Financial Crisis Inquiry Commission: Explained | TIOmarkets
BY TIOmarkets
|July 8, 2024The Financial Crisis Inquiry Commission (FCIC) was a ten-member commission appointed by the leaders of the United States Congress in 2009 to investigate the causes of the financial crisis of 2007-2008. The commission was tasked with examining the roles of fraud, regulatory oversight, taxation, accounting, corporate governance, and credit rating agencies in the financial crisis. This article provides a comprehensive glossary of the FCIC, its role, and its findings.
Understanding the FCIC is crucial for traders as it offers insights into the factors that led to the financial crisis, the regulatory changes that followed, and the potential risks that could trigger future crises. This knowledge can help traders make informed decisions and mitigate risks in their trading activities.
Background of the FCIC
The FCIC was established by the Fraud Enforcement and Recovery Act of 2009, which was signed into law by President Barack Obama on May 20, 2009. The act was a response to the financial crisis of 2007-2008, which was the most severe economic downturn since the Great Depression of the 1930s.
The crisis was characterized by the collapse of large financial institutions, the bailout of banks by national governments, and downturns in stock markets around the world. In the United States, it resulted in significant job losses, a decline in consumer wealth, and a downturn in economic activity.
Formation of the FCIC
The FCIC was formed to investigate the causes of the financial crisis. The commission was made up of six Democrats and four Republicans, who were appointed by the leaders of the United States Congress. The commission was chaired by Phil Angelides, a former California State Treasurer, and its vice chair was Bill Thomas, a former Republican member of the U.S. House of Representatives.
The commission held its first meeting on September 17, 2009, and it was given the authority to subpoena documents and witnesses, hold hearings, and refer potential violations of law to the U.S. Department of Justice or state Attorneys General.
Mandate of the FCIC
The FCIC was tasked with examining 22 specific areas related to the financial crisis. These included the role of fraud and abuse in the financial sector, the failures of corporate governance and risk management at many systemically important financial institutions, and the role of excessive borrowing and risky investments.
The commission was also mandated to examine the role of the Federal Reserve in stabilizing the financial sector, the impact of the financial crisis on the U.S. economy and market stability, and the role of government-sponsored enterprises and federal housing policy in the financial crisis.
Investigation by the FCIC
The FCIC conducted a wide-ranging investigation into the causes of the financial crisis. It held 19 days of public hearings, interviewed more than 700 witnesses, and reviewed millions of pages of documents.
The commission's investigation focused on a range of issues, including the role of high-risk mortgage lending, the growth of the housing bubble, the role of complex financial products, the failures of credit rating agencies, and the role of government policy and regulation.
Public Hearings
The FCIC held a series of public hearings to gather information and hear testimony from key players in the financial crisis. These hearings were held in several cities across the United States and were broadcast live on the internet.
Witnesses at the hearings included current and former executives of major financial institutions, regulators, credit rating agency representatives, and academics. The hearings provided a public forum for the examination of the causes of the financial crisis and the role of various actors in the crisis.
Interviews and Document Review
In addition to the public hearings, the FCIC conducted hundreds of interviews with individuals involved in the financial crisis. These interviews provided the commission with firsthand accounts of the events leading up to the crisis and the response to the crisis.
The commission also reviewed millions of pages of documents, including internal corporate documents, regulatory reports, and financial statements. This document review helped the commission to understand the actions of financial institutions, regulators, and other actors in the lead-up to the crisis.
Findings of the FCIC
The FCIC released its final report on January 27, 2011. The report concluded that the financial crisis was avoidable and was caused by widespread failures in financial regulation and supervision, dramatic failures in corporate governance and risk management at many systemically important financial institutions, excessive borrowing and risky investments, and the government's ill-preparedness and inconsistent response.
The report also highlighted the systemic breakdown in accountability and ethics, the collapse of the mortgage lending standards and the mortgage securitization pipeline, the deregulatory legislation that stripped away key safeguards, and the explosive growth of the financial sector's size and profitability at the expense of its stability.
Role of Financial Institutions
The FCIC found that many financial institutions acted recklessly and took on too much risk. These institutions were found to have failed in their basic duty to ensure that their businesses were run in a safe and sound manner. The commission also found that these institutions hid their risky activities from investors, regulators, and the public.
The commission found that the failures of these financial institutions directly contributed to the financial crisis. The commission also found that the executives of these institutions were not held accountable for their actions and that their compensation was not aligned with the long-term health of their institutions.
Role of Regulators
The FCIC found that regulators failed to effectively oversee the financial sector and did not take steps to curb the excessive risk-taking by financial institutions. The commission found that regulators had the power to protect the financial system but chose not to use it.
The commission also found that the regulatory system was fragmented and outdated, and that regulators did not have a clear understanding of the risks in the financial system. The commission concluded that this lack of effective regulation allowed the financial crisis to happen.
Impact of the FCIC
The FCIC's report had a significant impact on the understanding of the financial crisis and the policy response to the crisis. The report's findings led to a reevaluation of the role of financial institutions and regulators in the financial system and the need for stronger oversight and regulation.
The report also led to a greater focus on corporate governance and risk management in financial institutions. The findings of the FCIC have been used by policymakers, regulators, and academics to understand the causes of the financial crisis and to develop policies to prevent future crises.
Policy Changes
The FCIC's findings led to significant policy changes in the United States and around the world. These changes included the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was designed to prevent another financial crisis by improving accountability and transparency in the financial system, ending "too big to fail", and protecting consumers from abusive financial services practices.
The findings of the FCIC also led to changes in the regulation of credit rating agencies, the oversight of financial institutions, and the regulation of complex financial products. These changes have been aimed at reducing the risk of another financial crisis and improving the stability of the financial system.
Impact on Trading
The FCIC's findings have had a significant impact on trading. The increased regulation and oversight of financial institutions and financial products have led to changes in the way that traders operate. These changes have included increased transparency, stricter risk management practices, and greater accountability.
The findings of the FCIC have also led to a greater understanding of the risks in the financial system and the factors that can lead to a financial crisis. This knowledge has helped traders to better understand the market and to make more informed trading decisions.
Conclusion
The Financial Crisis Inquiry Commission played a crucial role in investigating the causes of the financial crisis of 2007-2008. Its findings have led to significant changes in the regulation and oversight of the financial system, and have provided important insights into the factors that can lead to a financial crisis.
For traders, understanding the FCIC and its findings is crucial. This knowledge can help traders to understand the risks in the financial system, to make more informed trading decisions, and to better manage their risk. By understanding the FCIC, traders can gain a deeper understanding of the financial system and the factors that can impact their trading activities.
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