Wall Street and the Financial Crisis: Anatomy of a Financial Collapse facts for kids
Wall Street and the Financial Crisis: Anatomy of a Financial Collapse is a report on the financial crisis of 2007–2008 issued on April 13, 2011 by the United States Senate Permanent Subcommittee on Investigations. The 639-page report was issued under the chairmanship of Senators Carl Levin and Tom Coburn, and is colloquially known as the Levin-Coburn Report. After conducting "over 150 interviews and depositions, consulting with dozens of government, academic, and private sector experts" found that "the crisis was not a natural disaster, but the result of high risk, complex financial products, undisclosed conflicts of interest; and the failure of regulators, the credit rating agencies, and the market itself to rein in the excesses of Wall Street." In an interview, Senator Levin noted that "The overwhelming evidence is that those institutions deceived their clients and deceived the public, and they were aided and abetted by deferential regulators and credit ratings agencies who had conflicts of interest." By the end of their two-year investigation, the staff amassed 56 million pages of memos, documents, prospectuses and e-mails. The report, which contains 2,800 footnotes and references thousands of internal documents focused on four major areas of concern regarding the failure of the financial system: high risk mortgage lending, failure of regulators to stop such practices, inflated credit ratings, and abuses of the system by investment banks. The Report also issued several recommendations for future action regarding each of these categories.
The Financial Crisis Inquiry Commission released its report on the financial crisis in January 2011.
Contents
Report findings
The Report found that the four causative aspects of the crisis were all interconnected in facilitating the risky practices that ultimately led to the collapse of the global financial system. Lenders sold and securitized high risk and complex home loans while practicing subpar underwriting, preying on unqualified buyers to maximize profits. The credit rating agencies granted these securities safe investment ratings, which facilitated their sale to investors around the globe.
Federal securities regulators failed to execute their duty to ensure safe and sound lending and risk management by lenders and investment banks. Investment banks engineered and promoted complex and poor quality financial products composed of these high risk home loans. They allowed investors to use credit default swaps to bet on the failure of these financial products, and in cases disregarded conflicts of interest by themselves betting against products they marketed and sold to their own clients.
The collusion of these four institutions led to the rise of a massive bubble of securities based on high risk home loans. When the unqualified buyers finally defaulted on their mortgages, the entire global financial system incurred massive losses.
Impact and reactions
Media reaction
Although there was a massive scale of fraud and deception uncovered in the Levin-Coburn Report, the media's coverage of the report was timid. In an analysis of the media's coverage of the report, the Columbia Journalism Review criticizes the Wall Street Journal, the nation's foremost business newspaper, for its placement of the story in the third section of the day's paper, as well as its general dodging around the facts laid by and the criticisms made in the Report about Wall Street investment banks. On the other hand, the New York Times lauds how "The report adds significant new evidence to previously disclosed material showing that a wide swath of the financial industry chose profits over propriety during the mortgage lending spree." In his Rolling Stone op-ed, Wall Street investigative journalist Matt Taibbi, who once referred to Goldman Sachs as a "a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.", applauds the "extraordinary investigative effort" by the Senate subcommittee. He decried the "aristocratic impunity and prosecutorial immunity "of Wall Street CEOs who facilitated the exploitation of the mortgage market and defrauding of American homeowners. Taibbi stated that the record $550 million fine the SEC charged to Goldman Sachs looks "woefully inadequate" after the findings of the Levin Report.
Wall Street reaction
In a company statement after the release of the report, Goldman said "While we disagree with many of the conclusions of the report, we take seriously the issues explored by the subcommittee. We recently issued the results of a comprehensive examination of our business standards and practices and committed to making significant changes that will strengthen relationships with clients, improve transparency and disclosure and enhance standards for the review, approval and suitability of complex instruments." In another press release, Goldman claimed that they " did not have access to any special information that caused us to know that the U.S. housing market would collapse." They claimed they had no bets against their clients, yet the Levin Report claims that there were over 3,000 instances of the term "net short" in internal e-mails looked at by investigators. No charges have been brought as of mid-2011.
Legislative reaction
See Dodd–Frank Wall Street Reform and Consumer Protection Act
- Wall Street Reform
- Financial Crisis of 2007-2010
- Subprime Mortgage Crisis Solutions Debate
- Regulatory Responses to the Subprime Crisis
