007. That was the relatively sudden outbreak of delinquencies and defaults among mortgages, primarily in a few 

States—California, Arizona, Nevada, and Florida—but to a lesser degree everywhere in the country. No one disputes that the losses on these mortgages, the mortgage-backed securities (MBS) they supported, and the decline in housing values that 

resulted from the ensuing foreclosures were the precipitating cause of the crisis. 

These mortgage losses weakened, and caused a loss of market confidence in, Bear 

Stearns, Lehman, WaMu, and Wachovia. The Fed thought it had to rescue AIG because the firm had written credit default swaps on portfolios of private MBS backed 

by subprime mortgages. 

Since we know that the triggering event for the financial crisis was the mortgage 

meltdown, it is necessary to draw the causal connections between this event and the 

Government’s housing policies. These connections become clear when we ask three 

questions. 

1. Why was an international financial crisis triggered by the collapse of a housing 

bubble in the U.S.? The U.S. has had housing bubbles in the past. Since the Second 

World War, there have been two—beginning in 1979 and 1989—but when these 

bubbles deflated they had triggered only local losses. Part of the answer is that the 

bubble that developed between 1997 and 2007 was far larger and of far longer duration than any previous housing bubble. Figure 1 is derived from Robert Shiller’s calculation of real home prices since 1890 and shows the extraordinary size and duration of the 1997–2007 bubble in comparison to prior booms or bubbles. 

36 

2. Why was the deflation of the housing bubble in 2007 so destructive? The number 

of subprime and Alt-A loans in the 1997–2007 bubble was unprecedented. In prior 

housing bubbles, the number of low-quality nonprime loans never exceeded a few 

percent. As noted earlier, and as the Commission never acknowledged or disputed, 

by 2008, half all mortgages in the U.S.—27 million—were subprime or otherwise 

risky loans. 

Table 1, below, shows that in early 2008 the credit risk of more than two-thirds 

of these low-quality loans—19.2 million mortgages—was held by various Government agencies or by firms the Government regulated or could otherwise influence. 

This makes clear that the Government’s housing policies were directly responsible 

for creating the demand for these mortgages. The remaining number in Table 1, 7.8 

million loans, were privately securitized by Wall Street firms and others. As I will 

show, the development of a market for securitized subprime loans was also attributable to the same Government housing policies. 

When the bubble began to deflate, the overwhelming number of delinquencies and 

defaults among these low-quality loans drove down housing values, caused the collapse of the market for MBS, and weakened financial institutions in the U.S. and 

around the world. 

37 

4 U.S. Department of Housing and Urban Development, ‘‘HUD’s Affordable Housing Goals for 

Fannie Mae and Freddie Mac’’, Issue Brief No. V (Washington, DC, January 2011), 5, 

www.huduser.org/Publications/PDF/gse.pdf (accessed February 4, 2011). 

3. Why were there so many weak and risky loans in this bubble? What had happened to mortgage underwriting standards in the preceding years that caused such 

a serious deterioration in mortgage quality? This is perhaps the most fundamental 

question, and it was completely ignored by the Commission majority’s in its report. 

However, the answer lay in plain sight; beginning in 1992, U.S. housing policy 

sought to increase home ownership in the United States by reducing mortgage underwriting standards in order to make mortgage credit more readily available to low 

income borrowers. 

Although there might be some question about whether this was actually Government policy, HUD made no effort to hide its purposes. In statements over several 

years, and through two Administrations, the department made clear its intent to reduce mortgage underwriting standards. Many of these statements are included in 

my dissent; three are set out below. The first was made in 2000 when HUD was 

increasing the affordable-housing goals for Fannie and Freddie. (The term, ‘‘more 

flexible mortgage underwriting,’’ as used in this declaration, has always been code 

for avoiding traditional underwriting standards.) 

Lower-income and minority families have made major gains in access to the 

mortgage market in the 1990s. A variety of reasons have accounted for 

these gains, including improved housing affordability, enhanced enforcement of the Community Reinvestment Act, more flexible mortgage underwriting, and stepped-up enforcement of the Fair Housing Act. But most industry observers believe that one factor behind these gains has been the improved performance of Fannie Mae and Freddie Mac under HUD’s affordable lending goals. HUD’s recent increases in the goals for 2001–03 will encourage the GSEs to further step up their support for affordable lending. 4

[emphasis mine.] 

Similarly, in 2004, when HUD was again increasing the affordable-housing goals 

for Fannie and Freddie, the department stated: 

Millions of Americans with less than perfect credit or who cannot meet some 

of the tougher underwriting requirements of the prime market for reasons 

38 

5Final Rule, http://fdsys.gpo.gov/fdsys/pkg/FR-2004-11-02/pdf/04-24101.pdf. 6 U.S. Department of Housing and Urban Development, Office of Policy Development and 

Resesarch, ‘‘Recent House Price Trends and Homeownership Affordability (Washington, DC, 

May 2005), 85, www.huduser.org/Publications/pdf/RecentHousePrice.pdf (accessed February 4, 

2011). 7The table shows the years in which the requirements went into effect, rather than the year 

in which they were imposed. For example, the 50 percent affordable housing goal was imposed 

by HUD in October 2000 and went into effect in 2001. 

such as inadequate income documentation, limited down payment or cash 

reserves, or the desire to take more cash out in a refinancing than conventional loans allow, rely on subprime lenders for access to mortgage financing. If the GSEs reach deeper into the subprime market, more borrowers will 

benefit from the advantages that greater stability and standardization create. 5 [emphasis mine.] 

Finally, the following statement appeared in a 2005 report commissioned by HUD: 

More liberal mortgage financing has contributed to the increase in demand 

for housing. During the 1990s, lenders have been encouraged by HUD and 

banking regulators to increase lending to low-income and minority households. The Community Reinvestment Act (CRA), Home Mortgage Disclosure 

Act (HMDA), Government-sponsored enterprises (GSE) housing goals and 

fair lending laws have strongly encouraged mortgage brokers and lenders 

to market to low-income and minority borrowers. Sometimes these borrowers are higher risk, with blemished credit histories and high debt or 

simply little savings for a down payment. Lenders have responded with low 

down payment loan products and automated underwriting, which has allowed them to more carefully determine the risk of the loan. 6 [emphasis 

mine.] 

These statements are strong evidence that the decline in mortgage underwriting 

standards between 1992 and 2007 did not just happen; nor was it the result of low 

interest rates, flows of funds from abroad, or any of the other events or conditions 

suggested by the Commission majority and the other dissenters. The process by 

which HUD gradually reduced underwriting standards is described fully in my dissent. 

The Affordable Housing Goals and the Deterioration in Underwriting Standards 

The turning point came in 1992, with the enactment by Congress of what were 

called ‘‘affordable housing goals’’ for Fannie Mae and Freddie Mac. As the Committee knows, Fannie and Freddie are Government-sponsored enterprises (GSEs) 

which were chartered by Congress more than 40 years ago to operate a secondary 

market in mortgages. Although they were shareholder-owned at all times relevant 

to this testimony, the Government placed them in a Government-controlled conservatorship in 2008 when they became insolvent. The original mission of Fannie 

and Freddie was to operate a secondary mortgage market by purchasing mortgages 

from originators, providing originating banks and others with the cash to make 

more mortgages. 

As originally chartered by Congress, Fannie and Freddie were required to buy 

only mortgages that would be acceptable to institutional investors—in other words, 

prime mortgages. At the time they were chartered, a prime mortgage was a loan 

with a 10–20 percent down payment, made to a borrower with a good credit record 

who had sufficient income to meet his or her debt obligations after the loan was 

made. Fannie and Freddie operated under these standards until 1992. 

The 1992 affordable housing goals required that at least 30 percent of all the 

mortgages that Fannie and Freddie bought in any year had to be loans made to borrowers who were at or below the median income in the places where they lived. 

These were considered low-to-moderate income (LMI) borrowers. Over succeeding 

years, the Department of Housing and Urban Development (HUD) increased this requirement—to 42 percent in 1996, 50 percent in 2000, and finally to 56 percent in 

2008. Table 2, below, prepared by the Federal Housing Finance Agency, shows the 

gradually increasing affordable housing goals after 1992, and the success of Fannie 

and Freddie in meeting them. 7 The table also shows the subgoals. In the case of 

the Special Affordable goal, it is noteworthy that this goal—which required the 

GSEs to purchase loans to very low income borrowers (60 percent and 80 percent 

of area median income)—rose much faster than the general LMI goal. 

When the goals reached 50 percent, simple arithmetic required Fannie and 

Freddie to acquire at least one goals-eligible loan for every prime loan that they acquired, and since not all subprime loans were goals-eligible Fannie and Freddie 

39 

were in effect required to buy many more subprime loans than prime loans to meet 

the goals. As a result of this process, by 2008, as shown in Table 1 above, Fannie 

and Freddie held the credit risk of 12 million subprime or otherwise risky loans. 

But this was not by any means the full extent of HUD’s efforts. The agency apparently viewed Congress’ enactment of the affordable housing goals as an expression 

of a congressional policy to reduce underwriting standards so that low income borrowers would have greater access to mortgage credit. As outlined fully in my dissent, by tightening the affordable housing goals, HUD put Fannie and Freddie into 

competition with FHA—which had an explicit mission to provide credit to low-income borrowers—and with subprime lenders, such as Countrywide, that had signed 

up for a HUD program called the Best Practices Initiative, in which adherents were 

expected to take affirmative steps to reduce underwriting standards. 

Moreover, these organizations were joined by insured banks and S&Ls, which 

were required under the Community Reinvestment Act to make mortgage credit 

available to borrowers who are at or below 80 percent of the median income in the 

areas where they live. 

It was this Government-induced competition that created substantial demand for 

subprime and Alt-A loans, which had previously been a niche market. By 2008, as 

noted in Table 1, 19.2 million out of the total of 27 million subprime and other weak 

loans in the U.S. financial system could be traced directly to U.S. Government housing policies. 

Of course, it is possible to find borrowers who meet prime loan standards among 

LMI families, but it is far more difficult to do this than among middle income 

groups. Among the more obvious problems, LMI borrowers don’t generally have substantial down payments, their FICO credit scores are often below average, and their 

debt to income ratios are often very high. When Fannie, Freddie, FHA, subprime 

lenders and insured banks and S&Ls are all competing to find loans to borrowers 

in the LMI category, they had to reduce their underwriting standards in order to 

find the mortgages they were required to make. So underwriting standards deteriorated as the affordable housing goals rose. For example, in 1990, only one in 200 

mortgages involved a down payment of 3 percent or less; but by 2007 40 percent 

of all mortgages had a down payment of 3 percent or less. 

These policies were successful in raising home ownership rates. These rates had 

fluctuated around 64 percent for 30 years, but between 1995 and 2004 they rose to 

69 percent. These results were very pleasing to policy makers at the time. Only 

40 

8 Commission majority report, p. xxvi. 

later, as the enormous number of delinquencies and defaults rolled in, did HUD 

begin to deny its role in the policies that caused the mortgage debacle, and along 

with others to point fingers at the GSEs and Wall Street. 

The Private Securitization of Subprime Loans 

What about the additional 7.8 million low-quality mortgages, shown in Table 1, 

that were securitized by Wall Street and others as private label securities (PLS) or 

private mortgage-backed securities (PMBS)? These were also subprime and Alt-A 

mortgages that were bought and held as investments by financial institutions 

around the world. Although they were less than one-third of the total number of 

subprime and other Alt-A loans outstanding, private MBS are the reason that banks 

and loan originators generally have been blamed for the financial crisis in the 

media, in most books about the financial crisis, and of course by the Government, 

which was seeking to avoid its own culpability. 

How were these mortgages related to U.S. Government housing policy? 

The securitization of subprime and other risky loans developed during the latter 

stages of the 1997–2007 housing bubble and was also a new phenomenon in the 

housing finance market. Indeed, it was a direct result of the extraordinary growth 

of the bubble itself. Most bubbles in the past had lasted 3 or 4 years. See Figure 

1, above. This is because in that time delinquencies begin to appear and the inflow 

of the necessary speculative funds begins to dry up. 

The bubble that deflated in 2007, however, had an unprecedentedly long 10 year 

life. This is because the money flowing into the bubble was not from private speculators looking for profit and alert to risk, but primarily from the Government pursuing a social policy by directing the investments of companies it regulated. The 

Government, unlike private speculators, was not concerned about risk, but only 

about increasing home ownership. 

The mechanism here is important to understand: housing bubbles tend to suppress delinquencies and defaults. As housing prices rise, people who can’t meet their 

obligations can sell the house for more than they paid, or can refinance, so defaults 

are lower than one might expect. By 2002, five years into the bubble that began 

in 1997, investors were noticing that subprime and other risky loans—which usually 

carried higher than normal interest rates because of their risk—were not showing 

a commensurate number of defaults. In other words, the data suggested that these 

mortgages and the private MBS they backed were offering unusually high risk-adjusted yields. 

This stimulated the development of the private market in PLS, beginning in the 

early 2000s. The first year that this market was larger than $100 billion was 2002, 

when it reached $130 billion—about 4 percent of all mortgages made that year. For 

comparison, by 2002, Fannie and Freddie had already acquired almost $1.2 trillion 

in subprime and other risky loans, including $206 billion in 2002 alone. Thus, the 

7.8 million subprime and other risky loans that were securitized by the private sector during the 2000s, and still outstanding in 2008, were an indirect result of U.S. 

Government housing policies, which had built an unprecedented bubble in the late 

1990s. The bubble created the necessary conditions—a long run of subprime loans 

without the expected losses—for the growth of a huge securitization market in 

subprime and other risky loans in the mid-2000s. It remains to be discussed, then, 

how the buildup of subprime and Alt-A loans—now shown to be both the direct and 

indirect result of Government housing policies—caused the financial crisis. 

Before leaving this subject, I’d like to deal with an issue that comes up again and 

again—whether Fannie and Freddie followed Wall Street into subprime lending or 

Wall Street followed Fannie and Freddie. From what I’ve just said it should be obvious that Fannie and Freddie led Wall Street. 

Still, those who want to protect the Government won’t give up. The FCIC, without 

any evidence at all, said in its report that Fannie and Freddie followed Wall Street 

into subprime loans for market share or for profit—that the affordable housing goals 

were not responsible. The Commission majority’s report said: ‘‘[The GSEs’] relaxed 

their underwriting standards to purchase or guarantee riskier loans and related securities in order to meet stock market analysts’ and investors’ expectations for 

growth, to regain market share, and to ensure generous compensation for their executives and employees—justifying their activities on the broad and sustained public 

policy support for home ownership.’’ 8

I am no defender of the GSEs, but this is simply a fantasy. Here’s a quote from 

Fannie’s 2006 10-K: 

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[W]e have made, and continue to make, significant adjustments to our 

mortgage loan sourcing and purchase strategies in an effort to meet HUD’s 

increased housing goals and new subgoals. These strategies include entering into some purchase and securitization transactions with lower expected 

economic returns than our typical transactions. We have also relaxed some 

of our underwriting criteria to obtain goals-qualifying mortgage loans and 

increased our investments in higher-risk mortgage loan products that are 

more likely to serve the borrowers targeted by HUD’s goals and subgoals, 

which could increase our credit losses. [emphasis supplied.] 

This language, which confirms that Fannie bought subprime and other risky loans 

to comply with the affordable housing goals, and not for market share or for profit, 

somehow never made it into the Commission’s report. 

Subprime and Other Risky Loans Cause the Financial Crisis 

The private MBS market kept growing through 2005 and 2006, but completely 

collapsed in 2007, when the Government-created 10 year bubble finally topped out 

and began to deflate. Figure 2, below, shows the extraordinary decline in this market, beginning in 2007. Alarmed by the unexpected and unprecedented numbers of 

delinquencies and defaults, investors fled the multitrillion dollar market for mortgage-backed securities (MBS) and other asset-backed securities, dropping MBS values—and especially those MBS backed by subprime and other risky loans—to fractions of their former prices. 

The collapse of the MBS market had an almost immediate and highly adverse effect on the apparent financial condition of major financial institutions in the U.S. 

and around the world. Under the accounting rules applicable to most financial institutions, securities must be valued on a mark-to-market basis unless they are being 

held to maturity. Without an existing liquid market, roughly $2 trillion in MBS simply could not be sold except at distress prices, and thus financial institutions were 

compelled to report significant capital writedowns as they marked substantial portions of their private MBS holdings to market. 

In addition, the inability to sell private MBS at any but fire sale prices also had 

a major adverse effect on the liquidity positions of firms such as Bear Stearns and 

Lehman Brothers, which used AAA-rated MBS as a source of financing through repurchase agreements, or repose When AAA-rated MBS became unmarketable because of the collapse of the MBS market, these securities also became useless for 

liquidity purposes. Whether or not Bear and Lehman were actually insolvent, the 

market lost confidence in their ability to meet their obligations as they came due— 

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primarily because they did not have the liquidity resources that they had counted 

on to reassure counterparties. 

The capital writedowns and liquidity effects of the collapse of the MBS market 

were a major contributor to the financial crisis. At the very least, they induced an 

investor anxiety about the solvency and stability of financial institutions that became an outright panic when Lehman filed for bankruptcy. Nevertheless, although 

the Commission reported that accounting losses seemed to exceed real losses, it 

never attempted to assess the effect of accounting requirements on the financial crisis—to determine, in other words, what the world would have looked like if markto-market accounting had not been required. This is another major lapse in the 

Commission’s work, and leaves policy makers without a clear idea whether financial 

institutions should or should not be required in the future to mark their securities 

assets to market. 

With half of all mortgages weak and low quality by late 2007, the financial crisis 

was a foregone conclusion. No financial system could withstand the huge losses that 

occurred when the delinquencies and defaults associated with 27 million subprime 

and other risky loans began to appear. Mark-to-market accounting then required financial institutions to write down the value of their assets—reducing their capital 

and liquidity positions and causing great investor and creditor unease. In this environment, the Government’s rescue of Bear Stearns in March of 2008 temporarily 

calmed investor fears but created a significant moral hazard; investors and other 

market participants reasonably believed after the rescue of Bear that all large financial institutions would also be rescued if they encountered financial difficulties. 

However, when Lehman Brothers—an investment bank even larger than Bear— 

was allowed to fail, market participants were shocked; suddenly, they were forced 

to consider the financial health of their counterparties, many of which appeared 

weakened by losses and the capital write downs required by mark-to-market accounting. This caused a halt to lending and a hoarding of cash—a virtually unprecedented period of market paralysis and panic that we know as the financial crisis 

of 2008. 

In summary, then, this is the causal connection between the housing policies of 

the U.S. Government and the financial crisis: 

• The Government’s housing policies—by creating demand for subprime and AltA loans—fostered the growth of an unprecedented housing bubble and the creation of 19.2 million subprime and Alt-A loans. 

• The size and duration of the bubble permitted the development of a 

securitization market in subprime and Alt-A loans, adding an additional 7.8 

million weak and low-quality loans to the financial system. 

• When the bubble deflated, these mortgages—then totaling almost half of all 

U.S. mortgages outstanding—defaulted in large numbers, causing losses (or anticipated losses) among private MBS and the collapse of the private MBS market. 

• Without a market for private MBS, financial institutions were required by 

mark-to-market accounting to write down the value of their assets, making 

them appear weak and possibly insolvent. 

• The absence of a market for private MBS also eliminated these securities as a 

source of liquidity for financial institutions, causing a loss of confidence among 

market participants in their ability to meet their cash obligations as they came 

due. 

• The rescue of Bear Stearns, the first of the institutions to lose market confidence, temporarily calmed the investors and market participants, but when 

Lehman Brothers filed for bankruptcy a full-scale panic ensued in which market 

participants hoarded cash and refused to lend to one another. This is what we 

know as the financial crisis. 

Conclusion 

In brief, my dissent shows that the financial crisis was not caused by lack of regulation or by private sector greed but by misguided Government housing policy. The 

policy implication of this fact is that the Dodd-Frank Act—which has imposed tight 

and costly regulation on all aspects of the financial system—was not an appropriate 

response to the financial crisis. For this reason, Dodd-Frank should be repealed. 

Those who want to protect the Government and the policies it followed will continue to assert that the failure to regulate the private sector caused the financial 

crisis. This was certainly the motive of the Commission majority in issuing its wholly deficient report. As my dissent suggest, however, they do not have the facts on 

their side. 

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JPMORGAN STUDY ‘‘EYE ON THE MARKET’’ 

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FINANCIAL CRISIS INQUIRY COMMISSION ARCHIVED WEB SITE LIST 

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FINANCIAL CRISIS INQUIRY COMMISSION PRELIMINARY STAFF 

REPORT 

‘‘THE MORTGAGE CRISIS’’ 

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FINANCIAL CRISIS INQUIRY COMMISSION MEMORANDUM 

‘‘ANALYSIS OF HOUSING DATA’’ 

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