To get to the heart of what went wrong with the report released yesterday by the Financial Crisis Inquiry Commission, check out its account on page 254 of how the largest investor in a cash fund managed by Bank of America suddenly pulled out $20 billion of its money in November 2007.
The withdrawal crippled the fund, which had $40 billion of assets at its peak, forcing Bank of America to step in and prop it up. The commission included a note about the episode in the back of its report.
“The identity of the investor has never been publicly disclosed,” it says. The note then referred readers to the source of the information: A couple of stories published in December 2007 by Bloomberg News and the New York Times.
And here I had thought the purpose of the commission’s inquiry was to uncover new facts that the public didn’t already know. Such as: The identity of the mystery investor that single- handedly kneecapped Bank of America’s Columbia Strategic Cash Portfolio, once the largest cash fund of its kind in the U.S. The commission had subpoena power. It should have been able to get this information. It didn’t, though.
This, in journalistic parlance, is what we call a clip job. And that’s the trouble with much of the commission’s 545-page report. There’s lots of breezy, magazine-style, narrative prose. But there’s not much new information.
You can tell the writers knew they were sprinkling MSG on a bunch of recycled material, too, by the way they described their sources. The text and accompanying notes often seem deliberately unclear about whether the commission had dug up its own facts, or was rehashing information already disclosed in court records, news articles or other congressional inquiries.
For instance, we’re told how a former Bear Stearns hedge- fund manager, Matthew Tannin, sent an e-mail in April 2007 to colleague Ralph Cioffi that said: “Looks pretty damn ugly.” (A few days later they told investors they were confident about their funds, which held subprime mortgage bonds.) The report cites the e-mail as the source for the quote. What it doesn’t say is that the e-mail came out in court records that were widely publicized in 2009.
The report does break some morsels of news. Before it imploded, Bear Stearns used to rely on “window dressing” to make its quarterly balance sheets look smaller. Moody’s Investors Service assumed a 4 percent annual increase in home prices to justify AAA ratings for mortgage-backed securities that later blew up. More such tidbits surely will emerge as reporters and bloggers plow through the report’s pages.
The bulk of it, though, covers ground that was largely known, or at least not all that surprising. (I bought my copy at a local bookstore in Manhattan on Wednesday, the day before the commission’s intended release date, and spent the last two days reading it.)
The report’s conclusions were obvious: The financial crisis was man-made and avoidable. Regulators and credit-rating companies blew it. Banks and homeowners borrowed too much. Companies such as AIG and Lehman Brothers had horrible governance. Ethics and accountability broke down. The government panicked when the crisis hit in 2008. And so forth.
The lack of new insights dovetailed with the commission’s non-confrontational approach. More than 700 people granted interviews, most behind closed doors. Only seldom did the panel issue subpoenas.
Ferdinand Pecora, the chief counsel who led the Senate Banking Committee’s landmark hearings on the 1929 stock market crash, wrote a memoir years later called “ Wall Street Under Oath.” A good title for this week’s report would be Wall Street on the Couch.” It remains to be seen whether the commission will make public all the investigative materials it accumulated, as the Pecora Commission did in 1934.
The FCIC’s failure was predictable from the start. To examine the causes of the financial crisis, Congress created a bipartisan panel of 10 political appointees led by Democrat Phil Angelides, a former California state treasurer. What was needed was a nonpartisan investigation directed by seasoned prosecutors (like Pecora was) who know how to cross-examine witnesses and get answers.
Whereas Pecora had no fixed deadline, Congress gave the crisis commission until December 2010 to complete its inquiry. Witnesses who didn’t want to cooperate fully could simply milk the clock. The panel got a budget of less than $10 million to investigate all the causes of the financial crisis. Lehman’s bankruptcy examiner got $42 million to produce a 2,200-page report on the failure of a single company.
This week’s report will serve a useful purpose. For anyone who doesn’t know much about the financial crisis, the book is a good, condensed version that’s worth reading, even if it doesn’t add much to the public’s body of knowledge.
“There is still much to learn, much to investigate, and much to fix,” the commission wrote in the preface to its report. That also would make a fitting epitaph.
This story originally appeared on Bloomberg.com as "." is a Bloomberg News columnist. The opinions expressed are his own.)