The Financial Crisis Inquiry Report: Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States.

• Author: Hartlage, Andrew W.
• Position: Book review

THE FINANCIAL CRISIS INQUIRY REPORT: FINAL REPORT OF THE NATIONAL COMMISSION ON THE CAUSES OF THE FINANCIAL AND ECONOMIC CRISIS IN THE UNITED STATES. By Staff of the Financial Crisis Inquiry Commission. Official Government Edition. Washington, D.C.: Government Printing Office. 2011. Pp. xxviii, 533. $29. Available at http://www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPOFCIC.pdf. Authorized Edition. New York: PublicAffairs. 2011. Pp. xxviii, 450. $14.99.

INTRODUCTION

Despite the benefit of five years to heal its wounds, the United States remains hobbled from the devastating economic injuries of the 2007-08 global financial crisis. Families across the country still struggle with overwhelming debt and debilitating joblessness. The financial innovations that were once seen as a path to broader homeownership and greater financial equality nearly led to a once-unthinkable catastrophe, and ironically, have worked to widen the gap between rich and poor.

These events took many top business leaders and regulators by surprise. (1) After the crisis abated, legislators and other policymakers sought to understand how a financial crisis of such severity could arise undetected in one of the world's most advanced and well-regulated economies. To this end, in May 2009 Congress created the Financial Crisis Inquiry Commission ("FCIC"). The FCIC was composed of commissioners "with national recognition and significant depth of experience in such fields as banking, regulation of markets, taxation, finance, economics, consumer protection, and housing," (2) and Congress charged it with analyzing the causes of the global financial crisis. (3) After an eighteen-month investigation, during which the FCIC's commissioners and staff "reviewed millions of pages of documents, interviewed more than 700 witnesses, and held 19 days of public hearings" (p. xi), the FCIC made public its book-length final report, titled The Financial Crisis Inquiry Report: Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States. The Report attributed the crisis to "widespread failures in financial regulation and supervision" (p. xviii); "dramatic failures of corporate governance and risk management at many systemically important financial institutions" (p. xviii); "excessive borrowing, risky investments, and lack of transparency" (p. xix); the government's "ill prepar[ation] for the crisis, and its inconsistent response" (p. xxi); and "a systemic breakdown in accountability and ethics" (p. xxii). Though commissioned for submission to the President and Congress, (4) The Financial Crisis Inquiry Report also attracted significant popular attention, spending two weeks on the New York Times Best Sellers' List for Paperback Nonfiction. (5)

The idea of a postcrisis congressional investigation into the causes of a financial crisis is not new; indeed, postcrisis investigations have a pedigree that can be traced back to at least the beginning of the twentieth century. Banking panics punctuated the economically tumultuous late years of the nineteenth century, (6) and at the century's close, federal legislators realized that the frequency of such panics required a stronger federal solution. (7) Since then, postcrisis investigations have been fixtures appurtenant to all financial crises. The earliest of these investigations began in May 1908, when Congress created a new joint committee, the National Monetary Commission ("NMC'), and tasked it with developing recommendations for financial and monetary reform. (8) Nearly four years later, in February 1912, the House of Representatives authorized its Committee on Banking and Currency, then chaired by Representative Arsbne Pujo, to conduct an investigation into the concentration of power in the financial sector. (9) And in 1932, the Senate Committee on Banking and Currency began an examination of short selling (10) that grew into a broad inquiry into stock-exchange practices. (11) In its final years, this investigation was led by Chief Counsel Ferdinand Pecora, for whom the investigation is now known. (12)

The timing of these investigations correlates with fundamental changes in the relationship between the federal government and the financial sector. The NMC's recommendations led to the passage of the Federal Reserve Act in 1913. (13) and the creation in the following year of the Federal Reserve System, the United States' central bank. (14) The revelations of the 1912-13 Pujo Investigation helped to build a "movement for legislative action"15 that not only influenced the Federal Reserve Act16 but also contributed to the passage of the Clayton Antitrust Act (17) and the Federal Trade Commission Act, (18) key reforms that help curb market abuses. For its part, the 1933-34 Pecora Investigation helped build political will for broad financial reforms, such as the Glass-Steagall Act, (19) which separated banking and investment activities, and the Securities Act of 1933 (20) and Securities Exchange Act of 1934, (21) which together form a large part of U.S. capital-markets regulation. (22) There was hope that the FCIC's work could bring about similar large-scale reforms. (23)

Though The Financial Crisis Inquiry Report was a minor hit at the bookstore and received favorable reviews praising its approachable style, (24) the Report, and the work of the FCIC more broadly, has faced nearly universal criticism. Some criticize the Commission on the grounds that it revealed little beyond what was already known about the causes of the crisis. (25) Others fault the FCIC for having failed to contribute to reform by way of a proposed legislative agenda. (26)

In this Notice, I argue that both the criticism and praise of The Financial Crisis Inquiry Report rely on inaccurate or outdated conceptions of the functions of modern postcrisis investigative commissions. Changes over the last 100 years to the nature of federal power, the actors involved in the formulation of U.S. financial policy, and even the Wall Street business model mean that the early-twentieth-century model of the postcrisis investigation no longer reflects the realities or needs of the twenty-first-century economy.

My argument identifies three core functions of postcrisis congressional commissions, past and present, and evaluates the FCIC's execution of each function. In Parts I and II, I argue that criticism of the FCIC's performance as a fact finder or legislative working group, particularly criticism that compares the FCIC unfavorably with previous postcrisis investigations, fails to consider the FCIC's unique statutory design and ignores significant shifts during the intervening decades that explain the differing functions and performance of postcrisis investigations. In Part III, I argue that praise of The Financial Crisis Inquiry Report's readability overlooks regrettable flaws in the Report's preparation that undermine its usefulness as a reference work.

1. THE COMMISSION AS FACT FINDER

   The most fundamental task of postcrisis congressional investigations has been, unsurprisingly, to investigate. Some of the sharpest criticisms directed toward the FCIC involve its execution of this most basic function. Some have criticized The Financial Crisis Inquiry Report and the FCIC for revealing little information beyond that available in the already voluminous literature on the financial crisis. (27) These commentators criticize the FCIC for its timid use of its subpoena power, (28) which could have given the Commission access to information unavailable to journalists and other private investigators. Parts of The Financial Crisis Inquiry Report seem to confirm this account: in one instance, the FCIC notes that Bank of America "failed to produce documents" related to a 2007 collateralized-debt-obligation deal that implicated a possible conflict of interest (p. 192); despite identifying this issue, the FCIC did not issue a subpoena. (29)

   This lack of investigative depth, however, was in large part a product of statutory design. Unlike the broad subpoena authority exercised by past investigations, (30) which fed prosecutions, (31)...