Financial Crisis Was Avoidable, Inquiry Finds

1. WASHINGTON — The 2008 financial crisis was an “avoidable” disaster caused by widespread failures in government regulation, corporate mismanagement and heedless risk-taking by Wall Street, according to the conclusions of a federal inquiry.The commission that investigated the crisis casts a wide net of blame, faulting two administrations, the Federal Reserve and other regulators for permitting a calamitous concoction: shoddy mortgage lending, the excessive packaging and sale of loans to investors and risky bets on securities backed by the loans. “The greatest tragedy would be to accept the refrain that no one could have seen this coming and thus nothing could have been done,” the panel wrote in the report’s conclusions, which were read by The New York Times. “If we accept this notion, it will happen again.” While the panel, the Financial Crisis Inquiry Commission, accuses several financial institutions of greed, ineptitude or both, some of its gravest conclusions concern government failings, with embarrassing implications for both parties. But the panel was itself divided along partisan lines, which could blunt the impact of its findings.

2. Many of the conclusions have been widely described, but the synthesis of interviews, documents and testimony, along with its government imprimatur, give the report — to be released on Thursday as a 576-page book — a conclusive sweep and authority. The commission held 19 days of hearings and interviews with more than 700 witnesses; it has pledged to release a trove of transcripts and other raw material online. Of the 10 commission members, the six appointed by Democrats endorsed the final report. Three Republican members have prepared a dissent focusing on a narrower set of causes; a fourth Republican, Peter J. Wallison, has his own dissent, calling policies to promote homeownership the major culprit. The panel was hobbled repeatedly by internal divisions and staff turnover. The majority report finds fault with two Fed chairmen: Alan Greenspan, who led the central bank as the housing bubble expanded, and his successor, Ben S. Bernanke, who did not foresee the crisis but played a crucial role in the response. It criticizes Mr. Greenspan for advocating deregulation and cites a “pivotal failure to stem the flow of toxic mortgages” under his leadership as a “prime example” of negligence.

3. It also criticizes the Bush administration’s “inconsistent response” to the crisis — allowing Lehman Brothers to collapse in September 2008 after earlier bailing out another bank, Bear Stearns, with Fed help — as having “added to the uncertainty and panic in the financial markets.” Like Mr. Bernanke, Mr. Bush’s Treasury secretary, Henry M. Paulson Jr., predicted in 2007 — wrongly, it turned out — that the subprime collapse would be contained, the report notes. Democrats also come under fire. The decision in 2000 to shield the exotic financial instruments known as over-the-counter derivatives from regulation, made during the last year of President Bill Clinton’s term, is called “a key turning point in the march toward the financial crisis.” Timothy F. Geithner, who was president of the Federal Reserve Bank of New York during the crisis and is now the Treasury secretary, was not unscathed; the report finds that the New York Fed missed signs of trouble at Citigroup and Lehman, though it did not have the main responsibility for overseeing them. Former and current officials named in the report, as well as financial institutions, declined Tuesday to comment before the report was released.

4. The report could reignite debate over the influence of Wall Street; it says regulators “lacked the political will” to scrutinize and hold accountable the institutions they were supposed to oversee. The financial industry spent $2.7 billion on lobbying from 1999 to 2008, while individuals and committees affiliated with it made more than $1 billion in campaign contributions. The report does knock down — at least partly — several early theories for the financial crisis. It says the low interest rates brought about by the Fed after the 2001 recession; Fannie Mae and Freddie Mac, the mortgage finance giants; and the “aggressive homeownership goals” set by the government as part of a “philosophy of opportunity” were not major culprits. On the other hand, the report is harsh on regulators. It finds that the Securities and Exchange Commission failed to require big banks to hold more capital to cushion potential losses and halt risky practices, and that the Fed “neglected its mission.” It says the Office of the Comptroller of the Currency, which regulates some banks, and the Office of Thrift Supervision, which oversees savings and loans, blocked states from curbing abuses because they were “caught up in turf wars.”

5. “The crisis was the result of human action and inaction, not of Mother Nature or computer models gone haywire,” the report states. “The captains of finance and the public stewards of our financial system ignored warnings and failed to question, understand and manage evolving risks within a system essential to the well-being of the American public. Theirs was a big miss, not a stumble.” The report’s implications may be felt more in the political realm than in public policy. The Dodd-Frank law overhauling the regulation of Wall Street, signed in July, took as its premise the same regulatory deficiencies cited by the commission. But the report is sure to be a factor in the debate over the future of Fannie and Freddie, which have been run by the government since 2008. Though the report documents questionable practices by mortgage lenders and careless betting by banks, one striking finding is its portrayal of incompetence. It quotes Citigroup executives conceding that they paid little attention to mortgage-related risks. Executives at the American International Group were found to have been blind to its $79 billion exposure to credit-default swaps, a kind of insurance that was sold to investors seeking protection against a drop in the value of securities backed by home loans. At Merrill Lynch, managers were surprised when seemingly secure mortgage investments suddenly suffered huge losses.

6. By one measure, for about every $40 in assets, the nation’s five largest investment banks had only $1 in capital to cover losses, meaning that a 3 percent drop in asset values could have wiped out the firm. The banks hid their excessive leverage using derivatives, off-balance-sheet entities and other devices, the report found. The speculative binge was abetted by a giant “shadow banking system” in which the banks relied heavily on short-term debt. “When the housing and mortgage markets cratered, the lack of transparency, the extraordinary debt loads, the short-term loans and the risky assets all came home to roost,” the report found. “What resulted was panic. We had reaped what we had sown.” The report, which was heavily shaped by the commission’s chairman, Phil Angelides, is dotted with literary flourishes. It calls credit-rating agencies “cogs in the wheel of financial destruction.” Paraphrasing Shakespeare’s “Julius Caesar,” it states, “The fault lies not in the stars, but in us.” Of the banks that bought, created, packaged and sold trillions of dollars in mortgage-related securities, it says: “Like Icarus, they never feared flying ever closer to the sun.”

Приложение. Примеры УПС. Тексты 19, 20 и 21 из учебника «Linn Visson»

Text 19 V.I. Resin, First Deputy Premier, Moscow City Administration Russian-American Investment Symposium, 1999 (Harvard University, Boston, USA) (Читается с американским акцептом)   Distinguished ladies and gentlemen, Distinguished colleagues, Attracting foreign capital and investments is one of the major areas of our municipal investment policy. This has become particularly important due to the recent economic problems resulting from the August decisions of the Russian government, of which you are aware, which complicated the financial situation in the country.   I should like to particularly stress that Moscow, as an independent subject of the Federation has not renounced its commitments and continues to be a reliable associate for foreign partners.   Moreover, Moscow is producing its own plan for a favorable investment climate, taking into account the need for: - first: solid guarantees - second: the establishment of most favored nation conditions - third: simplification of the procedure for obtaining permission and documents, - and finally, sound business relations between investors and the city administration. Any city which has begun to implement a plan for major changes cannot make do with only its own resources; it always needs external financing.     Investment activity in Moscow is high in terms of the country as a whole. In 1997 foreign investors invested 8.5 billion US dollars in the Moscow economy, which accounted for 66% of investments in Russia. The same level was true for 1998.   We understand that western investors are concerned about the degree of risk to their investments, and they are right in counting on a stable political situation in the country, on being guaranteed receipt of an appropriate return for their investments, on acceptable norms of legislation and insurance of their investments, etc.

Intervention at a Meeting of the Directors of World Bank and the Economic and Social Council (ECOSOC) (Читается в нормальном и быстром темпе с американским акцентом)     Mr. Chairman, Finding resources to finance development has always been a difficult problem, especially during the last few years, when there was the beginning of a trend towards a decline in official development assistance and a reduction in voluntary contributions to the operational activities of the UN, accompanied by a decline in prices of raw materials and energy resources.     The problem of financing was further exacerbated by the growing financial crisis, for not only are foreign investors displaying understandable caution, but there are also very limited possibilities for mobilizing internal resources for development, particularly in countries which have been affected by the crisis.   In this situation, we believe that favorable conditions for providing needy countries with resources for development can be fully realized if the financial crisis is overcome, and the stability of international financing and national finance systems is restored in the countries affected by the crisis.   On this point I would like to ask a few questions of the President of the World Bank, Mr. Wolfenson:   How do you assess the effectiveness of the measures taken by the international financial institutions to render assistance to countries affected by the crisis? Is there a need for special additional measures for the affected countries because of the aggravation of the crisis there and since its consequences may turn out to be highly pernicious for the global economy as a whole?

Text 21. Advertising (Interview with Konstantin Kostin, Head of the Advertising Department of a Bank) (Читается с американским акцентом)   Recently, advertising has been in the forefront as a marketing tool which puts across the bank's products and the bank's image.   Just look at how the "image" publicity of banks has changed: abstract slogans such as "A speck of gold in a sea of sand" are things we don't hear anymore.   And just think of all those symbols of the power of banks at the beginning of the 90s — a heavy wooden desk, a cellular phone, a Swiss watch. Since then the market has really gone professional. The banks are getting very picky.   In response to that there are new ads with very specific and clear business ideas.   There's also that powerful weapon, meaningful silence. That's also an advertising trick. However, you have to go easy on that. Being silent for too long is just as bad as talking about yourself too often. Particularly in tough spots on the financial markets. I think that some of the silent banks should come out with their positions not just obliquely, but through direct advertising.     The major goal of the advertising department is to provide advertising in support of the bank's development.   I don't have any abstract goals. Like getting a hundred billion. There's a plan to sell the image.     There's a timetable to provide ads for the products the bank is pushing, and, by the way, that accounts for a quarter of the estimate.   As I see it, getting information to the public through publications and stories by experienced journalists is a lot better than going the direct advertising route. After all, a good journalist is seen as an expert by the public.

МОСКОВСКИЙ ГОСУДАРСТВЕННЫЙ ГУМАНИТАРНЫЙ УНИВЕРСИТЕТ им. М.А. ШОЛОХОВА

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